Foreclosure Mediation Becomes Mandatory
Program staffing, caseload expected to double
By DOUGLAS S. MALAN
A voluntary foreclosure mediation program has worked so well in the eyes of legislators that the General Assembly pushed through a measure to make the program mandatory starting July 1.
Nearly 60 percent of those participating in the voluntary program have remained in their homes, and supporters contend that even more distressed mortgage holders will benefit from being forced into mediation. To date, only about 34 percent of those eligible for mediation have made use of the voluntary program, according to the Judicial Branch.
But more participants means increased costs, and the Judicial Branch expects that it will have to double the size of its current staff to handle a caseload that also is likely to double.
“We supported the legislation making mediation mandatory and did have the opportunity to have some input,” said Deborah J. Fuller, legislative director for the Judicial Branch. “Although it will require great effort, we believe we will be ready for the expansion.”
The program has received a $5 million grant, although it appears that more funding might be needed to operate it through the next two-year budget cycle.
Meanwhile, banks also will invest more time, effort and money to have lawyers and lending representatives on hand for the mediations.
Tom Mongellow, vice president of the Connecticut Bankers Association, said his industry initially opposed the state mediation program because too many details were left unexplained. But he said banks support the new legislation, despite the additional resources it will require.
“The mediation program has worked out extremely well,” he said. “We recognize this is an unusual time from a foreclosure and banking perspective, and we’re willing to do what’s necessary to cooperate.”
But there are those who question how much a mandatory program will help.
“You’re going to have people who were told [pre-foreclosure] that they’re not eligible for a modification [of their mortgage] forced into mediation, and I don’t know how that will be successful,” said attorney Christopher Brown, head of the debtor/creditor group at Begos, Horgan & Brown in Westport. “I don’t think [mandatory mediation] will hurt, but I just don’t know how much it will help.”
‘Huge Victory’
Mediation will be mandatory for any foreclosure action on residential real property with a return date between July 1, 2009, and June 30, 2010. And there are plenty of potential cases. As of March 31, there were more than 28,000 mortgages in Connecticut that were either in foreclosure or 90 days past due, double the number last summer, according to the Mortgage Bankers Association.
Additionally, the voluntary program has settled seven out of every 10 foreclosure cases, and a mandatory program could go a long way toward unclogging court dockets.
“It was a huge victory because this bill will help a lot of people,” said Norwalk Sen. Robert Duff, co-chair of the legislature’s Banks Committee. “We didn’t really encounter any resistance. We just wanted to make sure the bill didn’t get lost in the session.”
The House approved the measure in late May and the Senate passed it last Tuesday night.
Rep. Ryan Barry, the other Banks Committee co-chair, said mandatory mediation was a much more tolerable option for his banking constituents than some other legislation that was considered. That included a moratorium on foreclosures and what’s been called “cramdown” legislation, which allows bankruptcy judges to reduce principal and interest payments on home mortgages. In Washington, the U.S. Senate shot down such a bill in late April.
“I think the best way to [help those in foreclosure] is mandatory mediation,” said Barry. “Banks like this because they don’t want to own the properties and they don’t want a moratorium on foreclosures.”
Barry, like other supporters, believes that the mediation’s program’s success rate in keeping people in their homes will rise as more people go through the system.
“The challenges were making sure that the people drafting it, including myself, understood the program to draft the bill in a way that would bring as many people in as possible,” Barry said.
Costs Disputed
Mandatory mediation is said to be financed by a grant worth about $5 million that was provided to the Connecticut Housing Finance Authority.
However, the Office of Fiscal Analysis projects that the cost to the Judicial Branch will be $6.4 million in the next fiscal year and $1.6 million the following year.
Fuller, of the Judicial Branch, expects that the program’s staff size will more than double after July 1. Currently, 30 staffers (12 mediators, 7 case-flow coordinators and 11 office clerks) are part of the mediation program; Fuller said 33 additional staffers will be needed. She anticipates the caseload increasing from about 6,000 in the program’s first year to more than 12,700 per year.
Brown, the Westport attorney, said he suspects the relatively high percentage of those staying in their homes will drop once more mortgage holders go through mediation. That’s because in his experience a large majority of borrowers near foreclosure reach out to lenders to discuss their options before any foreclosure action commences.
“One reason the percentage of people participating [in the voluntary program] is so low, I suspect, is that [others] were already told they have no options,” Brown said.
He added that the stats don’t track how many people whose homes are saved end up falling behind their payments again and eventually losing their property.
But Brown does see some potential positives to the new legislation.
In this time of record numbers of foreclosure filings, debtors risk falling through the cracks in their attempts to contact lenders and negotiate new mortgage terms.
“Even if they were rejected for a modification in pre-foreclosure, their odds may go up slightly because someone is focusing on their case now that the court is involved,” Brown added. Plus, “there’s a need to relieve courts of foreclosure congestion, and this may accomplish that.” •
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