The loss of a home to foreclosure can be devastating for a family. In addition to losing what is often their biggest asset, families are uprooted from their community and may find themselves with no place to go. The losses extend beyond individual families: foreclosures destabilize entire neighborhoods through declines in property values, a loss of tax revenue, and blight as houses become vacant.
Federal, state, and local law and policymakers have initiated a broad array of interventions to stem the foreclosure pandemic, and one vehicle is foreclosure mediation. Jurisdictions nationwide are increasingly offering mediation programs as an opportunity for lenders and homeowners to reach mutually agreeable and beneficial alternatives to foreclosure.
What is Mediation?
Mediation is an alternative dispute resolution method where a neutral third party (a mediator) helps parties arguing over an issue work out a settlement or compromise. When parties disagree, mediation is a way for them to come to a joint position on how to resolve the matter. Mediation is an alternative to a lawsuit (although if the mediation fails to resolve the matter, the parties can take the issue to court). The mediator’s presence helps keep the parties from acting unhelpfully, such as angry outbursts.
At the end of the mediation, the mediator will give the parties the mediator’s views on how the matter should be resolved. The mediator has no power to force the parties to accept the mediator’s decision (that power only rests with an arbitrator in an arbitration proceeding).
Usually, however, the mediator’s decision, and especially the mediator’s explanation of how they arrived at that conclusion, are given great weight by the parties in future negotiations. They will now know how a judge or jury might resolve the issue.
What is Foreclosure Mediation?
Foreclosure mediation is specifically meant to help homeowners at risk of foreclosure. Many states offer foreclosure mediation programs as a way for homeowners to avoid losing their homes to the bank. The mediation consists of a meeting between you, your lender, and an impartial mediator. During the meeting, you will discuss ways to handle the situation best, and try together to work out options to avoid foreclosure.
Some options you may consider include debt modification, repayment plans, short sales, and executing a deed to transfer ownership. The principal benefit of these alternative approaches is that you will not have a foreclosure on your credit record.
Debt Modification in the Event of a Foreclosure
This is where the bank agrees to modify the original loan terms. For example, if your current terms are $1,000 per month for 48 months, a modification to the monthly payment amount will hopefully make the payments affordable. Ultimately, you will still have to repay the entire mortgage, but this will be easier to do under the loan modification.
When the monthly payment is reduced, the debt term will be lengthened to ensure that the full loan gets paid off. Debt modification may also increase the interest that you are required to pay.
Repayment Plans to Prevent Foreclosure
Your lender may agree to help you work out a repayment plan. Even if they do not change the terms of your loan under your promissory note, they may agree to allow you to make lower payments short-term until you can get your finances in order so you can return to your regular payment terms.
Short Sale to Avoid Foreclosure
A short sale is when the property is sold quickly, often at a loss. The proceeds from the sale may be less than the amount the homeowner may have left to pay on the mortgage, but some lenders are willing to accept the short sale proceeds and cancel or forgive the remaining payments so that the lender doesn’t end up with a total loss.
Deed in Lieu Of Foreclosure
A deed in lieu of foreclosure (sometimes called a “deed in lieu”) is a specific deed used as an alternative to foreclosure. With a deed in lieu, the homeowner transfers their deed to the lender or bank instead of having to make payments through the course of the foreclosure proceedings. Basically, you use this to transfer the property to the lender to fulfill the debt.
What Starts the Foreclosure Mediation Process?
The details of the foreclosure mediation process depend on the state where the property is located. In most cases, the process starts after a lender begins to foreclose on the house. The lender formally notifies the homeowner that they are behind in their mortgage payments and that the lender is planning on pursuing foreclosure as laid out in the mortgage documents. When a lender begins foreclosure proceedings, they are required to follow certain standards, including providing notice of foreclosure to the homeowner.
In states where foreclosure mediation programs are available, the lender will send out the notice of foreclosure as well as:
- A foreclosure mediation notice
- In states where the mediation program is automatic, details on how to opt out of the foreclosure mediation program
- Information about the state’s low-cost legal services and housing counselors approved by the U.S. Department of Housing and Urban Development (HUD)
Where Can I Get Foreclosure Mediation?
While foreclosure mediation may sound attractive if you find yourself in a position where you’re having trouble making your mortgage payments, it is very important to note that it is not available everywhere. Fourteen states and many cities and counties offer mediation programs.
Who Pays for Foreclosure Mediation?
It depends on where you live and your state’s rules. Some states will foot the bill for the mediation program. Others will require a fee from the lender when they file the foreclosure action. If the state requires a fee from the homeowner, the cost is usually reduced for people who may not be able to afford the full fee.
What Documents Do I Need to Bring for Foreclosure Mediation?
The documents required for mediation will also depend on the state where the foreclosure mediation takes place. Some states have strict requirements for documentation. At the very least, you must provide your current financial information and a proposal on how you would like to avoid foreclosure.
The lender will be required to provide documentation as well. They will have to provide information regarding the property’s value, such as a recent appraisal or a short sale estimate, as well as their own proposal on how to avoid foreclosure.
From there, the mediator will help both sides to discuss the pros and cons of the proposals and the realistic options and hopefully help them reach a resolution that is acceptable to both parties. One or more meetings will take place on neutral territory (usually the mediator’s office), and the parties will present to each other their suggested method of avoiding foreclosure, and most likely, negotiations will begin with the mediator’s input.
Should I Contact My Lender to Start Foreclosure Mediation?
You can always attempt to contact your lender. However, some people find that working directly with their lenders can be difficult. The lender’s representatives may be slow to respond at times, and some people may not feel that the lender is very helpful in helping them avoid foreclosure.
When the bank recognizes that the house is in danger of foreclosure, the bank itself will contact you. You need not start the process yourself.
Do I Need an Attorney If I Want to Try Foreclosure Mediation?
Foreclosure mediation may help to save your home from foreclosure, but it may not prevent it altogether. If you are facing a foreclosure proceeding, talk to a foreclosure attorney. An attorney with experience in this area can help you navigate the different options you have and hopefully help you keep your property.
