Foreclosure Diversion and Mediation in the States
| Publication year | 2017 |
Foreclosure Diversion And Mediation In The States
Alan M. White
CUNY School of Law
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The recent mortgage foreclosure crisis, whose economic effects are well known,1 transformed state legal structures governing the mortgage foreclosure process. What had been a relatively routine system of default judgments and auction sales has evolved into a negotiation and workout practice in which homeowners contest foreclosures, demand loan modifications and short sales, and propose other alternatives to foreclosures.2
A profusion of state laws and court orders were adopted between 2008 and 2014 with the aim of promoting negotiated foreclosure alternatives.3 These laws have produced a variety of experiments in the "laboratories of democracy."4 The outcomes of mortgage loan
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defaults—whether home loans are renegotiated, defaults are cured, or homes are sold at auction—have varied tremendously among the states.5 We can now begin to assess the desirability of these new laws and procedures, and more importantly, identify the foreclosure reforms that merit wider adoption.
One of the most effective legal innovations has been the use of mandatory pre-foreclosure mediation, introduced in about half the states during this period. The Uniform Home Foreclosure Procedures Act (UHFPA), approved by the Uniform Law Commission in 2015, incorporates permanent provisions for pre-foreclosure mediation in all residential mortgage foreclosure cases. 6 The uniform law provisions are modeled on the most successful state programs and were drafted with the aid of judges, mediators, and attorneys with experience in several state foreclosure mediation programs.7
This article will begin with a brief history of the foreclosure crisis and the progressive adoption of foreclosure mediation programs in various states. Next, it will summarize the empirical research and data measuring the effectiveness of those programs. Both the benefits of mediation and the costs, including delay, will be considered and compared. The article will then discuss the ways in which foreclosure mediation may or may not differ from conventional mediation standards embodied in the Uniform Mediation Act, and in particular, how and why courts enforce a duty to mediate in good faith. Finally, the mediation provisions of the new UHFPA and the case for their adoption will be presented.
A. The Foreclosure Crisis Overwhelmed Mortgage Servicers and Led
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to a Variety of Industry and Policy Responses
Historically unprecedented numbers of mortgages were foreclosed between 2007 and 2014.8 Between five and six million homeowners were dispossessed via completed foreclosure sales, and perhaps twice that many fell behind in payments and were exposed to foreclosure threat at one point or another.9 The story of this great foreclosure crisis of 2008-2014 includes a story of remarkable variations among states in how many homeowners eventually lost homes at foreclosure sales and how many of them were able to cure a default and save their homes.10 Of all the home mortgages referred for foreclosure action, the likelihood of a completed foreclosure sale ranged from 76% in Arizona to 26% in New York.11 The story behind these variations in foreclosure outcomes is a complex story of legal pluralism and industry failures.
At the onset of the foreclosure crisis, banks bemoaned their inability to get homeowners in default to respond to their generous offers of loan modifications and other foreclosure alternatives.12 Homeowners, it seemed, were like the proverbial ostriches with their heads in the sand. Outreach efforts were launched to bring the homeowners in from the cold.13 Foreclosure sales, banks told us,
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were the worst possible outcome, and everything should be done to avoid them.14
After a few years, industry complaints about those unresponsive homeowners faded away. The mortgage servicing industry, starting around 2007, was rapidly overwhelmed with homeowners seeking loan modifications and other workouts. 15 Homeowners now complained about getting no responses from mortgage servicers.16 Diligent homeowner attorneys uncovered the robo-signing scandal, namely the widespread practice of servicers and their legal teams using falsified note endorsements, assignments, and affidavits to mass-produce foreclosure paperwork. 17 In response, courts and regulators demanded that servicers clean up their act, and foreclosure cases languished while servicers gave homeowners applying for loan modifications and short sales the runaround.18
Now, as the foreclosure crisis wanes, the banking industry can be heard complaining that they are now spending too much time talking to homeowners, and that long foreclosure delays resulting from homeowners coming in from the cold en masse are just wasting everyone's time and money.19 Foreclosure delays can be traced to many causes: capacity limitations of servicers, law firms, courts and county sheriffs, banks' reluctance to sell into an already glutted market, federal and state agency enforcement actions in response to robo-signing and other servicer misconduct, and some of the state laws enacted to ameliorate the foreclosure crisis.20
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The federal government's response to the foreclosure crisis relied primarily on incentives for voluntary action by mortgage servicers to reduce or mitigate foreclosure sales via the Home Affordable Modification Program (HAMP).21 The Federal Housing Finance Agency (FHFA), the de facto manager of the nationalized mortgage funders Fannie Mae and Freddie Mac, had the power to tell servicers to rewrite loans, but the Treasury Department and FHFA have been ambivalent at best about loan modifications, and whether to encourage or discourage speedy foreclosure sales.22
While the federal government tacked and dithered, the states adopted a myriad of laws, regulations, and court orders to encourage workouts and minimize foreclosure sales, as well as to deal with abandoned properties in foreclosure. Literally hundreds of laws were adopted by the states between 2007 and 2013 modifying the foreclosure process in various ways: to encourage negotiated alternatives to foreclosure sales, to address responsibility for abandoned properties, to reduce redemption periods, and to protect tenants in foreclosed homes, among other issues.23
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B. Nearly Half the States Tried Some Form of Foreclosure Mediation or Settlement Conference Program
Among these new foreclosure laws were an array of mediation and settlement conference programs, both in judicial and nonjudicial foreclosure states.24 While these programs have been a factor in slowing foreclosures,25 foreclosure mediation has also had a clear record of success, both in getting homeowners to better communicate with mortgage servicers, and in producing default cures, voluntary sales, and other beneficial alternatives to foreclosure auctions.26
Seventeen states adopted statewide foreclosure mediation programs after 2008. Thirteen statewide programs were established by statute,27 and the other four were implemented via court rule or other court or agency initiative.28 At least eight other states have established local or county court mediation programs in some parts of their states, without statewide legislation or court action.29 Other states, notably California, have eschewed mediation and instead enacted "meet-and-confer" statutes.30 These laws require a 30- to
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150-day delay before nonjudicial foreclosure, during which the servicer must attempt to contact the borrower and offer foreclosure alternatives, but do not provide a neutral third party to facilitate the negotiation.31
Sunset provisions are common in the state statutes, presumably based on the expectation that foreclosures will return to normal levels as the crisis wanes. For example, Connecticut's law sunsets on July 1, 2019,32 and New York's on February 13, 2020.33 Maine's law required a report and review by 2013.34 States where outcomes data were collected and reported have generally found their programs successful and chosen to extend them.35 On the other hand, mediation bills were not adopted in many states,36 and banks have successfully challenged the right of some local governments to adopt mediation programs on the grounds that they conflict with state law or exceed local government authority.37
The various state and local mediation programs are by no means uniform. Homeowners must usually make an affirmative request for mediation (opt-in), but in a few programs the initial meeting is scheduled automatically (opt-out).38 Some require the homeowner to
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meet with a housing counselor before mediation, and most have detailed lists of documents and information that the homeowner and mortgage servicer must submit to the mediator.39 The mortgage servicer must send someone to participate in person in some states, while others permit telephone conference sessions.40 The degree of data reporting and court oversight also varies from state to state.41 Despite these variations, the defining feature of mediation or foreclosure diversion programs is the same: the presence of a neutral individual to facilitate communication between homeowner and servicer, together with a pause in the foreclosure process.42
The varied mediation programs launched during the foreclosure crisis have produced a wealth of data to evaluate their effectiveness. Several states have incorporated detailed data collection as part of their program to facilitate empirical studies of the outcomes.43 States adopting mediation programs have tended to be those with the most severe foreclosure rates. As of June 30, 2009, the ten states with the highest foreclosure inventory rates were Florida, Nevada, Arizona, California, New Jersey, Illinois, Ohio...
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