It’s been nearly 48 years since the road captain in the blockbuster movie “Cool Hand Luke” mumbled the memorable line “What we’ve got here … is failure to communicate.”
While the message has been applied to a number of common occurrences, it is the backbone for new legislation considered by some states to solve an ongoing problem. The idea is to provide a mediation process where a mediator assists the homeowner and a lender to reach a fair, voluntary, and negotiated agreement once the homeowner defaults on a loan.
“It is something that if used properly can legally stall off foreclosure and force a bank to make a decision,” said short-sales specialist Wes Jones of Keller Williams Realty. “It gives a homeowner additional time.”
In some states, the cost for the mediation is $200, far cheaper than any foreclosure proceeding, which can easily run $3,000 to $4,000. It is a legal process and almost always involves an attorney. States differ on how they handle foreclosures.
Borrowers can only apply for mediation once they have received a Notice of Default. Once the mediation application is filed and a Notice of Trustee Sale has not been posted, the lender cannot post a Notice of Trustee Sale until the actual mediation conference has taken place. According to Jones, submitting the application usually nets the borrower three more months in the home to consider their options.
A mediator is not a judge. Foreclosure mediation programs have proven effective in reducing foreclosures but they don’t solve every borrower’s case. While no change may come out of the mediation, the most likely outcome is the cancellation of the Trustee’s Sale in order to execute a short sale. Other results include the resolution and approval of a contested short sale, or a loan modification.
Why do we need this process? Mistakes have been made on both sides. Borrowers who were behind on their payments did not know where to turn for help. If they did know, many were too embarrassed to do so. Lenders often did not return borrowers’ requests for meetings. Some said they were too busy; others did not want to renegotiate the interest rate in order to keep the buyer in the home.
Many underwater borrowers who made timely payments genuinely wished to stay in the home. They felt they deserved at least a conversation with their loan-decision maker – especially since the country recently bailed out the banking industry.
We have a nephew who was in that boat. The three-bedroom home his family purchased four years ago in a huge subdivision had plunged in value. While their hefty monthly mortgage payment was a stretch from the outset, the family had researched schools and churches in the area and decided this was the neighborhood for them. His wife took a job as a substitute teacher to help make ends meet.
“We never missed a payment,” Matt said. “When rates dropped under 4 percent, we approached the bank about lowering our interest rate. We read about what other lenders were doing for owners who were behind and in financial trouble because of the economy. I realized that we probably wouldn’t ever get what we paid for the house, but our bank still said there was nothing it could do for us.”
Fast forward nine months and two more written attempts to the bank to reduce the interest rate. Still, no help from the bank.
“I spoke to an attorney who told me I probably wouldn’t get any response until I was behind on my loan,” Matt said. “That seemed crazy. Other people were getting bailed out, but I just wanted a lower rate. Seriously, I didn’t want to hurt my credit by getting behind, but there were larger homes in our neighborhood we could rent for half of what we were paying on a mortgage.”
Matt decided to stop paying the mortgage and become a “strategic defaulter” – a borrower who could make payments but decided against doing so. After four months, he got the lender’s attention but he was so soured by the bank’s lack of communication and unwillingness to listen that he decided to stay in the house until it was repossessed.
It’s sad to think that one conversation – one mediation – could have made a difference. At the least, it would have forced the lender to act – to communicate.