By Abby Tolchinsky and Ellie Wertheim
As the federal government continues to grapple with the recession, and the housing crisis in particular, mediation is emerging as a productive tool for both borrowers and lenders. According to the Mortgage Banker’s Association, one in 10 homeowners is either delinquent on their mortgage payments or already in the process of foreclosure. That is to say, 4.6 million people are at risk of losing their homes. The ripple effect of these potential home losses leads to further depression in home values, dislocation of families (who may already be among the unemployed) and a decline in quality of life for the whole neighborhood. In order to assist borrowers in remaining in their homes, and lenders in preserving their investments, some states have been catalyzed to develop alternative solutions to foreclosure.
In New York State, Albany has responded with The Foreclosure Prevention and Responsible Lending Act. This legislation, effective August 2008, is limited to foreclosures in high-cost, subprime or non-traditional home loans. The lynchpin of the law is a mandatory settlement conference, the purpose of which is to determine “whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other work out options may be agreed to ….”1
The legislation, while clearly intended to help homeowners remain in their homes, is, nevertheless, limited in scope. Most glaringly, it does not take into account the effect of increased unemployment or underemployment on a family’s ability to meet once affordable mortgage payments. Indeed, while the Legislature set a noble goal (to wit, protecting those who signed a predatory loan on the dotted line), the legislation is more notable with today’s hindsight for what is not addressed. That is, with the deepening recession, a struggle to make previously affordable mortgage payments is the new reality for both lenders and borrowers. Non-predatory loans are similarly at risk of default and homeowners are seeing a decline in home equity, often a family’s main financial asset.
Beyond the limited scope of which types of mortgages are covered, the process of these settlement conferences does not include mediation as a methodology. Additionally, the settlement conference format is being interpreted and implemented in a different manner from county to county. According to Rebecca Case-Grammatico, supervisor of the Foreclosure Prevention Unit at the Rochester office of the Empire Justice Center, the handling of these settlement conferences varies greatly among judges. Some are holding them in chambers; some in open court with a court reporter; some on motion days; and some in special sessions. Overall, the conferences are being treated more as status conferences than as true negotiations.
Making a negotiation more challenging, there is an inherent power imbalance between borrower and lender. The Legislature has acknowledged this imbalance between the lender who appears with counsel and the borrower, who, already delinquent on home payments, often appears pro se, in which case he or she shall “be deemed to have made a motion to proceed as a poor person ….”2 Nevertheless, little has been done to address this power imbalance in the conference itself.
If there is an upside to these settlement conferences, it is that they create an opportunity for borrowers to respond to a complaint, to be heard, and to have increased access to court proceedings.3 However, the process itself needs to be supported by guidelines so that parties know what the settlement conference will look like, how to prepare and what each side can hope to accomplish. As it now stands, the model of the settlement conference is litigation – not mediation.
In vivid contrast to New York’s efforts, several other states, looking to protect at-risk borrowers, have developed mediation-based models on both the state and the local levels. Two examples of models that differ significantly from New York’s have been instituted in New Jersey and three counties in Florida.
As of January 2009, New Jersey has begun the Mortgage Stabilization and the Housing Assistance and Recovery Program – statewide and state-funded – including mandatory mediation to prevent foreclosures of all primary residences, regardless of the type of mortgage involved. This mediation initiative grew out of the efforts of one judge in Middlesex County. The legislation mandates mediation upon request of the borrower. Any time prior to a sheriff’s sale, a borrower may request mediation, thereby triggering the mandatory mediation provided for in the statute. The law also requires 45-day notice and full disclosure of financial details prior to the actual mediation session.
In order to actually implement the mediation program, the New Jersey judiciary has taken some innovative and far-reaching steps, designed to maximize the impact of the statute, such as producing a four-minute “YouTube” video that details the borrowers’ rights and the foreclosure mediation process. Additionally, a toll-free hotline is staffed with counselors available for consultation with the borrowers; calls are prioritized based upon the urgency of the cases. Those in which a sheriff’s sale or foreclosure is imminent are handled before those with late payments or risk of default. In just a few months, the New Jersey court system has trained over 500 mediators to serve as neutral facilitators in these borrower-lender disputes. Lenders participate in good faith and find it in their interest to negotiate a workout, keeping homeowners in their residences rather than seizing properties lenders are unlikely to sell in the current recessionary market.4
In Florida, counties such as Miami-Dade, facing some of the highest foreclosure rates in the country, are developing mediation opportunities. The Collins Center for Public Policy, which already had a successful track record managing wide-scale mediation programs in Florida, is running the current initiative in just three counties to date. In these mediations, lenders are required to pay for the mediation sessions, as there is no state funding available at this time. Borrowers attend with detailed budgets and demonstrate what they believe they can reasonably afford to pay.
The mediations are mandatory upon the lenders. A failure to appear results in dismissal of the pending action, without prejudice. The mediators, who receive detailed mortgage workout training, focus on the ability of the parties to reach a deal in which a feasible payment schedule is developed, thereby keeping borrowers in their homes. In fact, financial advisers are available to consult with and assist the parties during the mediation, helping to generate possible options. The lenders, too, have an interest in protecting property values and preserving communities. In Miami/Dade County alone, 30,000 foreclosure mediations are anticipated for 2009.5
Perhaps most significant, predatory lending does not function as a predicate in either New Jersey or Florida’s mediation processes. Where predatory lending – high interest rates, subprime mortgages, interest-only mortgages – is a predicate, as in the New York statute, bias and fault-based assumptions may be inherent to the decision-making. Rather, mediators in the Florida and New Jersey programs begin with a neutral posture regarding both the borrower and the lender. The process is driven by the overarching goal of re-working the initial contract between the parties. Whether a mortgage was predatory or a borrower finds himself in debt as a result of having mismanaged his finances is beside the point. Preserving communities, homes, businesses and ultimately local economies, are the ultimate public policy goals.
New York’s new legislation provides the settlement conference as the forum for a class of borrowers at risk of default. However, New York should consider taking a page from the playbooks of Florida and New Jersey. Like Florida, if New York does not have statewide funding, then counties with high foreclosure rates can craft local initiatives and train professionals to mediate borrower/lender foreclosure disputes. This would provide those in serious financial binds with a voice, potentially reorganizing their mortgage obligations, while meeting the needs of lenders as well. And, not incidentally, it would ease the ever-increasing burden on the courts to hear the ever-increasing number of foreclosure matters.
One basic tenet of mediation entails seeking out the needs and interests of each side in an attempt to clarify and resolve the conflict. Here, the needs and interests are clear: for homeowners, there is a need to stay in their home and create a structure whereby payments can be affordable and, therefore, reliably made. For lenders, there is an interest in continuing to receive income on an investment rather than seizing a property that requires upkeep and which may prove difficult to sell in the current economic climate. For both, there is a fundamental interest in protecting an investment.
In the context of the settlement conferences, New York would do well to learn from New Jersey, and, at a minimum, disseminate information and guidelines that can be readily accessed by homeowners at risk statewide, enabling them to participate more effectively in the settlement negotiations, thus increasing the efficiency and probability of a successful negotiation for both sides. These shifts humanize the process, giving each side a chance to be heard and to work with each other where their interests intersect.
Abby Tolchinsky and Ellie Wertheim are partners at Family Mediation.
1. McKinney’s CPLR 3408 (a) (2008).
2. McKinney’s CPLR 3408 (b) (2008)
3. Indeed the legislation requires 90 days notice to the borrower, prior to a creditor filing an action for foreclosure. McKinney’s RPAPL 1304 (2008).
4. Telephone call with Kevin Wolfe, Chief of the Civil Practice Division, New Jersey State Judiciary, April 22, 2009.
5. Telephone call with Rod Petrie, President, Collins Center for Public Policy, April 21, 2009.