Periodically, StateImpact New Hampshire likes to check in with the Boston Fed to find out what forces analysts think are shaping the New England and national economies. And we stumbled onto this deceptively dry-titled little gem of a report by Robert Clifford: “State Foreclosure Prevention Efforts in New England: Mediation and Assistance.”This word cloud represents the Fed report
In his report, Clifford uses mainly New England examples to explain why some state foreclosure mediation programs work, why some don’t, and how states can fix their systems and prevent more foreclosures. Mediation, by the way, is when a neutral third-party helps negotiate an agreement between a lender and a borrower to prevent foreclosure. (And just FYI, Massachusetts is the only state in New England that doesn’t have some sort of state or city-headed mediation program).
StateImpact read the whole Fed report, and came back with Nine Essential Takeaways:
Mediation is better than foreclosure for everyone involved. Foreclosures aren’t good for anyone. Since the economy collapsed, banks have been saddled with thousands of houses they can’t get rid of. Vacant houses push down property values in their neighborhoods. And when homeowners are most vulnerable, they’re faced with the additional stress of losing their homes. If a bank forecloses, especially when the owner owes more than the house is worth (this situation is called “negative equity” or an “underwater mortgage”), the bank probably isn’t going to get all of its money back, anyway. And foreclosure procedures eat up time and money on both sides. Modifying the loan, offering forbearance, or getting financial assistance are possibilities for homeowners who want to stay put–and for banks that want to keep getting some sort of loan payment, even if they take some losses. There are also alternatives available like “cash for keys,” where a homeowner can take a cash settlement to leave without a formal foreclosure process.
- These programs are new, but promising. And they’re spreading. By 2008, two years after the housing market started its downhill slide, only five states (or cities) even had a foreclosure mediation program. Connecticut and Philadelphia were early adopters, and their programs were so successful that by early last year, 21 states plus Washington, DC, had started their own programs. By the end of January, 2011, Connecticut had prevented 7,478 foreclosures.
- Programs that favor the borrower are more successful than programs that favor the lender. There’s a lot of variation all over the country–and in New England–for who has the
upper hand in the mediation process, and why. One big factor is whether the process is judicial or statutory (non-judicial). In judicial states, a judge automatically oversees the foreclosure process. As Clifford writes, “Judicial foreclosure regimes are generally considered more borrower-friendly, as they give homeowners more time to correct a default and more opportunities to contest a foreclosure. In non-judicial states, defaulting homeowners can legally contest a foreclosure only by filing a lawsuit to stop the sale or filing for bankruptcy–both costly and unattractive options.” In New England, Connecticut, Maine and Vermont are judicial states, and these mediation programs use the court system to their advantage. If lenders don’t cooperate, the foreclosure can’t go forward. So there’s a built-in incentive for banks to cut deals with delinquent borrowers.
- Telling a homeowner they can go to mediation doesn’t work. It’s better to automatically enroll them and force them to opt-out later. Voluntary participation doesn’t work very well for many programs, even if it’s in a person’s best interest to sign-up (just ask your job’s retirement fund administrator). That’s true for foreclosure mediation, too. Nevada has a huge foreclosure problem, and a voluntary mediation program. Only about 20 percent of people there who need to participate actually do. Philadelphia automatically enrolls delinquent homeowners, and the participation rate there is 70 percent.
- Connecticut is a superstar. Of all six New England states, Clifford found that Connecticut has been the most successful at preventing foreclosure. By the end of January this year, 9,472 homeowners had completed mediation. About 79 percent of them somehow “avoided foreclosure.” And of those people, 64 percent got to stay in their homes. Only one out of five cases ended in foreclosure. As part of its foreclosure prevention efforts, Connecticut now funds two major financial assistance programs with millions of dollars from state coffers.
New Hampshire needs work.* As a statutory (or non-judicial) state with voluntary enrollment, the lender pretty much holds all the cards. Clifford explains it this way, “New Hampshire requires both homeowners and lenders to voluntarily agree to participate for mediation to occur. The homeowners’ request for mediation is sent to the lender, who evaluates their eligibility for federal foreclosure prevention programs and determines whether mediation is appropriate. If the lender finds that borrowers are not eligible for mediation, it notifies them and the program administrator, and the process ends.” If mediation fails, homeowners in non-judicial states (like New Hampshire) really only have one other option–plunking down money on a lawsuit to stop the foreclosure. While New Hampshire doesn’t have as many foreclosures as a lot of other states, its mediation track record is lackluster. During the first year and a half of the program, mediators handled 100 cases–and only settled 14 of them. The New Hampshire’s program is also incredibly small, with only $60,000 in grants from the state Housing Finance Authority and some private funding. If each case costs $400 to mediate, the state can only handle 150 foreclosure proceedings.
- Success breeds success. The more foreclosures states prevent now, the more foreclosures states prevent in the future. Successful mediation gives policy makers the nudge they need to fund programs for more mediation or financial assistance. If intervention works, states can sometimes find creative ways to fund new programs or expand or revamp old ones to prevent foreclosure. If policy makers see that programs work, they’ll have the impetus to track down funding or create what Clifford calls “unique funding sources,” like lender fees, for mediation.
- Information is key to determining success. Most states that have mediation programs
aren’t good at keeping track of the data that proves if they do–or don’t–work. Most states already have mediators file reports with basic financial info. The next logical step is to put the data into a central clearing house.There’s lots of data on the Connecticut program, because the state’s set aside part of its mediation budget to keep track of everything. There’s also lots of data on the Vermont program, because as part of the process, the mediator takes down basic financial information from the homeowner and crunches some numbers to determine “whether they are eligible for a mortgage modification, and whether the lender would benefit from modifying the loan.” This is called the Net Present Value (or NPV) calculation, and it’s a goldmine of data. We know that Philadelphia’s program works because the city not only plugged information into a database, but it followed up with participants about two years after mediation to see if they were still in their homes.
- Do everything in balance. Early intervention is best, since it gives mediation programs time to work before the situation’s desperate. There also needs to be time for mediators to dig into paperwork and for everyone to work out an agreeable solution. At the same time, the process shouldn’t last so long that the homeowner racks up additional, significant, debt. A balanced approach is also important when considering fees. Some states can (and do) levy fees against lenders and/or borrowers. Fees that are too heavy, however, can hurt participation on both sides. And no fees can create a situation where programs are under-funded and less effective.
*New Hampshire’s foreclosure prevention has since been all-but shuttered, and is taking no new cases.