As Mediations Take Hold, Servicers Seek To Improve The Process

[i]REQUIRED READING:[/i][/u][/b] [b]With nearly one in eight mortgages either delinquent or in the foreclosure process right now,[/b] the social momentum and legislative motivation to explore alternative methods of dispute resolution are greater than ever. One increasingly popular option is mediation – the process by which borrowers, servicers and attorneys are able to come together and negotiate a mutually satisfactory resolution without resorting to formal foreclosure proceedings. A number of jurisdictions in states around the country have already formalized legal and logistical guidelines and have implemented mediation programs and other forms of alternative dispute resolution. This trend seems certain to continue in the months and years ahead. For defaulting borrowers and homeowners facing foreclosure, mediation often represents a way to move forward without losing the home – a prospect that can be equally appealing to servicers and their attorneys looking to reduce losses and minimize their exposure. While these mediation initiatives are still in the early stages, some have shown promising indications that mediation can be an effective tool to help stem what some fear might add to the rising tide of foreclosures. In Connecticut, for example, 5,014 mediation cases had been completed as of Dec. 31, 2009. Of those cases, approximately 61% of homeowners were able to remain in their home, and approximately 75% of all cases were ultimately resolved successfully through the mediation process. Whether through loan modification or alternative solutions like short sales, deeds-in-lieu, or law-day or sale-date extensions, mediation has frequently been able to provide a viable framework and a legitimate and effective forum for default dispute resolution. But not everyone agrees that mediation is an ideal solution. Critics of mediation point to the sometimes time-consuming nature of the process, and a variable success rate that can sometimes deliver little more than disappointment. Servicing professionals are often forced to deal with an array of obstacles and challenges, including understaffed courts, absentee borrowers and judges who lack familiarity with not only existing loss mitigation programs, but also sometimes even the fundamentals of real estate law. Some servicers and attorneys are pessimistic about the long-term value of widespread mediation and maintain that such methods, when applied indiscriminately across the board, all too often fail to provide any meaningful resolution. But criticism cuts both ways. Some studies report testimony that criticizes servicers and their attorneys as sometimes unprepared for mediation. Common complaints include confusion on who possesses the delegated authority to approve a modification and all parties being unfamiliar with the status of borrowers' existing requests for loss mitigation. While no system is without flaws – on both sides of the docket – advocates of mediation point to early indications that success rates such as those achieved in Connecticut and other successful early adopters of comprehensive mediation programs can be replicated nationwide. To proponents, mediation has the potential to blunt the impact of the housing crisis and streamline default resolutions by reducing the volume of litigation and delivering more efficient, effective and affordable alternatives to lenders, borrowers, members of the default servicing industry and hard-hit communities across the country. With mediation's increasingly prevalent presence in the default servicing landscape, it behooves borrowers, servicers, default servicing attorneys and even courts and judicial figures to educate themselves about the ins and outs of the process, and to take responsibility for implementing guidelines and policies aimed at promoting an efficient and productive mediation process. While the legislative and procedural details vary – sometimes quite dramatically – from state to state, there are certain best practices that should be a part of every responsive, responsible and efficient foreclosure mediation proceeding. [b]Encourage participation.[/b] Much of the servicer frustration with current mediation programs stems from the mandatory requirement for servicer participation while failing to demand a similar obligation on the part of the homeowner. Early communication, efficient scheduling and/or mandatory homeowner participation in mediation programs can maximize the pool of eligible borrowers and homeowners, potentially saving the state, the industry and the homeowners themselves a great deal of both time and money. Implementing outreach and counseling programs when possible via civic, community and professional groups is another way to encourage responsible and responsive homeowner participation. Similarly, providing borrowers with access to Department of Housing and Urban Development-approved counselors or other informed officials can help make them aware of their options before mediation even begins, and may help eliminate delays caused by a lack of materials or avoidable misunderstandings. [b]Be prepared.[/b] Comprehensive preparation before the mediation process even begins applies equally to all parties involved in any mediation program. Homeowners, servicers and their attorneys need to have all required documentation ready to go in order to approach the mediation. Any missing documents can and will cause a delay. Because there is such a massive volume of cases both pending and currently being reviewed, in many cases, courts are overwhelmed. While adjustments are slowly being made to accommodate these new realities, with courts hiring more mediators and, in some cases, engaging in logistical upgrades that can be as straightforward as literally finding more conference rooms, it is more important than ever that all parties be fully prepared before mediation. [b]Streamline the process.[/b] There are a number of ways that an efficient mediation program can more easily meet the needs of both servicers and borrowers. Perhaps the single most important step that a mediation program can take to improve functionality and generate more timely results is to mandate that borrowers submit all necessary financial information and documentation at the same time they submit their request for mediation. Avoiding costly delays and misunderstanding by providing the lender with all the necessary documents to make a quick and accurate evaluation is critically important. In addition to making the initial mediation a much more productive process, it can minimize or even eliminate the need for follow-up. Such a strategy also helps avoid the all-too-common headache of documents "going stale" (due to outdated or time-sensitive documentation) while one party waits for supplemental information. At the same time, the current practice of attorneys being metaphorically handcuffed by the lack of authority to finalize a settlement is inefficient and similarly laden with the potential for delay and inefficiency. Servicing professionals or attorneys should work out a range of possible acceptable resolution options ahead of time and, whenever feasible, should have the authority to make a deal on behalf of the lender. [b]Be realistic.[/b] The overriding goal of mediation is to find a remedy that allows the borrower to stay in the home while resolving thorny financial issues through a forbearance or loan modification. In some cases, however, it becomes evident that it is not financially or logistically feasible for the defaulting borrower to stay in the house. (An unemployed individual, for example, is unlikely to be able to meet the terms of even the most generously modified loan agreement.) In these cases, all sides need to remain flexible and open to coming to terms with another more realistic option, such as a short sale. And because the documentation necessary for a workout or mediation is different than that needed for a foreclosure or liquidation, it may be necessary for the lender and the mediator to display scheduling or logistic flexibility once it is determined that an alternative resolution will be necessary. [b]Understand available options.[/b] It is important for servicers to recognize who is sitting on the other side of the negotiating table. A one-size-fits-all approach is likely to be inefficient at best and counterproductive at worst. Taking the time to understand the priorities, resources and individual circumstances of the borrower is a valuable prerequisite to understanding what options are available during the mediation process and in what direction you and the borrower might proceed in order to come to a mutually satisfactory resolution. To that end, it is vital that servicers be not only aware of, but intimately familiar with, the ever-evolving range of programs that are available in the state in which the defaulted loan resides. Familiarity with the policies and the process is important, and comprehensive training is the key to building and maintaining a quality mediation practice group. Going forward, it is incumbent upon servicers and their counsel to recognize that they are building a whole new default servicing unit that did not exist a few years ago, and familiarity with the process, the documents and even the basics of real estate law is likely to be an evolving process – not a fixed destination. As this nationwide trend continues, each state is going to have its own mediation program, and all of these programs are likely to be different. Staffing toward the volume to come and strategic staffing with the understanding that employees will need to familiarize themselves with the legal and procedural nuances that can vary so significantly from state to state is the sign of default servicing professionals who understand that mediation is likely to continue to become an ever more prominent feature in the new industry reality. [i]Donna M. Case-Rossato is a managing attorney at Hartford, Conn.-based Hunt Leibert, which provides legal representation in finance, foreclosure, bankruptcy and mortgage litigation in both state and federal courts. She can be reached at (860) 241-1677 or drossato@huntleibert.c


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