Spring 2010-#4. How Foreclosure Mediation Legislation Can Keep Vermonters in Their Homes (and Money in the Pockets of Mortgage Holders).

• Author: by Grace B. Pazdan, Esq.

Vermont Bar Journal

2010.

Spring 2010-#4.

How Foreclosure Mediation Legislation Can Keep Vermonters in Their Homes (and Money in the Pockets of Mortgage Holders)

THE VERMONT BAR JOURNALVolume 36, No.1Spring 2010How Foreclosure Mediation Legislation Can Keep Vermonters in Their Homes (and Money in the Pockets of Mortgage Holders)by Grace B. Pazdan, Esq.Introduction

In the wake of the recent economic recession, Vermont has seen a dramatic increase in the number of foreclosure filings statewide. Although Vermont has fared better than many states with larger urban areas, in a state of just over 600,000 people there were a total of 1924 new foreclosure filings in 2009.(fn1) To put this in perspective, the 2009 figure represents an increase of over 120% from just three years ago.(fn2) Furthermore, the majority of filings were foreclosures of primary residences, which means Vermont families are being displaced from their homes at a higher rate than we have seen in years. Nor does it appear that the situation for Vermont homeowners is likely to improve anytime soon given that the most recent foreclosure data tracks the recent trend, with 146 new foreclosures filed in the month of January alone.(fn3)

In an effort to address the bleak situation facing many Vermont homeowners, at the start of this legislative session Representatives Willem Jewett of Ripton and Maxine Grad of Moretown introduced H.590, "An Act Relating to Mediation in Foreclosure Proceedings."(fn4) H.590 was drafted as a joint effort by Vermont Legal Aid, Inc., and the Consumer Protection Unit of the Attorney General's Office, and would mandate the availability of structured mediation in foreclosures of primary residences. The proposed legislation developed out of a recognition that foreclosure is often a losing proposition for both the families who are struggling to save their homes and the lenders or investors who own their mortgages, and it builds on the success of foreclosure mediation programs that have sprung up around the country in recent years.

Certainly, in an economy where unemployment rates are high and housing prices low, there is no question that some Vermonters simply cannot afford to stay in their homes. But in many cases, Vermont homeowners who have suffered a financial hardship can remain in their homes with the help of a loan modification that makes their payments more affordable. Particularly where homeowners are stuck in high-interest rate or adjustable rate loans, a simple modification of the interest rate to the current historically low rate can mean the difference between housing security and homelessness.

Despite federal initiatives to encourage loan modifications that are beneficial to all parties, loan servicers continue to pursue foreclosure against homeowners who qualify for loan modifications and other loss mitigation options.(fn5) Federal oversight of the loan modification program has been lax and the program has thus far fallen far short of its promise to prevent millions of foreclosures. The foreclosure mediation program introduced in the Vermont legislature this session as H.590 has the potential to provide much-needed oversight of the loan modification process and prevent hundreds of needless foreclosures, particularly where homeowners qualify under existing programs but lack the representation or sophistication to vindicate their rights to these foreclosure alternatives.(fn6)

Foreclosures: Bad for Homeowners, Bad for Mortgage Holders

The rising foreclosure rate in Vermont, as elsewhere, is a concern not only for homeowners but for the lenders or investors who own their mortgage loans. A national study conducted in November 2008 revealed that mortgage holders' losses from foreclosures averaged 57% of the value of the home.(fn7) Alternatively, a performing loan, even where the interest rate is lowered to provide an affordable payment, results in an income stream to the lender or investors for the term of the loan.

Nonetheless, lenders and loan servicers often pursue foreclosure over alternatives such as loan modifications that make homeowners' payments more affordable. Some have suggested that the problem is merely a breakdown in communication between the homeowners in default and the mortgage servicers with the authority to make loan modification and other loss mitigation decisions.(fn8) While there is certainly evidence of homeowners facing serious communication barriers with their loan servicers, the heart of the problem lies in mortgage servicers' perverse incentives to choose foreclosure over modification, even where foreclosure harms both the homeowner and lender or investors that own the loan.

Unlike the mortgages of old, which were originated and serviced by the same institution, in most cases today, the lender-or investment trust into which the mortgage is sold-hires a mortgage servicer to collect monthly payments immediately after the loan is made.(fn9) The servicer is responsible for all communication with the homeowner about the account, and is likewise responsible for deciding whether a delinquent loan is modified or goes to foreclosure. Often, mortgage servicers have financial incentives to foreclose because they typically do not lose money on a foreclosure and often, as part of their fee structure, actually get paid for a successful foreclosure.(fn10) On the other hand, a loan modification usually comes at a cost to the servicer, making it a less attractive option, even if the actual owner of the loan would realize a benefit through the modification.(fn11) Thus, as evidenced by early federal initiatives, foreclosure prevention programs that leave loan modification in the discretion of loan servicers are unlikely to succeed because of economic incentives.

The Federal Home Affordable Modification Program

Recognizing the dire situation for...