February 2, 2011 (Jeff Alan)
As promised, Rhode Island Senator Sheldon Whitehouse (D) and the Senate Judiciary Committee held a hearing Tuesday regarding possible legislation granting bankruptcy judges the power to require foreclosure mediation between banks and homeowners. Whitehouse, who recently commented on a story featured here concerning Judge Votolato’s recent bankruptcy court decision, is a leading advocate who believes forced foreclosure mediation programs result in more loan modifications and less loss of homes.

Only three other members of the Judiciary Committee managed to attend this hearing. Al Franken and Richard Blumenthal were there the whole time, and Republican ranking member Chuck Grassley poked his head in for a couple questions.

Experts and homeowners were called as witnesses to attest to their experiences and beliefs about the current foreclosure process. One homeowner in the hearing has been waiting 19 months on a loan modification. Whitehouse became visibly angry when talking about him.

“When you have to come up with the same damn paperwork, and you talk to someone different every time you call, after 19, 20 months of that it’s pretty frustrating,” he said. “That could be broken simply by getting people in a room.”

Al Franken put an exclamation point on this, by mentioning the form letter he received from Ally Financial when he wrote to them about robo-signing problems. “It’s nice to see that Ally doesn’t treat homeowners any worse than they treat a Senator.”

Robert Drain, a judge for the U.S. Bankruptcy Court for the Southern District of New York, testified that half of the mediations that take place in his court’s loss-mitigation program end in an agreement, often a modification. The other half, he said, at least give the homeowner a clear understanding for why they’re losing their home.

Drain added that lenders, too, have pushed participation in the programs as often the outcome clears mortgage servicers from future litigation from investors. Of the 2,000 loss-mitigation requests by homeowners, Drain oversaw, only 90 were objected to by the banks.

“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,” Drain said.

But not everyone would agree with that opinion. For the most part, the mortgage industry has been against forced mediation programs on the grounds that the states and the mortgage companies are ill-equipped for the amount of mediations that would be necessary to work through the current level of foreclosed properties, thus prolonging the housing slump for years.

John Mechem, a spokesman for the Mortgage Bankers Association which represents the largest mortgage lenders, said the group is opposed to both mandatory and voluntary mediation programs. He argued that the programs are expensive and are often used by borrowers as a tactic to stall foreclosure.

Mechem said the industry on its own has done almost 1.5 million mortgage modifications this year outside of mediation programs. If such programs must be implemented, he said, the MBA favors a voluntary system over mandatory meetings.

Foreclosure timelines in New York and Florida continue to be the longest in the nation due to the sizeable backlog of cases in the system. Not surprising, these are states that require judicial foreclosures.

Andrew Grossman, the visiting legal fellow at The Heritage Foundation, said it is hard to pinpoint what additional benefit homeowners can receive from programs that have proven only modest success so far. He added that more loss-mitigation programs would push lenders to raise premium risk prices, making mortgages less affordable in the future.

But Grossman also added that the real risk from such a broad-ranging program is that further delays to the foreclosure process would only delay a recovery at this point.

Drain admitted to the problems with overbearing legislation, but he said such programs are vital to sorting out the foreclosure issue.

“Since I am not testifying today on behalf of any group, I can tell you that my personal view of legislation is that less is best,” Drain said. “Even if you share that view, however, and perhaps especially if you share it, enabling homeowners and lenders to negotiate the resolution of their loans is a good idea.”

Unfortunately, given the current political climate in Washington, we wonder how far this will really go.

Tags: foreclosure mediation program, banks, home owners, mortgage servicers, legislation, loan modification, litigation, financial crisis, mortgage industry