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Mediation Programs Keep More Borrowers Out of REO

Over the past year, the number of states with programs offering foreclosure mediation has nearly doubled, from 11 to 21, according to the Center for American Progress.

California, Connecticut, Florida, Illinois, Maryland, Nevada, Pennsylvania, Rhode Island and Wisconsin are some of the states using mediation to bring servicers and lenders together with homeowners for "serious conversations about alternatives to foreclosure."

Based on their state-by-state assessment of existing programs, the Washington-based think tank argues that automatic scheduling of mediation at the start of the foreclosure process, as opposed to requiring already-stressed homeowners to opt in to the program, significantly increases participation rates without reduction in the rate of successful outcomes.

In their paper, "Now We're Talking: A Look at Current State-Based Foreclosure Mediation Programs and How to Bring Them to Scale," authors Andrew Jakabovics and Alon Cohen, recommend jurisdictions with opt-in programs adopt automatic scheduling, as Connecticut and Philadelphia, among others, have done.

With opt-in programs, the homeowner gets notice that a foreclosure is pending and has to respond to court and say they want mediation. When the foreclosure is initiated with automatic scheduling, notice is sent to both parties with the dates and time specified for a meeting.

"The problem with opt-in programs is the participation rate tops out based on our survey at 20%," said Cohen, SVP and general counsel of FightMetric, during a conference call on the subject.

"One in five homeowners gets into the program. A small number of those settle. We don't get to help as many homeowners as we possibly could. With automatic scheduling, you get a 70%-80% participation rate."

Similarly, the authors argue that successful pilot programs running at the circuit court, city, or county levels should now be scaled to the state level.

"There are a number of jurisdictions going live July 1-Cook County in Illinois and a number of Florida counties. The state of Florida is going live," said Jakabovics, associate director for housing and economics at the Center for American Progress.

"We know this works. The numbers we see coming out of these programs are really terrific. It's important to get as many people as possible into these programs as they become available."

Roberta Palmer, program manager for court operations for Connecticut's judicial branch, said for the majority of foreclosures in her state, conversations between homeowners and representatives for large national servicers "aren't happening.

"So, bringing the parties into the room and having someone with authority from the large servicers look over options with the homeowner has been a great benefit. Loan modifications that we enter into are much more sustainable than those done without a third party present in the mediation," she said.

Connecticut's noted "highly successful" mediation program, which has been in effect for two years, began as an "opt-in" program before moving to mandatory "or automatic" in June of 2009. The state has seen an increase in modifications since that has happened, Palmer said.

As of March 31, 2010, Connecticut had over 6,000 cases that completed the mediation process. Of those, 74% were settled. Sixty percent of homeowners reached agreements that allowed them to stay in their home through forbearance plans or loan modifications.

"I can say that our program when it was funded in 2008 and 2009 had a sunset date. During our legislative budget talks, there was great concern because of the economic situation," Palmer added.

"The results we've shown for two years really brought people to the point of understanding this was a program you can't afford not to fund. Homeowners and communities lose more money by not allowing conversations to happen where people can reach agreements and stay in their homes. It was refunded for an additional two years even in one of the most dire economic budgetary crises we've had in this state in a long, long time."

Currently, there is a great deal of conversation about whether financial documentation should be required upfront before getting the homeowner into mediation. Palmer believes the move might "be a disservice to homeowners."

"What you have to understand about mediation and why it's successful is it brings a human element to a very paper-driven, anonymous process," she said.

"I am a little suspect about requiring paperwork before you bring them into the table because I think your modification rates might fall."

The original principal balance of the current shadow inventory overhang - which Standard & Poor's defines as outstanding properties that are (or were recently) 90 days or more delinquent, in foreclosure, or real estate-owned, but haven't yet hit the market -- amounts to roughly $480 billion, or 30% of the entire nonagency market.

To liquidate distressed homes, servicers may be forced to reduce their prices. And as these reduced-price homes hit the market, the supply will keep keep rising, which could drive prices further down.