Foreclosure Mediation Programs Aren't Working Because of Net Present Value (NPV) Calculations
Is foreclosure mediation going to prevent millions of foreclosures over the next few years?
Probably not, according to a new study released this afternoon by the National Consumer Law Center (NCLC) that looks at how effective 25 foreclosure mediation programs in 14 states have been at preventing foreclosures.
Like President Obama's HAMP program, foreclosure mediation is a great idea that just doesn't seem to be taking hold. In fact, most homeowners don't even know it exists.
Foreclosure mediation programs were designed to help homeowners who were about to be foreclosed upon aren't working in part because the net present value (NPV) - calculations lenders do to decide whether loan modifications or foreclosures will be more profitable to the lender - aren't being disclosed to the borrower, along with a lot of other seemingly helpful information, according to "State and Local Foreclosure Mediation Programs: Can they save homes?."
Geoffry Walsh, a staff attorney with NCLC and author of the study, says these foreclosure mediation programs are surprisingly ineffective.
"There are barriers that preclude homeowners from participating" in foreclosure mediations, Walsh said in a press conference earlier today.
"Under most of the foreclosure mediation programs, servicers have all the discretion and homeowners have no power. If the programs demand little or no accountability from servicers, it's likely foreclosure mediation programs will go the way of the federal foreclosure prevention program" and fail, he predicted.
Walsh said that foreclosure mediation programs could really help homeowners who have been confused by loan modification options or rebuffed by their lenders. The Treasury Dept. could choose to enforce the contracts it has signed with the loan servicers but has chosen not to.
"What programs require are enforceable obligations, structures and duties that few have implemented so far," Walsh noted.
What Walsh doesn't understand is why lenders can't see that they're losing much more money by letting properties go into foreclosure than by doing loan modifications.
"We looked at the promise of these programs. Investors and homeowners lose substantial amounts of money in foreclosure. Up to two-thirds of the value of the investment is lost when the foreclosure is completed," Walsh said. But loan modifications only cost investors 5 to 10 percent of their investment.
That may not be a full NPV calculation, but it's clear to me that it's better for investors, lenders and homeowners to do a fast loan modification than allow a home to join a few million other foreclosed homes on the market.
"The inability of homeowners to communicate with holders of securitized mortgage obligations has been a significant barrier to completing affordable (loan) modifications that might prevent foreclosures or minimize losses and keep more homeowners in their homes," Walsh said.
Fixing Foreclosure Mediation Programs
Walsh's study suggests foreclosure mediation programs include the following:
Require loan servicers to give homeowners the affordable loan modification calculations they made and the results of the NPV tests. Only Maine's foreclosure mediation programs require this.
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The foreclosure mediation programs should require servicers to produce all related documentation, including pooling and servicing agreements, appraisals, and loan payment histories that would facilitate options other than foreclosure.
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Require servicers to meet these foreclosure mediation obligations in good faith or otherwise be subject to sanctions. Walsh said that loan servicers have received substantial benefits from the federal government and cash incentives to do loan modifications rather than foreclosures and so should operate in good faith, as a defined legal standard.
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Servicers should prove they have the standing to close on loan modifications and have the authority to negotiate loan modifications.
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Loan servicers should document that they've looked at alternatives to foreclosure, including loan modifications, other state or federal workouts, and short sales.
Can foreclosure mediation programs make a difference?
