Automatic Foreclosure Mediation Pushed As Solution To Mortgage Mayhem

Requiring banks to hold mediation sessions with homeowners facing foreclosure could be the solution to the foreclosure crises, argues the Center for American Progress, a liberal think tank.

Banks should be mandated to hold mediation sessions with homeowners before any foreclosure for mortgages guaranteed or owned by the government. That would include mortgages backed by Fannie Mae, Freddie Mac, the VA and FHA.

What’s more, mediation sessions should be scheduled automatically, instead of waiting for a request from the homeowner. In mediation sessions, the homeowner and bank meet in the presence of a neutral third-party in an attempt to reach a loan modification agreement. Learn about foreclosure alternatives.

“Even though none of the parties are under any obligation to settle in mediation, in practice they settle more than half the time,” wrote Alon Cohen, a consultant on housing issues for the group, in the study just released. “It does not mean all foreclosures will end or that all homeowners will receive a modification.”

Banks and mortgage services, in addition to homeowners, would benefit. For every mortgage modified in mediation, the mortgage servicer cuts its losses by 60 percent, according to Cohen. Fannie Mae and Freddie Mac alone would save over $6 billion and over 177,000 homeowners would stay in their homes.

“Those in investment properties or those who cannot affordably be provided with a modification will still lose their homes,” Cohen wrote, “but hopefully in a faster, less costly, and more dignified matter.”

About 60 percent of homeowners attending mediation sessions stay in their homes, but participation jumps if the meetings are scheduled automatically. In Connecticut, for instance, participation went from 20 percent to 75 percent after the state went from opt-in to automatic sessions.

Experiences in Connecticut and Florida, he wrote, indicate that mediation helps foreclosures proceed more quickly if a loan modification agreement cannot be reached, as foreclosure efforts go forward simultaneously with mediation.

Many homeowners who unemployed or underemployed cannot meet even the modified loan payments. Plus, some homeowners are engaging in strategic defaults, choosing not to pay their mortgages even though they can because their home values have fallen below their mortgage amounts. Banks and servicers also say they have trouble reaching some homeowners, who are avoiding them.

Saying federal loan modification efforts have failed, Senator Sheldon Whitehouse, a Democrat from Rhode Island, has proposed granting bankruptcy judges the power to require mediation meetings.

Much ink, both print and digital, has been dedicated to describing the federal Home Affordable Modification Program (HAMP) as a failure. While critics call it a failure, saying it has fallen far short of its goal of modifying millions of loans, the Obama Administration points out that it has helped over half a million homeowners.