REQUIRED READING: Weighing The Pros And Cons Of Foreclosure Mediation

Written by John Clapp
on September 02, 2009 No Comments
Categories : Required Reading

Nevada's Legislature holds sessions only once every two years, but shortly before closing the books on its 2009 session, lawmakers were able to pass a significant piece of legislation – Assembly Bill 149. The bill provides for mediations in foreclosures commenced on or after July 1 and is one of the latest examples in a slew of like-minded programs being adopted throughout the nation.

Mediation programs – sometimes referred to as settlement or conciliation conferences – bring servicers, their legal counsel and homeowners to the negotiation table to discuss, in-person, alternatives to foreclosure. The intent guiding these programs' development – to improve lender-borrower communication – is almost universally endorsed, but the structure and implementation can vary greatly from state to state or, in some instances, from one judicial court circuit to another.
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In the case of Nevada, home to one of the highest foreclosure rates in the country, the state's Supreme Court scrambled to establish rules and a framework before the July 1 deadline mandated by A.B.149. Chief Justice James Hardesty, anticipating the bill's passage, assembled a task force while the legislation was pending, and the Supreme Court was narrowly able to hire a program administrator and publish rules on June 29 and 30, respectively.
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But as states such as Nevada wade through the early stages of creating such programs, and counties in Pennsylvania and Florida seek to adjust and perhaps streamline mediation efforts, high-profile government officials and consumer advocacy groups are calling for even greater adoption.
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In June, the U.S. Conference of Mayors teamed with nonprofit ACORN on a conference call in which the mayors of Miami, New York, Philadelphia and Los Angeles urged state lawmakers to require mandatory settlement conferences prior to foreclosure. Separately, New York Gov. David Paterson announced legislation that seeks to build upon a bill passed last year that requires servicers to meet with subprime borrowers before foreclosing. Paterson wants to expand the mediation to prime borrowers, as well.
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Conciliation conferences, though resulting in successful settlements in many areas, are far from a panacea, critics are quick to point out. Depending on the program, they may increase costs to taxpayers or needlessly delay some foreclosure proceedings.

Outreach efforts that increase consumer awareness are lacking in some programs, leading to borrower no-shows. Servicers, for fear of being the subject of judges' wrath, lose money in those instances, dedicating legal resources to mediations that never take place.

Additionally, court officials' knowledge of the strenuous, high-volume conditions under which loss mitigation departments operate varies greatly, and some judges are intolerant of any slow response to drawing up possible workout options. A judge in Allegheny County, Pa., recently imposed a $150 sanction against a lender for failing to reach a position in 30 days.

The lender did not refuse to offer a modification but merely did not make a decision – yes or no – in the allotted time on the basis of wanting more documentation. The judge postponed the lender's right to schedule sale for 60 days.

"Sanctions are never about the amount; they're always about the effect," says Michael McKeever, a partner with Philadelphia-based law firm Goldbeck, McCafferty & McKeever, which represents the lender. "That company now has a sanction against it. Our law firm, although not sanctioned, has to deal with that. It may be something that all of us have to report to our various insurance carriers."
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The lender will likely appeal the sanction, McKeever says.
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Situations like these caused the Pennsylvania House of Representatives to rethink a bill that sought to require mandatory conciliation in all of Pennsylvania's 67 counties. H.B.1042 was scheduled to be heard in late June, but the House's Commerce Committee canceled the hearing, which is now on hold until the fall, if not indefinitely.

Philly's pilot program
Though the Allegheny County judge's ruling demonstrates how stringent mediation timelines, combined with an obstinate judge, can negatively impact servicers, a pilot program based in nearby Philadelphia has earned acclaim for the progress it's made in the last year.
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According to data from the Court of Common Pleas, about 5,000 borrowers have enrolled in the city's Mortgage Foreclosure Diversion Pilot Program since its inception in June 2008, and to date, some 1,400 of those borrowers have averted foreclosure. The court has been recognized by both the National Association of Court Management and the Mid-Atlantic Association of Court Management for its administration of the program, and the program itself has served as a template for other communities.
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The Foreclosure Diversion Pilot Program is unique in that it operates with almost no direct funding, points out Alon Cohen, a Washington, D.C.-based attorney.
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"The entirety of the court system in Philadelphia is committed to this," says Cohen, who co-authored a Center for American Progress report on foreclosure mediation. "Therefore, supervisors in the clerk's office have been able to juggle around the schedules of their employees to make sure they're available for this program."
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The model is a two-tiered, mandatory mediation approach. Six other counties in Pennsylvania have conciliation programs, but they are voluntary, meaning borrowers are notified that mediation is available, but they must opt in. In Philadelphia, the court schedules mediation dates for borrowers, their counsel, and servicers' counsel.
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Every Thursday, a Philadelphia courtroom hosts a cattle call, in which hundreds of homeowners meet informally with housing counselors and attorneys acting on servicers' behalf. The majority of these informal meetings result in settlements, Cohen says. If the parties reach an impasse, the case turns into a formal mediation, where a neutral third party (oftentimes a pro bono senior attorney) is brought into the picture. The cattle calls allow for certain economies of scale.
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"Because we don't have to involve mediators – which are a pretty scarce resource – in this informal process, you've got the benefit of volume," Cohen adds. "You've got lots and lots of cases going on at the same time, so you can clear that docket quickly and get people to resolution fast."
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Whereas the Pennsylvania Legislature has hit the brakes on requiring mediation throughout the state, Florida may be heading in the streamlined direction. The state has 17 judicial circuits – some of the circuits mandate mediation, some have opt-in programs and others have no mediation at all.

In response to the fragmented environment, the Florida Supreme Court this year created a task force to study and report back on the various mediation programs, tapping 11th Circuit Judge Jennifer Bailey to lead the team. The task force is expected to release a report this month, and Cohen anticipates the report will propose a statewide effort.
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The 11th circuit – one of the few circuits that mandates mediation – governs Miami-Dade County, a particularly hard-hit market. Its program, along with those required by the first and 19th circuit courts, is managed by the Collins Center for Public Policy, an institution with experience in large-scale insurance mediations. The courts' push for mandatory mediation began last fall in response to a slow-moving legislature.
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"A number of people asked the legislature to do a better job and give powers earlier, but they didn't," says Rod Petry, president of the Collins Center.
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When a lender's attorney files a foreclosure action in either the first, 11th or 19th circuit court, the attorney must also file a document called Form A. Included on the document are borrower contact information and certification that the property in question is either a homestead or is owner-occupied. Also certified on Form A: that the lender's representative has the authority to modify the mortgage.
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The form then travels to the Collins Center, which is responsible for alerting the borrower of the foreclosure action and the court-sponsored mediation opportunity. The center has received more than 4,000 Form A's in two months' time, Petry says. So far, the actual number of mediations is small, at 38, but the settlement rate is encouraging. Twenty-six borrowers have settled during mediation, and another 11 settled prior to mediation. One borrower no-showed.
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In situations where the lender's representative doesn't appear, the case is dismissed without prejudice. What that means for banks is not only restarting the foreclosure process, but also additional filing fees, which the state Legislature raised in June. Petry estimates that 30% of cases can be off-ramped into mediation.

State-funded model
A statewide program launched last year in Connecticut represents a different kind of model in that it's state-funded. The program currently has 12 mediators, 12 caseload coordinators, seven clerks and a program administrator, and a recently passed public act that is expected to be signed by Gov. M. Jodi Rell will allocate more funds. Program manager Roberta Palmer says the lending community's initial response to the program was lukewarm, at best.
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"A year ago, when we were beginning this, I think they were very tentative and a little leery about the program and not so agreeable to participation," she says. Since then, servicers' acceptance has grown, and 73% of cases terminated as of the end of April resulted in either a home retention or home forfeiture settlement. Palmer suggests the confluence of a worsening economy, positive program results and federal modification incentives has caused servicers to approach mediation differently.
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"The modification offers we're seeing now are dramatically different than the ones we were getting even three, four months ago," she says. Whether or not the modifications will ultimately prove sustainable is the $64,000 question, she adds.
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As program manager, Palmer is responsible for training mediators and boosting consumer awareness. She brings in representatives from outside agencies, such as the Connecticut Housing Finance Authority and Fannie Mae, to educate mediators on a monthly basis. As a way of increasing borrower outreach, she has appeared on public-access television.
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Perhaps one of the most beneficial aspects of Connecticut's program is its flexibility, which allows servicers to avoid the problem faced by the lender in Allegheny County. The statute limits mediations to 90 days, but the courts have regularly permitted parties, with mutual consent, to negotiate beyond that time frame.
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"That's the by-product of the overwhelming caseload the servicers have," Palmer says. "The reason we oftentimes cannot get mediation done within the 60 to 90 days is because the servicer needs time to have their loss mitigation department look at the financial applications and decide whether the borrower would qualify for any programs. When that is happening, the parties are all in agreement that they will extend beyond the time frame."

A broader role

In their Center for American Progress report, Cohen and co-author Andrew Jakabovics suggest mediation can play the role of a compliance check for the federal Home Affordable Modification Program (HAMP). The government's audit program is not expected to publish details for several months, Jakabovics says.
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"Really what the mediation sessions do is provide an opportunity to ensure we're getting HAMP right," he says. Cohen and Jakabovics' report recommends that the Federal Housing Finance Agency require all servicers of Freddie Mac and Fannie Mae loans to participate in mediation prior to foreclosure. The Department of Housing and Urban Development should also explicitly permit community block grants to be used for funding programs, the report says.
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McKeever, however, points out that under the Fifth Amendment, the government is not permitted to take private property (e.g., mortgage contract rights) for a public purpose without compensation. He also emphasizes that some court officials have a better understanding of the foreclosure mediation process – and the burden it places on servicers – than others.
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"Philadelphia works because there's been one judge – [Court of Common Pleas Judge] Annette Rizzo – who's been dynamic and involved," he says. "She's hands-on, but fundamentally, she knows [a mortgage] is a contract between the parties. There's a lot of things the court can do, but they can't so put out a lender that it breaches a constitutional issue."
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Another major concern beyond process delays and financial penalties is borrower cooperation. In Philadelphia, ACORN volunteers went door-to-door to explain how the city's mediation program works and inform borrowers of their responsibility to come prepared (i.e., with financial documents in hand).
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"Servicers have done a tremendous job of creating an infrastructure and training the personnel necessary to handle the increase in cases and to review and respond to the workout requests in accordance with the court's schedules," McKeever says. Palmer echoes that thought, commending servicers, their attorneys and the courts for making the necessary systemic changes.
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Borrowers, on the other hand, often fail to provide the documents that loss mitigation staff need in order to offer modifications.

"Although there's a requirement that the home retention package be delivered to us 10 days prior to the hearing, the court is not aggressively enforcing that requirement," McKeever points out. "We have a fair number of homeowners who show up the day of the hearing with little or no paperwork but who are interested in delay of foreclosure action."
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The inequality goes further, as Allegheny courts are now routinely striking judgments and canceling sheriff's sales without prior notice to lenders for borrowers who apply late for the mediation program.
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During a public meeting in Nevada leading up to the state's enactment of A.B.149, attorney Kristen Schuler-Hintz said her lender clients who have participated in mediation elsewhere believe that sufficient documents are needed early on in the process.
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"The more documents they have, the sooner they have them, the better prepared they are to reach a resolution," she said. "Seven days is not enough time to do the analysis they need to do to generate the options available."
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While the final rules adopted by Nevada's Supreme Court do require documents to be delivered to the mediator and exchanged among parties prior to mediation, Schuler-Hintz's request for more than seven days' notice was only partly received. Rule 7 of the order states that homeowners must submit financial statements at least seven days prior to the mediation.

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