On July 24th a report was released by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) that gave an update on the success rates of homeowners participating in the Home Affordable Modification Program (HAMP). HAMP is a federal government program designed to help homeowners impacted by financial hardship by modifying their monthly mortgage payment. For homeowners who are eligible, the modification permanently changes the original terms of the mortgage. The report shows that of 1.2 million homeowners who received a HAMP permanent modification since the beginning of the HAMP program, 26% had redefaulted. Moreover, the more time that had passed since a homeowner had received a HAMP permanent modification, the more likely they were to have redefaulted, with the oldest HAMP modifications from 2009 at a 46% redefault rate.
To combat the issue, the SIGTARP report recommends that the US Treasury Department conduct greater research on what factors seem to contribute most to these frightening numbers and identify solutions. SIGTARP also suggests the potential use of “early warning systems” that would identify and help troubled homeowners sooner in an attempt to prevent the slide back into foreclosure. The details of how such an early warning system would work are left to the discretion of Treasury, but the report suggests greater use of “counseling and other assistance” for homeowners.
Picking up where the report leaves off, it is important to explore what “counseling and other assistance” might look like and to discuss the ways in which alternative dispute resolution techniques, foreclosure mediation in particular, could play a role in reducing redefault rates. After all, more housing counseling is a great place to start, but might combining the resources of housing counselors with the power of mediation to bring all parties together to the bargaining table be even better? While more information is needed about how homeowners who undergo mediation fare in the long term as compared with their non-mediating counterparts, statistics reported by the National Consumer Law Center do show evidence that in jurisdictions with foreclosure mediation programs in place, such as Philadelphia, Maine and Connecticut, homeowners are more likely to receive a modification when compared to the national average. In terms of a homeowner’s ability to remain in his or her home, receiving a modification to begin with can be a game-changer, making retaining the property a possibility.
However, what the SIGTARP report reveals is that, in terms of long term home retention, the quality of the modification also matters a great deal. The report states that “homeowners who received the worst deal on a HAMP modification were the most likely to redefault.” Factors at play included the degree to which a modification lowered monthly mortgage payments and how underwater on a property homeowners remained. Homeowners with subprime credit scores and high overall debt burdens were also most at risk. While mediation cannot remove the risk factors that may put home retention out of reach for some, mediation can be used as an effective tool to identify homeowners for whom mortgage modification is a promising option and help them work towards a lasting solution. Mediation can increase communication and the creative exploration of solutions so that the most promising long term outcome can be reached. SIGTARP reports that it has received thousands of calls through its hotline from homeowners that site lack of communication and miscommunications as stumbling blocks that led to homeowner redefault. Foreclosure mediation has the potential to significantly reduce these stumbling blocks.
The mediation process may also provide homeowners with a safe space to discuss fears and concerns, which could lead to greater understanding of their options and, therefore, greater long term follow through with modification terms. Even for homeowners who do not retain their homes, mediation can offer benefits. A clear and understandable evaluation of all options serves to empower homeowners so they can set their path going forward and feel invested in the process. What homeowners learn during the foreclosure process and the ways in which they are involved in decisions and provided with coping skills could have a significant impact on the ways in which families and communities recover from the foreclosure crisis.
As foreclosure dispute resolution methods mature, we need to know more about their long term impact and the ways in which programs can be designed to maximize stable outcomes. Exploring the relationship between foreclosure mediation and home retention rates can help identify the best path forward in addressing the ongoing foreclosure dilemma.