Wednesday, March 4, 2009

Mediation and Mortgage Foreclosure

I have commented previously here on the characteristics of disputes that are appropriate for resolution by mediation. With the large number of mortgage foreclosures anticipated during the rest of the current recession, only some of which are anticipated to be prevented by federal mortgage refinance and modification guidelines , one may wonder whether it makes sense for state court systems to implement mandatory mediation programs as an adjunct to court determination of these foreclosure actions. Perhaps you saw CNN video footage of a Florida state court's rapid fire processing of foreclosure actions. The Florida Bar has recently proposed mandatory mediation of foreclosures (perhaps they saw the video footage too). Apart from the policy and political implications of this proposal, is mediation likely to have a beneficial effect on the court administration of a large number of foreclosure actions?

Some states, such as Connecticut, have already implemented such mortgage foreclosure mediation programs, while New York, where I hang my hat, has not (New York requires, with respect to subprime mortgages, for homeowners to receive 90-day pre-foreclosure notice to alert borrowers that they are in default or foreclosure and advise them that there may be help available. Another provision establishes mandatory settlement conferences to bring a borrower together with the party initiating the foreclosure proceeding to attempt to reach a satisfactory conclusion. No mediation is called for in these settlement conferences).

Which court system has got it right?

I think mediation is probably not an apt dispute resolution mechanism in the mortgage foreclosure context. There is no real relationship between the parties in which interests and objectives can be worked through. The lender wants to maximize its net present value. While there may be information that the homeowner can provide the lender that will lead the lender to pursue modification as opposed to foreclosure (hence the New York mandatory subprime pretrial conference), there would be nothing tangible that I see that a mediator can add to this informational exchange that would enhance the resolution of the dispute.

Moreover, while there may be substantial asymmetry in knowledge and resources available to the foreclosing lender and the homeowner that should be addressed (hence the New York mandatory pre-foreclosure notice of where to get help), mediator neutrality would seem to prevent a mediator from expanding upon the type of information the homeowner could get from the local legal aid/housing rights office.

So what would mediation offer of any tangible benefit to the process beyond the information and meeting requirements set forth in the New York statute?


Marvin Schuldiner said...

I respectfully disagree with your conclusion that mediation is not appropriate for foreclosures. I am a mediator in NJ and I am also on the court's roster for foreclosure mediation. Our foreclosure mediation program allows any homeowner who requests a chance at the table to have it. The request can happen at any time in the foreclosure process, right up until the sheriff's sale -- the process will be stayed.

In NJ, all homeowners requesting mediation must go through a counseling program with a HUD-approved housing counselor. This person will help the homeowner determine what they can afford in a home. The counselor is also supposed to appear at the mediation to assist the homeowner should a loan modification be possible.

In many cases, the bank does not want the house in foreclosure as it will result in a significant net loss. In most cases, homeowners ignore the bank mailings, delinquency notices, complaint filed in court, etc. They have given up out of embarrassment, hopelessness, confusion over the legal process, etc. Getting them to the table is a significant step.

In some cases where there is no possible way for the homeowner to keep the home, banks have been making cash payments to the owner to voluntarily leave the house. They will also allow the homeowner to stay in the home until the end of the school year to minimize the impact on children. This saves both sides money and saves the homeowner from the embarrassment of being evicted by the sheriff.

Simply put, not much of this would be possible without mediation. I've written more about this on my blog at Sanns Mediation World of ADR. No mediation is perfect, but we must try to use mediation to help in any way we can when times are toughest -- for all sides to benefit.

Christian S. Herzeca, Esq. said...


While I disagree with nothing that you say, I remain unconvinced. I guess I should elaborate on my blog post, especially when I say that there is no real relationship between the workout officer and the defaulted homeowner that can reliably serve as the basis for mediation.

It has been my experience that workout teams use strict workout criteria, usually generated from the home office. The criteria may change over time, but there is little flexibility allowed at any point in time. While various pieces of information relevant to the homeowner's ability to pay, as well as local real estate prices etc, are important for the workout officer to know, and everything should be done to make sure that the homeowner is able to convey this information, there is little that a mediator can add here, other than perhaps a little misplaced advocacy.

I guess I am saying that if I would choose whether to impose on the foreclosure process as a social cost either the added fee and costs of a mediator or additional housing advocates working with homeowners outside of mediation, I would choose the latter.

Christian S. Herzeca, Esq. said...

This article seems to imply that foreclosure mediation was intended to foreclose foreclosures; and its intended result has not worked.