Foreclosure Mediation Program Considered by Senate

Foreclosure mediation is a topic that we have explored on this blog in the past. The idea behind mediation is to force lenders and borrowers to sit down at the bargaining table in order to work out an alternative solution to foreclosure that is hopefully palatable to both parties.

Last week the Senate Judiciary Committee met to discuss legislation that would allow bankruptcy judges to order foreclosure mediation between lenders and borrowers. Senator Sheldon Whitehouse of Rhode Island commented:

“Tragically, these foreclosures are often unnecessary, indeed often not even in the mortgage holder’s best interests, but they are driven forward by conflict-ridden bureaucratic machinery that lacks the most basic American failsafe: the chance to talk to a responsible human being who can make an actual decision. The bankruptcy court loss-mitigation programs won’t save every home, but they can help countless frustrated homeowners cut through the bureaucratic nightmare and get answers to their modification requests.”

It seems that one of the biggest complaints with HAMP and other mortgage modification programs is that they involve a lot of layers of paperwork and bureaucracy, and that borrowers often find it difficult to get straight answers about modifications from lenders. These mediation programs would attempt to alleviate this issue.

Robert Drain, a New York Bankruptcy Judge testified that about half of mediations that occur in his court end with some sort of agreement. Even those that do not end in modifications at least allow the homeowner and lender an opportunity to meet face to face. Judge Drain said lenders like the program because it ends the possibility of future liability on the modified loan. Drain commented:

“By passing legislation expressly recognizing the benefits of home mortgage mediation programs, Congress would endorse a solution to one of the most vexing problems of the financial crisis by encouraging bankers to return to being bankers.”

Several states and municipalities have enacted mediation programs with varying degrees of success. The possibility of success seems to be strongly linked to whether or not the mediation is compulsory and binding.