Connecting homeowners with assistance from a housing counselor, mediator or lawyer can help prevent foreclosures by providing information and resources on foreclosure alternatives, offering legal expertise, acting as advocates that help navigate the loan modification process and catalyzing negotiations between homeowners and mortgage servicers. Housing counselors and lawyers help homeowners understand their rights and assess their options for avoiding foreclosure, and mediators can assist both parties in reaching an acceptable outcome.
Counseling, mediation and legal assistance programs can be implemented in a wide variety of settings and are easily tailored to the circumstances of individual communities. An important early step in foreclosure prevention programs is linking borrowers with information and counseling. Communities can help borrowers understand their situation and assess the options by expanding outreach by reliable nonprofit assistance organizations and providing 24-hour foreclosure prevention hotlines.
Many housing counseling agencies offer foreclosure prevention or default loan counseling to help families avoid foreclosure. Foreclosure prevention counseling can be delivered one-on-one or in a group setting and can also be conducted over the phone. Foreclosure prevention counselors help families understand their options for loan repayment or modification and can also help families cope with the burdens of losing a home. Foreclosure prevention counseling is generally conducted by nonprofit organizations skilled in providing homeownership counseling and education.
From 2007 through 2015, the federal government committed over $853 million for a National Foreclosure Mitigation Counseling (NFMC) program, administered by NeighborWorks America, to expand foreclosure counseling capacity among HUD-certified nonprofit counseling agencies. By using Community Development Block Grants (CDBGs) or other locally controlled resources to supplement direct federal funding for these activities, communities can ensure that nonprofit programs can continue or even expand. Schenectady, N.Y., and West Jordan, Utah, are among the numerous cities nationwide that use a portion of their CDBG money to support foreclosure prevention counseling provided by HUD-certified nonprofit counseling agencies.
While the approach taken by specific foreclosure prevention counseling programs varies, an October 2008 interim report of the NFMC program provides insight into some common counseling strategies and challenges counselors and borrowers face. For example, NFMC-funded agencies found that families who receive early assistance in the default/foreclosure process are more likely to achieve a successful loan workout than those who seek housing counseling assistance further along in the foreclosure process. This suggests the importance of outreach to connect families with counselors as early as possible. In Cleveland, Ohio, the nonprofit Empowering and Strengthening Ohio’s People (ESOP) established direct points of contact and formal agreements with many lending companies. These agreements helped housing counselors successfully negotiate loan workouts on behalf of their clients in a streamlined fashion.
The report also documents several challenges reported by housing counselors. Counselors find that they must be persistent with loan servicers to make sure their cases are up to date and have all the relevant paperwork filed. If communication between counselors and servicers is infrequent, counselors risk information getting lost or experiencing long wait times to hear about the status of their clients. To avoid some of these frustrations, some counseling agencies use software tools that enable counselors to input all the necessary data about a loan and transmit it electronically to the servicer.
Foreclosure mediation is a process in which a homeowner facing foreclosure and the mortgage loan servicer meet with a neutral third party in an attempt to reach a resolution that avoids a foreclosure sale and is beneficial to both parties. Some mediations lead to both parties agreeing to a mortgage modification that keeps the homeowner in the home, while others instead provide a graceful exit for the homeowner if the parties cannot find an acceptable way to make the mortgage payment affordable. A graceful exit allows homeowners to avoid foreclosure by giving up their homes through a process that generally minimizes or eliminates any residual financial responsibility for the mortgage debt. Such options may include a short sale of the property, a deed-in-lieu of foreclosure (called a “deed-in-lieu” for short) or a cash-for-keys arrangement. Graceful exits permit the homeowner and servicer to avoid a lengthy foreclosure process and may be less damaging to the homeowner’s credit score. The homeowner also gains some amount of control over the outcome, such as allowing them to set the moving day.
Mediation programs are generally implemented at the state level through legislation or via local ordinance.
There are two major types of foreclosure mediation programs: opt-in and mandatory or automatic. In opt-in programs, homeowners receive notice that mediation is available when they are served with foreclosure papers and can request mediation prior to completion of foreclosure proceedings. In mandatory programs, mediation is automatically scheduled for both parties, and the date and time for their mediation session are included in the foreclosure notice. The only mandatory element of mandatory foreclosure mediation programs is attendance at the meeting; the parties are not required to agree to a settlement.
Implement a mediation program
Foreclosure mediation programs have been implemented in several states since 2008. No two have been exactly alike, but the most successful share several traits. It’s Time We Talked, a report from the Center for American Progress by Andrew Jakabovics and Alon Cohen, identified a set of best practices drawn from a detailed study of several programs. These include:
- maximizing both eligibility for and participation in the mediation program,
- actively involving housing counselors,
- ensuring that the servicer or its representative at the mediation has the authority to make a deal during negotiations, and
- facilitating a face-to-face meeting whenever possible.
For mediation programs – whether mandatory or opt-in – to have significant impact, a majority of homeowners facing foreclosure must be eligible. Participation should be as simple as possible: opt-in mediation programs should include clear and simple instructions for homeowners to seek counseling assistance and sufficient time to respond. Mandatory mediation programs go a step further by automatically scheduling the first mediation session and requiring attendance, increasing the likelihood that mediation may help improve the outcome.
Mediation works best when homeowners are given access to housing counselors and/or legal aid to help advise and represent them prior to and during the mediation session. Foreclosure prevention counselors have specific knowledge of foreclosure alternatives and experience in negotiating with lenders or servicers on a homeowner’s behalf.
The goal of the mediation is to reach a deal, so the servicer must provide a negotiator who has the power to make decisions on the spot (or who has phone access to such a person). Otherwise negotiations might be unproductive.
Mandatory mediation programs appear to be the more successful of the two types. Connecticut reports that approximately 68 percent of participants are able to reach a resolution and avoid foreclosure. This frees up court dockets in judicial foreclosure states and generally results in better outcomes for all parties than a foreclosure proceeding would.
Funding a mediation program
Securing funding for the mediation program is important, but not necessary. Cities such as Philadelphia have managed to implement successful mandatory mediation programs with almost no start-up funds by using existing staff and resources and tapping volunteers to serve as mediators.
Fees can also be used to fund a mediation program, though program administrators should be careful they are not a barrier to participation. A mediation law in Maryland funds the mediation process through filing fees; servicers must pay $300 to initiate a foreclosure complaint (after providing evidence that the borrower is not eligible for a loan modification), and borrowers are required to provide a $50 fee with their request for mediation once foreclosure proceedings have begun.
Mediation for judicial and non-judicial foreclosures
Variations in foreclosure law from state to state provide different starting points that are important to understand before adopting and implementing a mediation program. RealtyTrac provides information on the type and length of foreclosure proceedings by state. The amount of time it may take to complete foreclosure proceedings of either type ranges from 37 to 300 days, and a few states authorize either judicial or non-judicial systems depending on circumstance.
In many states, foreclosure happens within the court system – this is called judicial foreclosure. Loan servicers must file an official legal complaint of delinquency, and arguments are heard in front of a judge before the property can be sold.
States with non-judicial foreclosures have a less-formal process. Generally, servicers must only wait a specific period of time after filing a notice of foreclosure before selling the property.
- Judicial foreclosure states: mediation occurs during the foreclosure process. In areas with mandatory mediation, the servicer’s foreclosure complaint starts the mediation process; a session is scheduled automatically and the homeowner is notified of the date and time in the notice of foreclosure. In areas with opt-in programs, the notice of foreclosure from the court includes information about the mediation program and how to sign up. Generally, mediation does not delay the foreclosure process. Instead, the foreclosure process proceeds during the mediation, but final judgment and sale cannot occur until mediation is complete. Successful mediation discontinues the foreclosure process.
- Non-judicial foreclosure states: Since non-judicial foreclosures have a less-formal and generally faster process than judicial proceedings, mediation needs to occur early for the parties to reach a resolution before the foreclosure process is complete. In many states, the servicer issues the homeowner a notice of foreclosure and, after a set waiting period, is able to put the property up for sale. Some states require an initial notice of default prior to the notice of sale. Information about mediation programs could be contained in the default notice (or, less helpfully, in the later notice of sale), but given the faster pace of non-judicial foreclosure proceedings, it is helpful to adopt a policy that starts mediation prior to issuance of a notice of default or sale.
For example, in California, a non-judicial foreclosure state, servicers are required to contact the homeowner at least 30 days prior to issuing a notice of default to provide information on finding a housing counselor and to set up a telephone conference between the parties to discuss options other than foreclosure. While, strictly speaking, this is not mediation (there is no neutral third party present), it is a good example of providing time for negotiations to occur in a non-judicial foreclosure setting.
Non-judicial mediation can be either mandatory or voluntary, and, as in judicial foreclosure states, successful mediation ends the foreclosure process.
Legal assistance can be a critical resource to help families stay in their homes and prevent financial losses by negotiating alternatives to foreclosure. Legal assistance also provides representation for families who have been taken advantage of by predatory lenders.
The work of local and state legal assistance agencies can be effective in combination with, or as an extension of, housing counseling services. Whereas housing counselors might lay out the various options available to prevent foreclosure, offer budget advice and assistance, give information and referral services or help to negotiate a “workout” with the lender, legal assistance tends to be more specific in navigating the legal issues homeowners may face as they try to avoid foreclosure. In many cases, a housing counselor might recommend that a client seek legal assistance to meet their particular needs.
Over 800 legal aid offices operate at the state and local levels in the U.S., and most operate under the Legal Services Corporation, a national entity created by Congress in 1974. These quasi-public agencies are intended to provide support to individuals and communities that typically do not have access to legal services, often the same populations most hurt by abusive loan practices. While most of these agencies serve clients on a range of legal needs, many have developed programs specific to home foreclosure and predatory lending issues, including litigation for fair housing, consumer protections or education and advocacy.
Legal Services of New Jersey, for example, has the Anti-Predatory Lending Project, which provides legal help to low-income homeowners who are at risk for foreclosure or the loss of equity as a result of predatory lending. They also promote homeowner education and outreach, as well as policy advocacy.
Similarly, Legal Aid of North Carolina runs the Mortgage Foreclosure Prevention Project, which provides legal representation in foreclosure actions. The project helps to preserve clients’ credit ratings, save homes from foreclosure and make it difficult and expensive for predatory lenders to continue to engage in abusive loan practices. The Mortgage Foreclosure Prevention Project also promotes community education to increase awareness of home finance best practices and the dangers of predatory lending.
Although the Legal Services Corporation provides funding to state and local aid agencies, many agencies are dependent on grants and other funding mechanisms to support their work. Supporting legal service agencies can be a beneficial use of state and local government funds and can save governments money over the long term. Local and state governments can dedicate funding for their communities’ legal service agencies by:
- Providing direct funding to legal services or legal aid offices for legal assistance related to foreclosures.
- Integrating funding for legal services into the Consolidated Plan required by each community in order to receive Community Development Block Grant (CDBG) funding.
- Increasing court filing or recording fees to provide funds for additional legal services for those who need it.
Other strategies for foreclosure prevention
Governments can help families facing loss of their homes by offering a unified foreclosure prevention resource that allows homeowners to focus on sorting through their options rather than searching for them. By sponsoring and actively promoting a hotline for families at risk of foreclosure, governments can also provide a seal of approval that helps families avoid scams masquerading as foreclosure prevention assistance.
In addition to offering hotlines and other one-stop foreclosure prevention resources, communities need to actively promote these tools to connect families to the resources they need. In many cases, families are eligible for loan modifications from their mortgage company or for various forms of government assistance, but they don’t know where to look for help. Governments can play an important role by getting the word out about the availability of assistance and offering assurances that the assistance is reputable.
There are many different ways for governments to promote these tools, as the following examples show.
- Mail information about the new resources to all households in communities with high rates of foreclosure and conduct a citywide advertising campaign.
- Include 311 information on standard monthly bills like water and utility bills.
- Include 311 and housing counseling information in termination packages and at county unemployment departments.
- Advertise 311 and housing counseling services though robocalls with a recording of an elected official.
- Create press releases and media events to draw attention to foreclosure prevention hotlines. For example, a media event held by the Colorado Division of Housing was followed by a panel discussion on issues related to foreclosures.
To maximize the effectiveness of these hotlines, communities can encourage lenders and servicers to work closely with hotline counselors to help restructure loans when needed.