The Importance of Foreclosure Mediation Programs

10.18.12 | There’s an interesting controversy brewing in St. Louis County over a new law that requires banks to participate in formal mediation before foreclosing on residential property in the county.

Like much of the rest of the country, suburban St. Louis County has been hit hard by the foreclosure crisis and recession. The county has over 4,000 foreclosures a year, according to BRR Network member Todd Swanstrom. And homeowners like Casandra Sheperd, who lost her job at an insurance company last year and fell behind on mortgage payments, often get stuck in an endless loop of paperwork or an automated phone tree when trying to reach out to the bank to negotiate to avoid foreclosure.

“I would have ran to go sit and talk to them face-to-face, I really would have,” Sheperd told St. Louis Public Radio. Instead, Sheperd’s house is in foreclosure and she’s moving out.

The new law, which has yet to go into effect, requires banks to offer mediation before foreclosure. Lenders would be required to meet with homeowners who request mediation, but would not be required to reach an agreement.

But local bankers are suing to block to new law. The Missouri Bankers Association and Jonesburg State Bank have sued the county to block the ordinance, and the law is also being challenged in a class action lawsuit filed by The Business Bank of St. Louis.  These groups say the county has overstepped its authority and that the new ordinance conflicts with the state of Missouri’s current statutes for non-judicial foreclosures in St. Louis County. The banks also object to fees (the law requires lenders to pay $500 per mediation) and other provisions that they say could slow down the foreclosure process.

But Swanstrom, who’s been studying the foreclosure crisis in St. Louis and around the country, says mediation makes a lot of sense, for all members of the community, including the banks.

Swanstrom found that in 2010, foreclosures cost property owners in St. Louis County close to a billion dollars in lost property values and tax revenues. In a piece he wrote for this blog last year he emphasizes that the harm of foreclosures extends out beyond the individual to the community.  His billon-dollar estimate includes direct losses plus lost tax revenue and the costs to local governments and the broader metro area.

Swanstrom argues that mediation programs that bring together homeowners on the brink of foreclosure with lenders and neutral mediators to negotiate to avoid foreclosure have minimal cost and substantial benefits.

In fact, loan modifications could be a win-win for homeowners and investors.  Research in St. Louis shows that each house that goes through a foreclosure loses about 28 percent of its value.  From 2006 to 2010, foreclosed properties fell approximately $1 billion in price – a direct loss to those taking possession of these properties following foreclosures.  Lenders could offer to cut the principal owed by $500 million and, if this prevented the foreclosures, the drop in housing values from foreclosures would be averted and investors could still end up ahead.  Obviously, this is a simplified scenario, but at its core, some savings are better than nothing. And community college students, elementary and middle school students, the zoo, the police force, the roads and bridges, would all benefit.

Swanstrom says savings can also go beyond just monetary costs to include improvements to the social costs of foreclosures – rises in crime, stress, or the effect on children when they are suddenly pulled out of school.

“A recent study concluded that each foreclosure that forces kids to move out of school is the equivalent of that child losing a month of school,” Swanstrom told St. Louis Public Radio. (See Barbara’s post on this issue here).

A recent report from the National Consumer Law Center (NCLC) examined foreclosure mediation data from the past three years and made recommendations for best practices based on programs in place around the country. They found states with strong foreclosure programs are preventing foreclosures and saving money for investors and taxpayers.

The report found these programs can be financially self-sustaining. Small mediation fees, like the $500 per mediation session proposed in the St. Louis County ordinance, are small compared to the average of $145,000 NCLC found investors lost on average per home foreclosure in 2008.

The report also found these programs do not prolong inevitable foreclosures, as the bankers group was concerned about. For example in Philadelphia, the typical foreclosure case spent 53 days in a foreclosure conference, while the average time frame to complete an uncontested foreclosure was 10 months.

The report recommends the adoption of mediation programs with strong outreach components and enforceable standards. They found success in programs in New York and Connecticut.

During each of the years 2010 and 2011, New York courts conducted over 80,000 conferences in foreclosure cases. Before the courts implemented this foreclosure conference system, homeowners did not participate at all in about 90% of the foreclosure cases, Now, homeowners appear for conferences to discuss settlement options with their lenders in 90% of the cases, a complete reversal of the prior dynamic.

Similarly Swanstrom highlights a 2011 program in the state of Nevada, which like Missouri does not require judges to review foreclosures. There last year 15% of homeowners facing foreclosure chose mediation, and 78% of those were able to avoid foreclosure.  In comparison there were 4,749 distressed sales in St. Louis County in 2010, almost all of which were foreclosure cases.

“If a mediation program like Nevada’s had been in place,” Swanstrom writes “I estimate that 558 foreclosures could have been prevented, increasing property values by $114.6 million and giving local governments an additional $1.4 million in tax revenues.”

The NCLC report also found such programs can help preserve gains in minority home ownership that have been slipping over the past decade.

The ordinance in St. Louis County is held up in court and the St. Louis County Council is considering changes to the law in response to the bankers’ concerns. But the mayor of St. Louis is apparently also considering similar proposals.

You can read more about on the work of Swanstrom and his BRR Network colleagues who are studying how metro regions responded to the recent housing crisis here.

Comments are closed.