As part of my New Mexico mediation practice, I find I am increasingly being referred residential foreclosure mediation cases. This is no accident as today, an increasing number of states and/or individual state courts are utilizing foreclosure mediation programs to manage the current "foreclosure crisis." Some states with such programs, either state-wide or local include: Connecticut; Delaware; Florida—various judicial districts; Kentucky—Jefferson County; Maine; Maryland; Michigan; Nevada; New Jersey; New Mexico—First and Thirteenth Judicial Districts; New York; Ohio—various counties; Oregon; Pennsylvania—various counties; Rhode Island—Providence.
A recurring and thorny dilemma for mediators today is how to conduct and what are the proper parameters for a foreclosure mediation or settlement facilitation.
A recurring and thorny dilemma for mediators today is how to conduct and what are the proper parameters for a foreclosure mediation or settlement facilitation.
I am a member of various LinkedIn mediation groups, and this question has been raised a number of timers. Because I am an active foreclosure mediator/settlement facilitator in the First and Thirteenth Judicial Districts in New Mexico, I often chime in on these discussions, and decided it was time to address the matter more comprehensively in a separate blog. First, I will describe the general processes I use here in New Mexico. Then, I will address some of the concerns and limitations observed by mediators and counsel. Finally, I will address the little bit of law I have personally become aware of related to loan modification “work outs” and any duty to bargain in good faith over or to implement such modifications.
Foreclosure Settlement Facilitation Processes in New Mexico
New Mexico currently has no statutory framework for foreclosure mediation. Rather, individual courts may initiate programs for that purpose, pursuant to their own local rules. The two programs in which I am involved, the First and Thirteenth Judicial Districts, share similarities but also have unique features that the other could learn from.
In both the First and the Thirteenth, only attorneys are eligible to mediate, and in both programs it is called “settlement facilitation” rather than “mediation.” (I have never been sure if that makes a difference, and only those participants opposed to the Order seem to make much of the distinction.) Also, in both programs, mediation/facilitation is initiated by Court Order o Referral, upon one party’s request.
In the First Judicial District, which includes Santa Fe, New Mexico, the parties generally split the costs of mediation equally. However, a pro se home owner may request free-mediation services and mediators are required to provide one free, or reduced fee, mediation for every four paid mediations. In the Thirteenth Judicial District, in contrast, the Court pays for the first four hours of foreclosure mediation, out of a court fund generated by a nominal fee added to the civil filing fee.
The First Judicial District has several unique processes, most of which are helpful. The Order of Referral requires the homeowner to file a loan modification application, and attend credit counseling, if it has not already done so. The Order also requires the parties to have a pre-settlement facilitation "planning call," to narrow issues and before mediation; and provides for mediator evaluations by the parties after mediation. The loan modification application (also known by some insiders as “loss mitigation” paperwork) is obviously necessary, because that will always be the starting point of the foreclosure mediation (and usually also the end point, as discussed below), but many homeowners have filed one or more application prior to requesting a Order of Referral to mediation. The counseling, however, is very beneficial to the homeowners, because many lack at least some aspects of basic financial literacy. The main value of the pre-mediation planning call is that it permits the parties to ascertain whether a loan modification has been submitted, if there have been problems with the prior submission(s), and if additional information is necessary to complete the loan modification application.
The Thirteenth Judicial District’s innovation is to conduct monthly mass status conferences for all claims filed by a certain date, in which the homeowner is pro se. There, the judge briefly describes the general nature of the hearing and foreclosure process; introduces and directs the homeowners to speak with the counsel representing their bank; introduces any short sale real estate agents, and/or housing or pro bono foreclosure service providers that may be present that day; discusses the mediation option; and takes a roll call. Thereafter, Court Staff provide home owners with forms to file answers and to request mediation, and the various other representatives speak with the homeowners in turn. Court statistics indicate that about 40% of the homeowners attend the status conferences, and all or nearly all then file Answers, if they have not yet done so. The value of these conferences is that they help orient pro se homeowners in what can otherwise be a confusing legal morass, from which 60% choose to instead walk away. As the Thirteenth’s ADR Director Geoff Nims observed, “Once people walk in the door, you can work with them. The trick is getting them in the door.” See Albuquerque Journal, Nov. 26, 2010.
Once foreclosure mediation or settlement facilitation commences, it does not progress according to usual “mediation” processes, in either the First or the Thirteenth. Rather, the mediation is largely limited to discussing loan modification workout options for the homeowner. Although this can sometimes be frustrating for mediators, I understand this is common place in other jurisdictions as well. See Geoff Walsh, “State and Local Foreclosure Mediation Programs: Can They Save Homes?,” Sep. 2009, National Consumer Law Center, http://www.nclc.org/images/pdf/foreclosure_mortgage/mediation/report-state-mediation-programs.pdf.
Views of Participants
Because the foreclosure mediation is limited to discussing loan modification options, and is thus also a continuation of what has already likely been quite a long and drug out process, I have heard counsel for homeowners express disdain for the process. They ask, not completely unreasonably, what is its point or value? Again, this sentiment is not uncommon. See Walsh 2009; see also “Only 1% helped statewide in foreclosure mediation program,” Tampa Bay Online, http://www2.tbo.com/content/2011/jan/28/281739/only-1-helped-statewide-in-foreclosure-mediation-p/.
In general, however, I observe the foreclosure mediations do serve a valuable purpose in getting three actors together: (a) the lender’s loss mitigation department, (b) the lender’s foreclosure attorney, and (c) the home owner, none of whom generally know what the other is doing or has done on the case to date. I was particularly surprised in the beginning to learn that even the representatives ostensibly on the same side—the loss mitigation department and the foreclosure attorney—were not generally on the same page prior to the mediation. And, again, need I say it—it does not appear my own experiences in this regard are unusual. Compare Heather Scheiwe Kulp, “Court Mediation Prompts Pre-Filing Foreclosure Mediation Program” (Jan. 4th, 2011) at http://blog.aboutrsi.org/2011/evaluation/court-mediation-prompts-pre-filing-foreclosure-mediation-program/ (regarding the new Ohio foreclosure pre-filing mediation program).
Thus, even knowing its limitations, I continue to believe foreclosure mediation offers incredible benefit to the parties. To ensure there is benefit in light of the costs, I make sure to discuss and then memorialize responses from the following areas, because every lender (and perhaps loss mitigation specialist spoken with) appears to have different criteria:
1. is the homeowner being considered for a HAMP ("Home Affordable Modification Program") or in-house loan modification;
2. what is the status of any loss mitigation application;
3. is any additional documentation needed for that application, and if so where should it be sent and by what deadline;
4. is there an in-house modification program, in the event the homeowner is not eligible for a HAMP modification;
5. in the event a HAMP application is denied, does the homeowner need to apply separately for an in-house modification, or will the lender automatically use the same application to then consider an in-house modification;
6. does the lender consider the homeowner for an in-house modification simultaneously;
7. does the homeowner appear to fall within the guidelines of HAMP and/or an in-house modification based on what is presented so far;
8. discuss the net present value and other calculations leading to approval or acceptance of a loss mitigation/loan modification application;
9. if the homeowner has gotten conflicting information in the past, such as previously denied or withdrawn offers, what was the basis for such prior decisions;
10. what is the identity and contact information for any representative associated with prior loss mitigation decisions concerning this property;
11. if a deed in lieu or short sale is appropriate, discuss the general criteria for approval;
12. if a deed in lieu or short sale is appropriate, discuss timelines and whether the company will, may and/or typically seeks deficiency judgments from homeowners;
13. at what stage in the loss mitigation application process will the bank’s attorney be told to put the foreclosure litigation on “hold;” and
14. if no such “litigation hold” is authorized, what will be the likely time frames (including motions for summary judgment, notice of sale, sale and redemption period) will the homeowner need to be aware of.
Homeowners appear particularly grateful for a chance to speak to representatives they have likely been chasing around by voice mail for months or over a year, and a chance to understand the process and issues confronting them. Moreover, even the bank attorneys seem increasingly grateful for the opportunity to get on the same page with their loss mitigation folks.
Because I do see value in the process, my personal qualms tend to center instead on whether more can be done—e.g., should I somehow be pushing for more engagement, beyond mere loan modification?—and whether the loan modification information I am getting is accurate. A repeated complaint of homeowners is that they have been undergoing the loan modification process for months, in some cases over a year, prior to getting to me, and they are told different criteria each time they finally get to speak to a “real person.”
Maine and Nevada, at least, have attempted to address this issue by statutorily requiring the mortgage holder or servicing company “to produce documents showing an affordable loan modification analysis.” Id. (Maine); see also Geoff Walsh, “Foreclosures—State and Local Foreclosure Mediation Programs: Updates and New Developments,” Jan. 2010, National Consumer Law Center, http://www.nclc.org/images/pdf/foreclosure_mortgage/mediation/report-state-mediation-programs-update.pdf (Nevada). These states both also affirmatively require the plaintiff to demonstrate standing to foreclose. Id.
These are both changes I would like to see eventually made in New Mexico, to ensure greater clarity and transparency in the process. There is little foreclosure legislation on the horizon in New Mexico at present, however. At least one bill has been proposed in the past—Senate Bill 651 of 2009—to impose various loss mitigation (e.g., loan modification) requirements prior to even the filing of a foreclosure action. However, that bill died and currently there is only a bill introduced to grant attorney fees to a prevailing foreclosure defendant—House Bill 174.
Legal Issues and Framework
Although foreclosure is a hot and pressing issue, I am not aware of much case law dealing with the issues raised here. There are, however, a couple of slip opinions that may have some persuasive or illustrative value.
In the first case, BAC Home Loans Servicing Co. v. Westervelt, 2010 N.Y. Slip Op. 51992(U), Sup. Ct., Duchess Co. (Nov. 18, 2010, J. Pagones), a New York trial court has ruled that a lender has an obligation under New York law to act in good faith in foreclosure settlement conferences. The New York statute provides in part that “[t]he parties shall engage in settlement discussion in good faith to reach a mutually agreeable resolution, including a loan modification if possible. The court shall ensure that each party fulfills its obligations to negotiate in good faith.” See 22 NYCRR 202.12-a(c)(4). However, the language concerning good faith is not so very different from that in many court orders referring the parties to settlement facilitation.
Additionally, although the bank’s attorney in BAC had failed to appear, in ordering sanctions the Court also cited the instant bank’s refusal to re-examine the homeowner’s income upon request, and the industry’s general practice of negotiating modifications of onerous loans in bad faith. Notably, the Court closed its discussion by adding that it was “hard-pressed to comprehend why plaintiff would rather seize the property in foreclosure than work out a loan modification … with a homeowner who is gainfully employed.”
Additionally, although the bank’s attorney in BAC had failed to appear, in ordering sanctions the Court also cited the instant bank’s refusal to re-examine the homeowner’s income upon request, and the industry’s general practice of negotiating modifications of onerous loans in bad faith. Notably, the Court closed its discussion by adding that it was “hard-pressed to comprehend why plaintiff would rather seize the property in foreclosure than work out a loan modification … with a homeowner who is gainfully employed.”
In the second case, Garcia v. Ocwen Loan Servicing, LLC, Case No. C10-0290 PVT, U.S. Dist. Ct., N.D. Calif.(May 10, 2010, J. Trumbull), the federal court declined to dismiss, as failing to state a claim, a suit alleging negligence by a bank in the processing of a loan modification application, after which the plaintiff’s home was sold in foreclosure. As anecdotally purported to occur in many loss mitigation cases today, the homeowner had been required to submit various documents and duplicate documentation over the course of the application process, and some of that paperwork was misrouted or lost.
In its “duty of care” analysis, the Court determined (a) the loan modification transaction was intended to affect the homeowner; (b) the foreseeability of harm to the homeowner was quite substantial, since a foreclosure action was pending and loss of the home without a loan modification “was the inevitable outcome;” (c) the injury was certain, not speculative, “in that he lost the opportunity of obtaining a loan modification,” and his house was then sold; (d) there was a close connection between the bank’s “conduct and any injury actually suffered” because, to the extent the homeowner otherwise qualified for a loan modification, the bank’s conduct in mishandling the paperwork “directly precluded the loan modification application from being timely processed;”(e) a “public policy of preventing future harm to home loan borrowers is shown by recent actions taken by both the state and federal government to help homeowners caught in the home foreclosure crisis;” and (f) although it is unclear if any moral blame attaches to the bank for its conduct, this uncertainty is insufficient to warrant dismissal, “in light of the other factors weighing in favor of finding a duty of care.” The court also found a duty under the legal principal that a party undertaking an activity “owes a duty of care to exercise ordinary care or skill” in carry out that activity, because the bank had undertaken the activity of processing the homeowner’s loan modification request.
In its “duty of care” analysis, the Court determined (a) the loan modification transaction was intended to affect the homeowner; (b) the foreseeability of harm to the homeowner was quite substantial, since a foreclosure action was pending and loss of the home without a loan modification “was the inevitable outcome;” (c) the injury was certain, not speculative, “in that he lost the opportunity of obtaining a loan modification,” and his house was then sold; (d) there was a close connection between the bank’s “conduct and any injury actually suffered” because, to the extent the homeowner otherwise qualified for a loan modification, the bank’s conduct in mishandling the paperwork “directly precluded the loan modification application from being timely processed;”(e) a “public policy of preventing future harm to home loan borrowers is shown by recent actions taken by both the state and federal government to help homeowners caught in the home foreclosure crisis;” and (f) although it is unclear if any moral blame attaches to the bank for its conduct, this uncertainty is insufficient to warrant dismissal, “in light of the other factors weighing in favor of finding a duty of care.” The court also found a duty under the legal principal that a party undertaking an activity “owes a duty of care to exercise ordinary care or skill” in carry out that activity, because the bank had undertaken the activity of processing the homeowner’s loan modification request.
These cases are certainly evocative, and provide powerful imagery to the analysis. However, it is unclear what value they would have, even as persuasive or illuminating authority, in New Mexico as to the issue of good faith foreclosure settlement and loan modification. (Garcia may still be persuasive as a matter of negligence law.)
Although the First’s and Thirteenth’s Orders of Referral to Foreclosure Settlement Facilitation include language requiring good faith participation, the New Mexico Court of Appeals has indicated a strong aversion to looking beyond a party’s stated intentions and appearance at a settlement conference. In Carlsbad Hotels Assoc., LLC v. Patterson-UTI Drilling Co., 2009-NMCA-005, ¶¶ 31-32, 145 N.M. 385, 394, the Court discussed the New Mexico Mediation Procedures Act, NMSA §§ 44-7B-1 et seq., which was not binding on that case. It noted “the Act nowhere requires good faith participation or provides for sanctions for failing to act in good faith,” and “”[f]urther, the Act contains [a] confidentiality provision” under which mediation communications “shall not be used as evidence in a proceeding,” including those addressing a claim of bad faith. The Court also respectfully urged the lower courts to delete such “good faith requirements” from their rules and orders going forward in the future.
Thus, even assuming a bank acts in bad faith by declining to move beyond consideration of a loan modification application, it does not appear there would be any recourse under New Mexico law at the present time. At best, the homeowner might be able to state a claim for negligence in the processing and handling of the loan modification, depending on how matters unfold.
Conclusion
Currently, foreclosure mediation is both all the rage, and dissed and dismissed as inadequate to the task. However, to the extent the [unstated] task seems to be solving America’s mortgage crisis, this is perhaps an unfair burden. For my part as a mediator, I continue to see and provide good value to foreclosure litigants, notwithstanding the limitations of the system in which I and the parties are operating.
If you are interested in mediation services for a foreclosure matter (residential or commercial), please contact Pilar Vaile, P.C. at (505) 247-0802 or info@pilarvailepc.com.
* NOTE: This blog post is reprinted with permission from another of the author's blogs, On Being a Neutral, dated 2/7/11.
