Home Settling
Ian Phillips
Photo by David Fonda
As many as 9 million homeowners may lose their homes to foreclosure over the next four years, with nearly one in eight mortgages delinquent or in the process of foreclosure, according to a June report from the Center for American Progress.
And subprime loans are not the only problem: Studies show that prime loans account for most new foreclosures.
As a result, state and municipal court systems—inundated with homeowners, renters and landlords—are quickly turning the process over to mediation programs to avoid or forestall foreclosure.
Over the last two years, mediation systems have sprung up in various jurisdictions, including in the states of Connecticut and Florida and in the cities of Milwaukee, Philadelphia and Los Angeles.
“The vast majority of these folks would have been facing a sheriff forcing them from their homes,” says Ian Phillips, legislative director for the Pennsylvania chapter of the Association of Community Organizations for Reform Now, the national nonprofit community development group that has been coordinating Philadelphia’s mediation system. “That in itself is a pretty big story. We’re proud of what we have accomplished.”
In many cases, homeowners facing foreclosure have obtained large reductions in interest rates—some down to 2 percent, Phillips says. That, coupled with a foreclosure moratorium by the city and a high participation rate, has allowed many to remain in their homes for months.
Yet despite the rapid expansion of mediation programs, lawyers still wonder just how successful they are. According to a recent study by the U.S. Government Accountability Office, 60 percent of those who go through foreclosure mediation still wind up defaulting on their loans in six months.
SEARCHING FOR STANDARDS
Consumer lawyers say the only solution to the crisis is for Congress to require loan modifications, particularly in bankruptcies, and to make the standards more apparent.
“I don’t think there is any data out there showing that homeowners are getting better modifications through mediation foreclosure,” says Geoff Walsh, a staff attorney with the National Consumer Law Center in Boston.
“Mediation can have some value,” Walsh says, “if the programs apply standards, if they impose some obligations on servicers to produce documents showing they considered all the options. Right now, there’s not that much value in participating.” Walsh gives kudos to Maine, the only state to have passed a statute requiring loan servicers to produce individual calculations showing whether homeowners will lose more money in loan modifications or foreclosures. Maine began a provisional foreclosure mediation program July 1 and plans to expand it statewide by December.
In a 50-page report released in September, the NCLC says most mediations lack industry accountability—the same problem that led to many foreclosures in the first place. Under most mediation programs, says Walsh, the author of the report, “servicers have all the discretion and homeowners have little or no power.”
Despite the uncertainty, many states and courts nevertheless are rushing to implement mediation programs—many turning to Connecticut as a model.
Connecticut started its statewide foreclosure mediation program one year ago, the first statewide unified court program in the country. The program was mandated by the legislature and funded with $5 million. Twenty-four mediators have been hired—a mixture of experienced lawyers and recent law school graduates.
As of June, 3,376 homeowners had completed the mediation process, according to program manager Roberta Palmer. Of those, 75 percent settled with their lenders, 62 percent reached an agreement that allowed them to stay in their homes, and 13 percent reached agreement for a “graceful exit.”
“If you get into the program, you’re very successful,” Palmer says. She attributes the program’s success to the legislature’s early involvement and funding, and to the fact that mediators devote their full time to foreclosure mediation.
“To me, that is not an area you can slack off on,” Palmer says. “Foreclosure law can be very complicated —you are negotiating loan modifications. Very specific skills are necessary to be a foreclosure mediator.”
In Philadelphia, the common pleas court established a pilot program in June 2008 that uses a two-step mediation system. The court runs an open “cattle call” once a week during which servicers’ counsel, homeowners, housing counselors and pro bono attorneys engage in informal negotiations. The few cases that are not resolved informally are assigned to a mediator—a pro bono senior attorney or a judge—who meets with the parties.
Key to the program is the participation of ACORN, whose volunteers go door to door to inform homeowners whose residences are slated for foreclosure about the program. The city allocated $1 million for a foreclosure hotline.
According to a June press release from the city, of 5,200 homes slated for foreclosure, 4,000 were visited by volunteers, 3,800 participated in the mediation program and 1,200 were saved, with 1,500 still in negotiation.
The city reports a 75 percent participation rate—higher than most other programs. About a third of resolved cases since September 2008 have involved payment plans, interest forbearance, and interest-rate and term modifications, according to the city.
But April Charney, a consumer staff attorney with Jacksonville Area Legal Aid in Florida and a nationally recognized expert on foreclosures, calls Philadelphia’s statistics “extremely vague.”
“There is no way to determine what a ‘loan modification’ or what a ‘successful resolution’ is,” she says.
“I would be laughed out of court if I were to consider presenting this data to support anything, … and I would deserve it.”
The lack of specific data in such programs is a common complaint from Charney and other critics. Because the mediation is private—between the homeowner, the lender and the mediator—only general results are typically provided to authorities.
In July, Milwaukee launched its foreclosure mediation program, which is being administered through Marquette University Law School. Using grants from the city and the state of Wisconsin, the program will hire a chief mediator and program director. Pro bono attorneys and law students will act as mediators.
The program is voluntary; all foreclosure filings sent out include a request-for-mediation form. The city is off to a good start, with 60 pro bono attorneys and mediators attending the first training held in June.
“We’re very excited about this,” says Andrea Schneider, a Marquette law professor who is oversee- ing the program. “Foreclosures are a huge problem in Milwaukee.”
THE PRIVATE APPROACH
Also starting programs are California and Nevada, where foreclosures are nonjudicial—meaning they never touch the courts but are worked out privately between the parties.
In a recent, 66-page report about foreclosure mediation issued by the D.C.-based liberal think tank Center for American Progress, Florida was singled out as a state with a “disjointed” system. That’s because there is no statewide plan—each judicial circuit has come up with its own foreclosure strategy.
Currently, just three circuits—including Miami-Dade—have issued orders requiring foreclosure mediation. They all contract with the Collins Center for Public Policy, a private, nonprofit dispute-resolution center that pays and trains mediators.
After Nevada, Florida ranks second in the country for foreclosures. According to RealtyTrac, foreclosures in Florida more than doubled from 2006 to 2007, from 124,721 to 279,325.
In March, the Florida Supreme Court set up a foreclosure task force to study the problem. Its recently released report recommends mandatory mediation for all resident-homeowners facing foreclosure statewide. Key personnel would likely not be pro bono lawyers but paid mediators, since it would be difficult to find enough pro bono attorneys to handle the tens of thousands of foreclosures in Florida every year.
“The issue is getting everyone on the same page,” says Miami-Dade Circuit Judge Jennifer D. Bailey, who chairs the Florida Supreme Court’s foreclosure task force. “This will be better than the current chaotic, haphazard programs offered by loss mitigation teams at the banks. This will be a systemic and organized approach.”
Still, Bailey acknowledges that mediation will not solve the problem completely, echoing the words of consumer lawyers like Charney and Walsh.
“Some people just bought homes they could not afford—and that was before they lost their jobs,” she says. “But you have to whittle down what you can whittle down.”
