Instead of foreclosure, an easier route for all
IF NO sensible mortgage lender wants to foreclose on a homeowner except as a last resort, why are so many still foreclosing?
That question lies at the heart of Boston Mayor Thomas Menino’s proposal to require mediation before a family loses its home to foreclosure, recently passed by the City Council. If the city gets permission from the Legislature to start mandatory mediation, Boston will be on its way to preventing hundreds of avoidable foreclosures and the neighborhood deterioration that follows.
Nationally, roughly one in every seven households with a mortgage is behind on one or more mortgage payments. Moreover, with news of the “robo-signing’’ foreclosure petitions, the public has seen that lenders who were sloppy with paperwork when making the loans might be just as sloppy when calling the loans.
As a result, tens of millions of Americans are anxious about their home values; nearly 30 percent of homeowners with mortgages are drowning “underwater.’’ Even more worry about their ability to pay their mortgages. This is bad for everyone who wants the economy to recover, including those who are not in default, as home prices could plummet again while a cloud of uncertainty keeps the home-buying market perpetually overcast.
Mediation dispels this cloud, a proven antidote against unnecessary foreclosures. The Center for American Progress reports that states and cities “with fully implemented [mandatory mediation] programs, such as Connecticut, Philadelphia, and Nevada, report settlement rates nearing 75 percent, with the majority of homeowners remaining in their homes.’’ In Philadelphia, for example, 75 percent of foreclosures are going through mediation, with a 73 percent settlement rate, and more than 60 percent of homeowners are staying in their homes.
Unlike robo-signing and other practices that blindly push through foreclosures and ignore alternatives, mediation gives the borrower a chance to sit face-to-face with a lender and a neutral third party, reviewing the individual facts of each case.
There have been many instances of borrowers who gave their lenders evidence of ability to pay a modified amount, only to have the documents repeatedly getting lost in the foreclosure shuffle. By contrast, mediation creates a setting where such evidence cannot easily be ignored. And in many cases borrowers concede that foreclosure is the fair result, resolving cases faster once borrowers have had a chance to be heard in person.
But if mediation is so sensible, why would it need to be mandated?
Voluntary loan modification programs have fallen far short for years. While many factors contributed to the logjam, it is clear that the incentives and the very structure of the home mortgage finance system tilt the table toward foreclosure as the route most mortgage servicers will follow.
Most servicers work for investors who own pools of mortgages. The complicated agreements governing how servicers handle their work compensate foreclosure more than mediation. It takes more time, knowledge, and staffing for a servicer to process modifications than it does to call up lawyers and start a foreclosure.
And while foreclosure may yield less money for investors in the long run when all the costs are factored in, many of the foreclosure costs come “off the top’’ from the foreclosure sale, and are not borne by the servicer making the decisions.
In short, the mortgage pooling system that was set up to encourage private money to flow into mortgages and make them cheaper for consumers is now a virtual doomsday machine for the economy, pushing the process to foreclose on homes instead of modify loans. In Massachusetts, where foreclosures are auctions privately run by the lender, there is no sensible way to separate out the well-founded foreclosure from the foreclosure mill run amok.
With foreclosures in Boston on the rise, screening out bad foreclosures is good policy. The mayor’s proposal helps do just that. Now it is up to the state to enable Boston (and perhaps communities statewide) to promote mediating out more avoidable foreclosures.
David M. Abromowitz is senior fellow at the Center for American Progress.