In response to the ongoing foreclosure crisis in this country, many states have implemented mediation programs to assist borrowers in finding ways to avoid foreclosure. Read on to learn more about how foreclosure mediation works and how you can benefit from the process.
(To learn about other options for dealing with foreclosure, visit Nolo's Foreclosure section.)
What is Foreclosure Mediation?
Foreclosure mediation is a process that is used to help homeowners avoid foreclosure by coming up with an alternate solution that benefits both the borrowers and the lender. Mediation consists of a meeting between:
- the borrowers,
- their lender, and
- an impartial third-party (the mediator).
At the meeting, the parties discuss the borrower's financial situation and try to negotiate a way for the homeowner to keep the home or give up the property without going through a foreclosure. By working together, the parties are often able to reach an agreement.
Potential outcomes of mediation include:
(To get information about each of these options, see our Alternatives to Foreclosure area.)
The Mediation Process
The mediation process varies from state to state, but it generally begins when a lender initiates a foreclosure in accordance with state law. Along with notice of the foreclosure, the homeowners will receive:
- notification about the mediation program
- information about how to opt in to the mediation program if enrollment is not automatic, and
- contact information for HUD-approved housing counselors and/or low-cost legal services available in the state.
Borrower Must Be in Foreclosure
In most cases you must be in foreclosure to take advantage of the mediation programs.
However, in Oregon, mediation is available for homeowners who are at risk of default, but have not yet missed a payment. Borrowers must notify their lender that they would like to participate in mediation to be included in the program.
Do All States Provide Foreclosure Mediation?
Foreclosure mediation is available in roughly half of the states.
Generally, foreclosure mediation programs are created by state law or mandated by court order, but certain municipalities (for example, the cities of Providence, Cranston, Warwick, and town of Warren in Rhode Island) have passed ordinances implementing mediation as well. Consequently, there are statewide mediation programs in some states, while in others mediation may only be available only in certain counties or particular cities.
Who Pays for the Mediation?
In some states, the state government budget pays for the mediation program. Other states have added supplemental charges to the filing fee that lenders must pay when initiating the foreclosure to cover the costs of the program. Also, there are a few mediation programs where the homeowner must pay part of the cost of the mediation, but there is usually free or low-cost mediation available for borrowers who cannot afford the fees.
Why Not Contact the Lender Directly to Avoid Foreclosure?
You can always contact your lender to try to work something out. However, many homeowners seeking loan modifications, short sales, or deeds in lieu of foreclosure report that it can be difficult to work directly with the lender. Borrowers sometimes find that lenders are non-responsive to their needs. It can also be hard to reach anyone with the authority to actually approve a deal. Additionally, the process can be frustratingly slow and confusing. State-sponsored mediation programs are designed to force the lender to communicate with the borrower and facilitate the loss mitigation process.
The Success Rate of Foreclosure Mediation
Foreclosure mediation programs do not require the lender to provide the borrower with a way to avoid foreclosure, which means borrowers can leave the mediation without a solution. So what is the actual success rate of these state programs?
One study has shown that homeowners who participate in mediation are 1.7 times more likely to avoid foreclosure than those who did not. The process is more successful in some states than others.
Nevada, for example, is one state that has experienced success with its state-sponsored mediation program. One reason for this is because it requires that the borrower, and more importantly the lender, show up to the mediation prepared to make a deal. The program requires that borrowers and the lender provide the mediator (and each other) with certain documents prior to the mediation. The borrowers need to present financial information and a proposal to avoid foreclosure, while the lender must provide:
- a recent appraisal of the property
- a net present value figure
- an estimated short sale value of the property, and
- a confidential, non-binding proposal for resolving the foreclosure.
Moreover, Nevada also requires that the lender send a representative to the mediation who is authorized to negotiate an agreement. This ensures that the lender’s representative can evaluate the borrowers’ situation, determine if there is a loss mitigation option available, and approve it on the spot. As a result, borrowers can walk away from the mediation with a loan modification or another loss mitigation option. For this reason, Nevada foreclosure mediations often succeed in helping borrowers avoid foreclosure.
However, many of the existing programs in other states are not as successful -- often because they don't require the same level of preparedness as the Nevada program.
Should You Use State Foreclosure Mediation Programs?
Even though participating in a state foreclosure mediation program will not always help you prevent a foreclosure, it doesn't hurt to attend the meeting. The lender may be more likely to agree to a nonforeclosure solution. And you might qualify for a loss mitigation option that you hadn’t previously considered.