SOURCE: Center for American Progress
Chairman Nava and other distinguished members of the Banking and Finance Committee, thank you for inviting me to testify before you today on Assembly Bill 1588 and the growing use of mediation programs as an effective tool to prevent foreclosures. My name is Andrew Jakabovics, and I am the Associate Director for Housing and Economics at the Center for American Progress Action Fund. I am actively involved in researching and developing policies to prevent foreclosures and deal with the impact of foreclosures on communities.
In my remarks this morning, I will highlight some of the best practices that my colleague Alon Cohen and I identified in our research on mediation in the foreclosure process, published as a report called “It’s Time We Talked.” Many of these best practices we indentified were distilled from our analysis of what we believe to be the two best programs, Philadelphia and Connecticut, each of which has been running for more than a year.
Overall, nearly three-quarters of all cases that go to mediation are able to avoid foreclosure. When we consider the costs of foreclosure, not only to the individual but to their neighbors who see vacant properties that further drive down house prices and the community that must often divert already scarce resources to combat the blight and crime that often follows, it should come as little surprise that mediation programs are expanding across the country. I should also note that Senator Jack Reed of Rhode Island recently introduced legislation that would help fund state mediation programs.
We must be realistic that not all homeowners will be able to stay in their homes, but four out of five cases in Connecticut that settled through mediation, or about 60 percent of all cases that went to mediation, resulted in the borrowers saving their homes. Even in instances where the borrower moves from their home as a result of the settlement—through a short sale arrangement or deed in lieu of foreclosure—the mediation process offers what Judge Rizzo of Philadelphia calls a “graceful exit.” Knowing they cannot save their home, borrowers can successfully negotiate the date of departure and cash for keys to put toward a security deposit on a rental apartment, ideally avoiding homelessness as a result of eviction by the sheriff.
Mediation or a monitored workout program provides an opportunity to check previous efforts to modify a mortgage, including ensuring compliance with the federal Home Affordable Modification Program. My time this morning is limited and I know you were all provided with our full report, so I would like to use my remaining time to highlight just a few of the best practices we identified for running a mediation program. The relationship between state and local mediation programs and HAMP is discussed at length in the paper.
First and foremost, maximizing eligibility and maximizing participation are critical. Most programs limit eligible participation to owner-occupied properties, which is something the bill currently before the assembly does not do. Broad eligibility is critical, as the social costs of foreclosure do not discriminate based on who lived in the foreclosed property or what kind of mortgage they had. New York’s program, in contrast, is only available to borrowers with subprime mortgages. We believe this unnecessary limitation on participation is detrimental and are heartened by the wide scope of the proposed monitored mortgage workout program in AB 1588.
Eligibility alone is insufficient for a successful program, however; participation is also required. While Philadelphia’s program has always been mandatory—the first court hearing on the foreclosure was scheduled as a mediation session—Connecticut began as an opt-in program and subsequently passed a law changing to a mandatory program to improve participation rates. As an opt-in program, only an estimated one-third of eligible homeowners chose to participate. Participation has increased under the current system.
Nevada, whose opt-in program went into effect in August, has also seen low participation rates. In Nevada, the homeowner sends a response to both the program administrator and the trustee. There is no reason why a declaration of a homeowner’s intent to participate cannot be done through a simple phone call to the program administrator or submitted through a secure web site.
Beyond the question of how people are brought into the program is the need to set a low bar to participation. Requiring already stressed homeowners to provide a mountain of paperwork to simply be able to participate is an unnecessary barrier to the program. In most cases, the first mediation session is used as an opportunity for both parties to find out what the other needs to be able to make a good-faith offer at a follow-up session. After all, the premise behind the need for mediation programs has been the inability of borrowers to have meaningful contact and dialog with their servicers. There are other aspects of the bill that I believe raise the bar to participation, but in the interests of time, I would happy to address them during follow-up questions.
Mediation or, in this case, a monitored workout, is an effort to break down the barriers to communication that have prevented resolution to that point. Just as borrowers will likely be asked for documentation of income, servicers will be asked for a full accounting of the amount owed, including a payment history and itemized fees and charges that may accrue. In many cases, the outstanding balance itself is in dispute. Indeed, we have identified face-to-face participation, either by the parties themselves or their representatives with full authority to cut a deal, as another best practice.
Likewise, face-to-face dialog offers a chance for the exchange of necessary information which often has been requested and subsequently lost (often by the servicer) many times before. Being able to simply hand over a copy of a pay stub or for the servicer to provide an itemized list of fees and charges that have been added to the mortgage balance (which is something counselors will always request) eliminates the problem of lost documentation.
This touches upon another crucial component of successful programs: the inclusion of housing counselors throughout the process. They help borrowers prepare for their mediation sessions and are present during the sessions. They play an important role in helping maintain a level playing field for the borrower. If we consider that a homeowner has never been through the process before and that the servicer’s representative does this on a daily basis, the imbalance in experience is hard to overcome. The average homeowner does not even know what questions to ask. Well-trained counselors can help advocate on behalf of a client and can assess whether an extended offer is truly fair. Outreach to borrowers is a big part of raising participation rates.
In Philadelphia, ACORN goes door to door for every homeowner with a scheduled mediation session (using the list published by the court) with cell phones in hand telling the homeowner to call a housing counselor on the spot. In one survey, they successfully reached 97 percent of all eligible homeowners through their efforts. This speaks to the need for strong involvement of local community advocates.
This model has been successful in Philadelphia because it has a deep network of community groups and, unfortunately, a long history of economic difficulties. Not all places have such a network, particularly when looking at programs that are statewide. Where those networks exist, they should be leveraged, but the experience in Connecticut has been to use court staff who are involved in the program to do the necessary outreach, attending homeownership fairs, training members of the state bar, and interfacing with housing counselors and community groups where those networks exist.
Commitment to the program is not just a matter for running a successful program. Getting buy in and participation of all stakeholders is critical to implementing a successful program. The role of the servicers and foreclosure bar has been very important in Philadelphia. Specifically, it is very much worth noting that they were strong opponents of the program before it started and today are counted among the program’s staunchest advocates and defenders. They have found that mediation lets them get either a performing loan or clear title faster than they would have through foreclosure. It would not surprise me if we heard similar opposition from the lending industry later this morning. But given the experience in Philadelphia, they may yet become big supporters of the California program.
I thank you again for the opportunity to testify before this committee and welcome any questions you might have.
For more on this topic see the Center for American Progress’s housing page and:
- It’s Time We Talked by Andrew Jakabovics and Alon Cohen (CAP)
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