Should States Try to Force Loan Modifications?

January 4 2011 (Jeff Alan)
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Despite the outcries from consumer advocates, only three states and two cities require mandatory mediation and even those don’t require the lenders to make a settlement. The only thing that administrators in the mandatory programs tell borrowers and lenders at the beginning of the foreclosure process is that they are required to attend a scheduled mediation. Borrowers aren’t penalized if they don’t attend, but lenders can face penalties if they don’t.

The mandatory negotiations, with the assistance of third party mediators, are producing loan modifications and other settlements at substantially higher rates than voluntary mediation programs that are available in other states.

According to the Center for American progress, a liberal Washington think tank, twenty states currently offer some type of mediation program.

Connecticut, which became one of the first states to pass a law requiring mandatory mediation in 2008, reports that of the 29,000 borrowers who have entered foreclosure since July 2008, 70 percent of the borrowers have entered mediation.

Over 60 percent of the borrowers who have completed the program have received some form of a permanent loan modification that reduced their monthly mortgage payments and allowed them to keep their home. The other 40 percent had varying outcomes, including foreclosure.

By comparison in New Jersey where mediation isn’t required, only 20 percent of the state’s borrowers who entered foreclosure have sought mediation and of those who completed mediation, 65 percent received a loan modification.

The financial industry of course has mixed feelings about mandatory foreclosure mediation.

Scott Talbot, a spokesman for the Financial Services Roundtable, a trade group of 100 large financial companies including the biggest banks and MBA members, said the group favors any program that “keeps people in their homes.” He said the Roundtable doesn’t have a preference between mandatory and voluntary mediation, adding that a uniform program would make more sense than “a system implemented state by state.”

But 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.

Mr. 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.

Alon Cohen, an analyst at the Center for American Progress, said the results show that mediation works and that forced mediation works even better.

“If people are contacted by an official source telling them mediation has been scheduled, they are far more likely to participate than if they are required to request the mediation themselves,” he said. When mediation is mandatory, “success rates rocket,” he said.

It’s difficult to say how effective mandatory mediation would be. There would many difficulties as the system would probably be as overwhelmed as it is now. A perfect example is in Connecticut where the state only has 24 mediators that can only handle 10 to 12 cases a day. States that have high foreclosure rates like California and Nevada would need hundreds of mediators and the question of who would pay for that would have to be answered.

Nationwide, the number of troubled homeowners receiving assistance with their mortgages has been falling. About 470,000 homeowners received loan assistance in the third quarter, down 17% from the second quarter and down 32% from the same quarter a year earlier.

Tags: loan modifications, mortgages, mortgage loan, mediation, foreclosures, mortgage borrowers, mediators, negotiations