foreclosure mediation update · payments without a modification or the borrower goes into...

Vermont Bar Association

Seminar Materials

Foreclosure Mediation Update

June 28, 2012

Capitol Plaza, Montpelier

Faculty:

Christopher D’Elia, Esq.

Kathryn Donovan Smith, Esq.

Angela M. Eastman, Esq.

Jennifer R. Emens-Butler, Esq.

Aileen L. Lachs, Esq.

Robert M. Paolini, Esq.

Grace B. Pazdan, Esq.

Hon. Mary Miles Teachout

Foreclosure Mediation Update

June 28, 2012

Capitol Plaza, Montpelier

Agenda

8:30-9:00 Registration & Coffee

9:00-9:10 Welcome and Overview of the Day

Bob Paolini

9:10-9:30 H. 600 Study Committee

Bob Paolini & Chris D’Elia

9:30-12:00 National Foreclosure Settlement and HAMP Update

Grace Pazdan

12:00-1:00 Lunch On Your Own!

1:00-2:00 View From the Bench

Judge Mary Miles Teachout

2:00-3:30 Best Practices Panel

Jennifer Emens-Butler, Katie Donovan Smith,

Grace Pazdan, Angela Eastman, Aileen Lachs

Estimated 5.5 hours General MCLE Credits

SIGTARP 12-003 June 18, 2012

The Net Present Value Test’s Impact on the Home Affordable Modification Program

Office of the special inspector general

For the Troubled Asset ReFor the Troubled Asset ReFor the Troubled Asset ReFor the Troubled Asset Relief Programlief Programlief Programlief Program

1801 L Street, NW, 4th Floor

Washington, D.C. 20220

SIGTARP 12-003 June 18, 2012

June 18, 2012

MEMORANDUM FOR: The Honorable Timothy F. Geithner – Secretary of the Treasury

FROM: Ms. Christy L. Romero – Special Inspector General for the Troubled Asset Relief Program SUBJECT: The Net Present Value Test’s Impact on the Home Affordable

Modification Program (SIGTARP 12-003) We are providing this report for your information and use. It discusses the Home Affordable Modification Program’s net present value test. The Office of the Special Inspector General for the Troubled Asset Relief Program conducted this audit (engagement code 019), under the authority of Public Law 110-343, as amended, which also incorporates the duties and responsibilities of inspectors general under the Inspector General Act of 1978, as amended. We considered comments from the Department of the Treasury when preparing the report. Treasury’s comments are addressed in the report, where applicable, and a copy of Treasury’s response is included in the Management Comments appendix. We appreciate the courtesies extended to our staff. For additional information on this report, please contact Mr. Kurt W. Hyde, Deputy Special Inspector General for Audit and Evaluation ([email protected] / 202-622-4633), or Ms. Kimberley A. Caprio, Assistant Deputy Special Inspector General for Audit and Evaluation ([email protected] / 202-927-8978).

The Net Present Value Test’s Impact on the Home Affordable Modification Program

SIGTARP 12-003 June 18, 2012

Table of Contents

Introduction ................................................................................................................................................. 1

Background ................................................................................................................................................. 4

The Discretion Treasury Gave to Servicers To Add a Risk Premium to the Discount Rate

Reduced the Number of Homeowners Who Get Help in HAMP, According to SIGTARP’s

Sample................................................................................................................................................... 7

Servicers in SIGTARP’s Sample Erred Inputting Homeowner Information in the NPV Test and

Did Not Maintain Sufficient Documentation of the NPV Inputs ....................................................... 10

Servicers in SIGTARP’s Sample Communicated Poorly to Homeowners on the Denial of a

HAMP Modification ........................................................................................................................... 12

Treasury Must Ensure Servicers Appropriately Apply the NPV Test To Assess Homeowners for

HAMP ................................................................................................................................................. 13

Freddie Mac’s Review of HAMP Servicers ..................................................................................... 13

Treasury’s Oversight of Servicers’ Performance and Compliance, and Freddie Mac as the HAMP Compliance Agent ............................................................................................................ 13

Conclusions ............................................................................................................................................... 16

Recommendations ..................................................................................................................................... 20

Management Comments and SIGTARP’s Response ................................................................................ 21

Appendix A ‒ Scope and Methodology .................................................................................................... 22

Limitations on Data .......................................................................................................................... 24

Use of Computer-Processed Data .................................................................................................... 24

Internal Controls ............................................................................................................................... 25

Prior Coverage .................................................................................................................................. 25

Appendix B – The Home Affordable Modification Program’s Net Present Value Model ...................... 26

Appendix C ‒ Acronyms and Abbreviations ............................................................................................ 28

Appendix D ‒ Audit Team Members........................................................................................................ 29

Appendix E ‒ Management Comments .................................................................................................... 30

THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 1

SIGTARP 12-003 June 18, 2012

Introduction

Faced with record numbers of foreclosures, Congress intended for the Troubled Asset Relief Program (“TARP”) to help families keep their homes. In February 2009, the U.S. Department of the Treasury (“Treasury”) announced TARP’s signature housing program, the Home Affordable Modification Program (“HAMP”), under which mortgages would be modified to a payment that is “affordable” and “sustainable.” Originally announced as a program that would help as many as 3 million to 4 million homeowners avoid foreclosure, as of March 2012, only 794,748 homeowners were in a permanent mortgage modification, approximately half of which are funded by TARP.1 According to testimony by Phyllis Caldwell, Treasury’s former Chief of the Homeownership Preservation Office (“HPO”), Treasury designed HAMP on four core principles: affordability, pay for success, a net present value (“NPV”) test, and help for unemployed borrowers.2 This report addresses the NPV test. The NPV test is the gateway through which an otherwise eligible homeowner gets help under HAMP. A mortgage servicer3 first determines a homeowner’s eligibility based on whether the homeowner is in default or at risk of imminent default, and whether the home is an owner-occupied, single-family, one- to four-unit property with a maximum unpaid principal balance of $729,750 (for one unit).4 The mortgage servicer must take several steps5 to lower the borrower’s monthly mortgage payment to 31% of the borrower’s monthly gross income. If a homeowner meets these eligibility criteria, the decision of whether a homeowner must be approved for HAMP rests on the results of the NPV test. Based on Treasury data as of March 2012, approximately 5% of 3.2 million homeowners denied for HAMP were denied based on the NPV test. This represents 160,870 homeowners6 who did not get help from HAMP.

A key to understanding the NPV test is to know that it estimates whether it is in the best interests of the investor to modify a mortgage under HAMP. Servicers

1 The rest are funded by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan

Mortgage Corporation (“Freddie Mac”). 2 Throughout this report, the terms “homeowner” and “borrower” are used interchangeably. 3 A mortgage servicer collects payments from the borrower and administers the loan. The servicer may be the lender or

may be a specialized company under contract with the lender or the investor who owns the loan. 4 In March 2012, Treasury changed the name of HAMP to HAMP “Tier 1” and announced HAMP “Tier 2” effective

June 1, 2012. The described criteria apply to the original HAMP. 5 The steps may include adding accrued interest due and late fees to the principal of the mortgage, reducing the interest

rate, extending the term of the mortgage, and forbearing principal. For a more complete explanation of the NPV model and test, see Appendix B.

6 This number includes private mortgages as well as Fannie Mae and Freddie Mac mortgages.


SIGTARP 12-003 June 18, 2012

enter 44 inputs7 (39 of which are specific to the NPV decision) into the NPV test.8 The NPV test compares the expected cash flow from a modified loan with the expected cash flow from the same loan with no modification to determine which option is likely to be more valuable to the investor. If the NPV test estimates that modifying a mortgage will result in more revenue for the investor than not modifying the mortgage (described as a positive NPV result), the servicer must offer a HAMP mortgage modification to the homeowner.9 If the NPV test produces a negative result, a servicer has the option of modifying the mortgage under HAMP if the investor consents.

Because the NPV test is a linchpin in an otherwise eligible homeowner’s HAMP application, Treasury guidelines require that servicers maintain documentation on their NPV inputs. If a servicer turns down a homeowner for HAMP, within 10 business days it must send a letter to the homeowner explaining the reason for denial and describing other foreclosure alternatives. If the NPV test was the reason for the denial, the servicer must include 33 specific inputs that were used in its NPV test.10 Homeowners can request that the servicer rerun the NPV test if they believe one of the inputs is incorrect. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) required that Treasury make a web-based NPV calculator available to the public, which Treasury did on May 23, 2011, at www.CheckMyNPV.com. Homeowners can enter into the calculator the NPV inputs listed in their denial letter or substitute those with other inputs. Senator Jeff Merkley and eight other senators requested that the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) review whether servicers are correctly applying NPV to determine which homeowners qualify for HAMP.11 SIGTARP began a review to assess the issues

7 The NPV model uses three types of inputs: user inputs such as borrower and loan information; servicer-defined inputs

such as risk premium, modification fees, and mortgage insurance partial payment amount; and the terms of the proposed HAMP modification.

8 Treasury has given servicers discretion to adjust the value used for three of the variables: (1) modification fees such as notary or property valuation fees; (2) mortgage insurance; and (3) the risk premium. The NPV test also contains 12 assumptions, which are estimates or predictions about various mortgage characteristics that are factored into the NPV calculations. Treasury sets these assumptions based on Fannie Mae’s, Freddie Mac’s, and the Federal Housing Finance Agency’s analysis of mortgage data, including, for example, the probability a homeowner will default using standard redefault rates; home price projections (based on 110 local housing markets); and the time and costs associated with a foreclosure.

9 The scenario under which the mortgage is not modified assumes the borrower either becomes current on the mortgage payments without a modification or the borrower goes into foreclosure.

10 Inputs as specified in the Making Home Affordable Program Handbook for Servicers of Non-GSE Mortgages include information such as gross income and the co-borrower’s credit score.

11 The other senators were Richard Durbin, Jack Reed, Herb Kohl, Sherrod Brown, Russell Feingold, Sheldon Whitehouse, Mark Begich, and Maria Cantwell.


SIGTARP 12-003 June 18, 2012

surrounding the NPV test that have posed challenges to HAMP’s success, as well as the following objectives:

� whether the servicers correctly applied the NPV test under the program; � the extent to which Treasury ensured that servicers appropriately applied the

NPV test per HAMP guidelines when they assessed homeowners for program eligibility; and

� the procedures servicers followed to communicate to homeowners the reasons they were denied HAMP mortgage modifications, as well as to identify the full range of loss mitigation options then available to those homeowners.

In conducting this audit, SIGTARP gathered information from Treasury and its financial agent, the Federal Home Loan Mortgage Corporation (“Freddie Mac”), in its role as compliance agent for HAMP. SIGTARP also examined the application of the NPV test by three of the largest servicers participating in HAMP: Wells Fargo Bank, NA (“Wells Fargo”); GMAC Mortgage, LLC (“GMAC Mortgage”); and Ocwen Loan Servicing, LLC (“Ocwen”). From these servicers, SIGTARP judgmentally selected 149 homeowner applications to determine the impact that the NPV test had on whether these homeowners qualified for HAMP. SIGTARP also asked those three servicers and four additional servicers ‒ Bank of America, NA (“Bank of America”), CCO Mortgage, JPMorgan Chase Bank, NA (“JPMorgan”), and Saxon Mortgage Services, Inc. (“Saxon”) ‒ for their rationale or analysis for using the risk premium. SIGTARP conducted the audit from March 2010 through May 2012, and in accordance with generally accepted government auditing standards as prescribed by the Comptroller General of the United States. For a discussion of the audit’s scope and methodology, see Appendix A.


SIGTARP 12-003 June 18, 2012

Background Three TARP oversight bodies ‒ the Congressional Oversight Panel (“COP”), the Government Accountability Office (“GAO”), and SIGTARP ‒ previously reported on problems or concerns over the NPV test. This report involves some of the same issues and concerns raised, based in part on SIGTARP’s sample testing. In October 2009, COP reported evidence of eligible borrowers being denied HAMP modifications incorrectly, misinterpretations of program guidelines, and difficulties encountered by borrowers and housing counselors in understanding the NPV models, as well as the reasons that HAMP applications were being denied. COP examined Treasury’s NPV model and noted that it was highly sensitive to small changes. COP reported that Treasury lets servicers override the default discount rate set by Freddie Mac and add a risk premium up to 250 basis points (2.5%). COP reported that the discount rate impacts the present value of expected cash flows. COP found that only a one basis point change in the risk premium is necessary to change the outcome of the NPV test from NPV positive to NPV negative. COP called on Treasury to provide greater transparency by releasing its NPV model and stated that requiring servicers to give borrowers specific reasons for denials “could help alleviate [lack of transparency].” In March 2010, SIGTARP reported that Treasury’s many changes to the HAMP NPV model from March 2009 through November 2009 posed challenges to servicers. Treasury changed or clarified the NPV test eight times in 2009. Some of these changes included updating key parameters in the test, such as the discount rate, the cure rate, and foreclosure costs, and adding a home price decline protection incentive payment to the model.12 Changes caused problems for the servicers throughout the process. Servicers told SIGTARP that they encountered problems accessing the NPV test early in the process and getting documentation from Treasury concerning the model, and that earlier models had errors and inconsistencies. In addition, servicers complained to SIGTARP that there was a lack of Treasury guidance and there was confusion regarding multiple changes to the model. One servicer told SIGTARP that changing the model made it particularly difficult to manage version control over the model. Another servicer told SIGTARP that there was a short time to comply with significant changes to the model, and servicers were not notified of changes to the model until after they were implemented.

12 The discount rate is the current Freddie Mac’s Primary Mortgage Market Survey rate for 30-year fixed-rate conforming

loans. The cure rate is the percentage of delinquent mortgages that become current because the borrowers remit all of the missed payments or pay off the mortgage in full. Foreclosure costs include pre-foreclosure sales, third-party sales, and other costs associated with foreclosure. Home price decline protection incentive payments are additional incentives for modifications of loans on properties located in areas where home prices have recently declined and where investors are concerned that prices will continue to decline.


SIGTARP 12-003 June 18, 2012

In April 2010, COP again reported on problems and concerns regarding the NPV test. COP applauded Treasury’s efforts to test its new NPV model, but stated that because Treasury had still not publicly released the model for the benefit of borrowers and counselors, Treasury had not made meaningful progress in addressing concerns about the secrecy of the NPV model. COP also reported that, although Treasury had made significant progress on establishing guidelines for written communications to homeowners regarding the reasons for a HAMP denial, it was unclear whether borrowers were receiving notices in a timely manner. COP stated that it is important for Treasury to monitor the activities of the program participants, audit them, and enforce program rules, guidelines, and requirements. In June 2010, GAO reported that 15 of the 20 largest servicers were not running the NPV test in compliance with HAMP guidelines. GAO reported, “This lack of compliance likely resulted in differences in how borrowers were evaluated, and could have resulted in the inequitable treatment of similarly situated borrowers.” Because servicers linked the NPV model to their own systems, GAO found that values for inputs such as property values and credit scores were erroneously updated during the rerunning of the NPV model. These errors were so severe that Treasury required the servicers to fix the in-house models, and determined that until they did so, the servicers could not deny a HAMP modification based on the NPV test. GAO found that half of the servicers it sampled reported at least a 20% error rate for income calculations. GAO reported, “According to Treasury, the number of borrowers who were denied because of a servicer’s NPV errors could range from a handful to thousands, depending on the size of the servicer and the extent of the error.” GAO also found that servicers’ error rates for calculating borrower income were well above a servicer’s own established error thresholds (typically 3% to 5%). GAO reported, “Without accurate income calculations, similarly situated borrowers applying for HAMP may be inequitably evaluated for the program and may be inappropriately deemed eligible or ineligible for the program.” In addition to errors in inputs that servicers were using in the NPV test, GAO also reported concerns, similar to COP’s reported concerns, surrounding the risk premium. According to GAO, Treasury allowed some differences in how servicers evaluate borrowers for HAMP, which could result in inconsistent outcomes for borrowers. GAO was referring to Treasury allowing servicers to add up to a 2.5% risk premium to the Freddie Mac rate when inputting the discount rate to the NPV model. GAO explained, “The higher the risk premium a servicer chooses, the fewer the number of loans that are likely to pass the NPV model, because expected future cash flows would have less value.” GAO’s analysis determined that as of April 17, 2010, 11 servicers (out of more than 100 servicers) used a risk premium, most of them the full 2.5%.


SIGTARP 12-003 June 18, 2012

The reported problems surrounding a lack of transparency in the NPV test and servicer errors led to Congressional action. Section 1482 of the Dodd-Frank Act required a publicly available web-based NPV calculator based on the HAMP NPV model to assist borrowers in understanding the NPV evaluation process under HAMP and in conducting an estimated NPV evaluation of their mortgage. Congressman Mike Quigley, who sponsored the amendment to the Dodd-Frank Act that required the NPV calculator, explained, “A homeowner’s fate hinges on the NPV score, so the American dream is literally at stake here.”

In December 2010, COP reported that Treasury had come out with a new model and Dodd-Frank required its public release. COP noted that several factors could affect the success of the model, including the design and implementation of the model, and the accuracy of the data input by the servicers into the model. COP stated that Treasury still allowed servicers to add up to a 2.5% risk premium and added, “The number of loans that will qualify for a HAMP modification will vary depending on the risk premium a servicer uses in its NPV calculations.”


SIGTARP 12-003 June 18, 2012

The Discretion Treasury Gave to Servicers To Add a Risk Premium to the Discount Rate Reduced the Number of Homeowners Who Get Help in HAMP, According to SIGTARP’s Sample

This section describes how the use of a risk premium results in fewer homeowners

getting HAMP modifications.

Despite warnings by COP and GAO that Treasury’s practice of allowing servicers to add a risk premium to Freddie Mac’s discount rate results in fewer homeowners being approved for HAMP, Treasury has allowed that practice to continue without questioning the servicer’s rationale for adding a risk premium as long as it does not exceed 2.5%. According to Treasury, the addition of the risk premium reflects an additional cost that investors may face in modifying and continuing to carry mortgages at risk of default. According to GAO’s June 2010 report, only 11 out of more than 100 servicers participating in HAMP added a risk premium. SIGTARP decided to review these warnings by GAO and COP and found that although some servicers initially added a risk premium, only four continue to do so. It is unclear why this small number of servicers should be allowed to take an action that results in fewer HAMP modifications. With HAMP three years old and any risk in the program presumably known to servicers, Treasury should stop letting servicers add a risk premium to the discount rate used by Freddie Mac. SIGTARP surveyed seven servicers (GMAC Mortgage, Ocwen, Wells Fargo, Bank of America, CCO Mortgage, JPMorgan, and Saxon) to understand their rationale for use of the risk premium. Initially, only GMAC Mortgage did not add a risk premium.13 Six servicers added a risk premium – five added the maximum 2.5% (Bank of America, Saxon, Wells Fargo, JPMorgan, and Ocwen), and one, CCO Mortgage, added 0.005%. However, in late 2010 and early 2011, JPMorgan and Ocwen14 stopped adding any risk premium. JPMorgan explained to SIGTARP that initially it used the maximum risk premium because HAMP was new and had no performance results. JPMorgan told SIGTARP that it no longer used the risk premium because servicers and investors became more comfortable with HAMP over time and it wanted to align its practices with Fannie Mae and Freddie Mac, which do not use a risk premium.

The rationale of one of HAMP’s three largest servicers, JPMorgan, may apply to the other servicers that continue to add a risk premium, which supports Treasury’s

13 GMAC Mortgage told SIGTARP that it did not consider adding a risk premium and that it does not deny homeowners

a HAMP modification solely based on the NPV result. 14 Ocwen did not provide to SIGTARP its rationale for its decisions on how it assigned a risk premium or why it

eliminated the use of the risk premium.


SIGTARP 12-003 June 18, 2012

discontinuing any use of a risk premium. Bank of America, the largest HAMP servicer in terms of TARP incentives, told SIGTARP that it uses the highest risk premium allowed in part because investors wanted a higher discount rate, and rates that are too low could be costly to investors. Wells Fargo, the second-largest HAMP servicer, told SIGTARP that it uses the maximum risk premium because its “cost of capital” for its largest mortgage portfolio exceeds Treasury’s discount rate with the added 2.5% premium. In its sample, SIGTARP found that the discretion that Treasury gave to servicers to add a risk premium reduced the number of otherwise qualified homeowners that Treasury helped through HAMP. SIGTARP’s analysis of 51 judgmentally selected HAMP applications15 evaluated by Ocwen or Wells Fargo found that more than half (27) of the homeowners would have had a positive NPV result if the servicer had not used a risk premium. The following table demonstrates the impact of reducing and removing the risk premium.

TABLE 1

*Note: This column shows the number of NPV test results that changed from negative to positive when premium was reduced. Source: SIGTARP analysis of NPV negative mortgages from the two servicers that elected to use a risk premium.

INCREMENTAL RISK PREMIUM CHANGE SUMMARY

Risk Premium Decrease *Number of NPV

Decisions That

Reversed

From To

2.5% 2.0% 7

2.0% 1.5% 10

1.5% 1.0% 5

1.0% 0.5% 2

0.5% 0.0% 3

Total 27

SIGTARP’s analysis confirms that homeowners in the sample were denied a HAMP modification because of the servicers’ addition of a risk premium. A discount rate set by Freddie Mac is already used by more than 100 servicers in

15 This sample of 51 loans is a subset of 149 loans that SIGTARP judgmentally selected from Ocwen, Wells Fargo, and

GMAC Mortgage for NPV input testing. Of the 149 loans, only loans that were originally evaluated with a risk premium and returned a negative NPV test result were analyzed. The 149 loans were selected to represent a cross section of loans according to factors including geographic location, date the NPV test was run, and amount of unpaid principal balance. Results from a judgmental sample cannot be projected to the universe of data from which the sample was drawn.


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HAMP.16 Only four of the servicers in HAMP use the additional risk premium. If JPMorgan and Ocwen no longer believe there is a need to add a risk premium to the NPV test, it would not seem necessary for others. Treasury should remove this obstacle that prevents otherwise eligible homeowners from getting help from HAMP.

16 The number of servicers participating in HAMP has changed over the course of the program. As of December 2011,

there were 109 servicers participating in HAMP.


SIGTARP 12-003 June 18, 2012

Servicers in SIGTARP’s Sample Erred Inputting Homeowner Information in the NPV Test and Did Not Maintain Sufficient Documentation of the NPV Inputs

This section describes how three of the largest servicers in HAMP performed in

inputting NPV test information, according to SIGTARP’s sample.

Any model will be only as good as its inputs. In addition to other Treasury oversight bodies, SIGTARP found in its sample that servicers made errors using NPV inputs and did not properly maintain records of all NPV inputs17 during the period of our review. Good recordkeeping on NPV inputs is critical for oversight and to protect homeowners’ rights. Congress specifically intended that, through the web-based NPV calculator, homeowners have the right to ensure that their personal information was submitted correctly. A servicer’s failure to maintain the NPV inputs as required by Treasury guidance thwarts the intention of Congress, the ability for effective compliance and oversight, and the rights of homeowners who have been denied a HAMP modification due to the NPV test. Within SIGTARP’s judgmental sample of 149 applications that were reviewed for HAMP modifications between 2009 and early 2011 by 3 of the largest servicers – Ocwen, Wells Fargo, and GMAC Mortgage – SIGTARP found that the servicers could provide both accurate inputs and documentation for only 2 of the HAMP applications. SIGTARP found instances in which servicers failed to comply with HAMP guidelines on maintaining records on NPV inputs. For 19 HAMP applications, the servicer was not able to provide all of the inputs used to evaluate the homeowner for the NPV test. For another 19 HAMP applications, the servicer provided all inputs used to perform the NPV test, and provided documentation for all these inputs, but in some cases that documentation did not support the input used. For 109 applications, the servicers either could not provide documentation to support various inputs, or provided inaccurate documentation for various inputs. For the 149 denied HAMP applications, SIGTARP found that approximately 19% of the inputs either were entered incorrectly or could not be supported by the servicers’ records. Because of the servicers’ failure to maintain documentation of the NPV inputs, SIGTARP was unable to determine how many homeowners from its sample may have been wrongly denied a HAMP modification.

17 SIGTARP found errors in its sample related to credit scores, principal forgiveness, dates of NPV tests, unpaid

principal balance, amortization, principal and interest after modification, and the type of property valuation used.


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One of the key inputs in SIGTARP’s sample where SIGTARP found errors or lack of documentation was the borrower’s gross income. Despite GAO’s June 2010 report about servicer errors in calculating gross income, SIGTARP found servicer errors. The extent to which servicers used incorrect data increased the risk of an improper decision to an unacceptable level. When servicers use erroneous information in the NPV test, homeowners may be denied a HAMP modification and may ultimately lose their homes.


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Servicers in SIGTARP’s Sample Communicated Poorly to Homeowners on the Denial of a HAMP Modification

This section describes servicers’ performance in communicating with

homeowners in SIGTARP’s sample.

SIGTARP reviewed a sample of 26 denial letters sent by GMAC Mortgage, Ocwen, and Wells Fargo, and found that only 2 letters were issued in compliance with HAMP guidelines. HAMP guidelines require that servicers communicate a denial to the homeowner within 10 business days after the decision. SIGTARP found that for 4 homeowners, Wells Fargo sent the denial letter to the homeowner between 32 and 147 business days (69 days on average) after Wells Fargo’s decision.18 Servicers’ failure to communicate denial of a HAMP modification to homeowners in a timely manner can have serious consequences because a delay may prevent homeowners from finding other foreclosure alternatives sooner. One homeowner was left in the dark when GMAC Mortgage failed to provide the homeowner with a reason for the denial. GMAC Mortgage later offered that homeowner a non-HAMP mortgage modification. Of the 12 homeowners sampled who were denied a HAMP modification due to a negative NPV result, 6 denial letters from 1 servicer failed to follow HAMP guidelines of listing certain NPV inputs. This failure to follow HAMP’s guidelines can have serious consequences because without these inputs homeowners cannot use the web-based NPV calculator, required by the Dodd-Frank Act, to challenge servicer errors that may have prevented their participation in HAMP. SIGTARP also found that the servicers failed to provide vital information on foreclosure prevention alternatives to homeowners in 18 of the 26 cases SIGTARP reviewed. Although 17 of the 18 letters from servicers told the homeowner that there may be other loss mitigation options available or that the mortgage was being reviewed for other loss mitigation solutions, the servicer did not give the homeowner any information on those options. In the 18th letter, the servicer did not tell the homeowner that there were other foreclosure alternatives. Treasury told SIGTARP that according to a sample Freddie Mac conducted in December 2011 of four large servicers – Bank of America, Wells Fargo, JPMorgan, and CitiMortgage ‒ Treasury found that those servicers had made improvements to denial letters.

18 SIGTARP excluded two loans from timeliness testing. One was excluded because of the borrower’s bankruptcy

proceeding. The other was excluded because, according to the servicer, Treasury was not allowing the servicer to deny modifications because of possible NPV test errors.


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Treasury Must Ensure Servicers Appropriately Apply the NPV Test To Assess Homeowners for HAMP

Freddie Mac’s Review of HAMP Servicers

Treasury contracts with Freddie Mac as its financial agent to conduct examinations and review servicers’ compliance with HAMP’s guidelines. Treasury has obligated approximately $228 million to retain Freddie Mac as the compliance agent for all HAMP servicers except Fannie Mae and Freddie Mac, and has paid Freddie Mac approximately $152 million as of March 31, 2012. Treasury’s former HPO Chief, Phyllis Caldwell, testified before COP in October 2010, “…Freddie Mac, Treasury’s compliance agent, conducts periodic audits of servicers’ implementation of the [NPV] model.” In addition, Freddie Mac monitors servicers for compliance with program guidelines through a number of reviews, including the second look process. According to Freddie Mac, in second look reviews, Freddie Mac examines the reason why a borrower was denied a HAMP modification and determines whether it agrees, disagrees, or is unable to determine how the servicer made the decision. Freddie Mac told SIGTARP that it examines a sample of at least 100 loans from each servicer in the second look process. For those in the sample turned down for HAMP because of the NPV test, Freddie Mac requests from the servicer all loan documentation and a list of the NPV inputs the servicer used to run the test. Freddie Mac told SIGTARP that it examines the supporting documentation, determines what it believes the correct inputs to be, and reevaluates the loan using the NPV test.

Treasury’s Oversight of Servicers’ Performance and Compliance, and Freddie Mac as the HAMP Compliance Agent Treasury is ultimately responsible for ensuring that servicers comply with HAMP guidelines. However, SIGTARP’s findings of servicer errors with the NPV test and failure to comply with HAMP guidelines in SIGTARP’s sample of HAMP applications through the beginning of 2011, and the more recent June 2011 poor assessment results, raise serious concerns about the effectiveness of Treasury’s oversight. Treasury is responsible for overseeing and monitoring Freddie Mac’s compliance activities. Treasury said it approves the design of Freddie Mac’s compliance program; reviews the detailed results of the servicer reviews; and engages in additional oversight of a servicer if the servicer is significantly lagging in its efforts to correct identified issues. Treasury also monitors servicer progress with its Making Home Affordable Compliance Committee meetings. According to Treasury, Freddie Mac briefs the


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committee on the status of the servicers in correcting issues identified during Freddie Mac’s reviews and significant issues identified as part of NPV test reviews. SIGTARP reviewed committee minutes from September 2009 through March 2012 and found the minutes usually included a list of participants and a few bullet points. The committee’s charter states that Treasury “will also be responsible for capturing the notes of the meeting with special emphasis on the rationale behind any decisions … made …” Furthermore, the charter states that differing points of view should be documented in instances where there is a lack of consensus on issues discussed by the committee. However, given the lack of detail in the minutes, SIGTARP could not find evidence that the requirements of the committee’s charter were fulfilled. At the meetings, Freddie Mac presents details of its reviews of servicers, including results of second look reviews. Treasury told SIGTARP that it determines the appropriate course of action if there are significant delays or issues with a servicer’s remediation efforts. However, Treasury was unable to provide documentation confirming its oversight of servicers. Treasury did not provide SIGTARP documentation of actions that Treasury took as a result of Freddie Mac’s review. Treasury failed to document its oversight, stating that some of its oversight is conducted in such a way that there would be no formal documentation. Accordingly, SIGTARP was unable to verify Treasury’s role in the oversight of servicers or Freddie Mac. SIGTARP and COP have called for transparency of servicer performance. In March 2010, SIGTARP recommended that Treasury set performance benchmarks and publicly report on them to measure over time the implementation and success of HAMP. In April 2010, COP also recommended that Treasury release performance metrics, the results by servicer, and appropriate, meaningful sanctions or procedures to address noncompliance. However, despite these calls for accountability, Treasury did not publicly release information on Freddie Mac’s review of servicers until June 2011, more than 2 years after HAMP started, and then released information only on the reviews of the 10 largest servicers.19 Treasury reported that 4 of the 10 largest servicers needed substantial improvement and six needed moderate improvement. In findings similar to those from GAO and SIGTARP, Treasury found that all 10 of the largest HAMP servicers used erroneous gross income amounts when evaluating borrowers for HAMP, with gross income calculation errors that ranged from 6% to 33%. Treasury’s first published assessment of the servicers raises concerns about Treasury’s compliance and remediation efforts. In June 2011, for the first quarter of 2011, 3 of the 10 largest HAMP servicers ranked poorly on the second look

19 Treasury defined the 10 largest servicers as the 10 largest servicers based on HAMP activity volume.


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metric. That is, borrowers who should have received a permanent mortgage modification were wrongly denied. Four servicers had an unacceptably high number of cases where, in the second look process, Freddie Mac was unable to determine, based on the documentation provided, how the servicer reached the decision not to offer a permanent modification. Treasury withheld incentives from three servicers, but later released the funds. It is unclear why Treasury allowed large servicers to not follow HAMP guidelines without significant lasting consequences. Greater transparency over HAMP servicers’ failure to follow program guidelines since the June 2011 servicer assessments has led to some improvements from servicers. For example, seven servicers still need moderate improvement according to Treasury’s most recent assessment published in March 2012, which reported results for the fourth quarter of 2011. According to this most recent servicer assessment, as of the fourth quarter of 2011, some servicers are showing signs of improvement, but three servicers still have gross income error rates, ranging from 6% to 10% of Freddie Mac’s sample, above Treasury’s established benchmark of 5% and well above those servicers’ internal benchmarks as reported by GAO as often set at 3% to 5%.20 Gross income is a crucial input in the NPV test. Treasury’s failure to establish benchmarks and publicly report on them earlier represents a lost opportunity to make these improvements earlier in servicer compliance. Treasury’s oversight since June 2011 appears to be focused on using the results of Freddie Mac’s review of servicers to rate the servicer and determining whether to temporarily withhold incentives. The most Treasury has done has been to withhold TARP funds from servicers temporarily for one to three quarters. Despite finding (in the June 2011 assessment) that all of the 10 largest servicers required either moderate or substantial improvement more than two years after HAMP started, Treasury has never permanently withheld any TARP payments or clawed back any TARP funds paid to servicers for servicers’ noncompliance with HAMP guidelines.

20 GAO-10-634, “Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure

Mitigation Programs,” June 24, 2010, p. 21.


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Conclusions The Troubled Asset Relief Program’s (“TARP”) signature program, the Home Affordable Modification Program (“HAMP”), was designed around four core principles, one of which was a net present value test (“NPV test”) that estimates whether a mortgage modification is in the best interest of the investor. The NPV test is the gateway through which an otherwise eligible homeowner gets into HAMP. More than 160,000 HAMP-eligible homeowners have been turned down for a HAMP mortgage modification by their mortgage servicer based on the results of the NPV test. In 2009 and 2010, three TARP oversight bodies – the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”), the Government Accountability Office (“GAO”), and the Congressional Oversight Panel (“COP”) – reported several problems with the NPV test. These problems included servicers failing to follow HAMP guidelines, servicers making errors in implementing Treasury’s NPV model, servicers inputting the wrong data, such as a borrower’s income, into the test, and concerns about Treasury’s monitoring of its compliance agent for HAMP, the Federal Home Loan Mortgage Corporation (“Freddie Mac”). GAO reported that half of the servicers it sampled had a 20% error rate in listing borrowers’ income. COP characterized problems with the NPV test as evidence of eligible borrowers incorrectly being denied HAMP modifications. GAO similarly reported that “this lack of compliance likely resulted in differences in how borrowers were evaluated, and could have resulted in the inequitable treatment of similarly situated borrowers.” SIGTARP’s most recent analysis from its sample identified concerns with the NPV test that may stand as barriers to homeowners getting much-needed help from HAMP. One concern can be easily fixed, though others require greater compliance and enforcement by Treasury: � Treasury’s practice of protecting investors by allowing them to add a “risk

premium” to the NPV test calculation: SIGTARP found in its sample that the discretion that Treasury gave to servicers to override the baseline discount rate in the NPV test by adding a risk premium (of up to 2.5%) reduces the number of otherwise qualified homeowners Treasury helps through HAMP. According to Treasury, the addition of the risk premium reflects an additional cost that investors may face in modifying and continuing to carry mortgages at risk of default. Only 4 servicers add a risk premium, down from 11 in 2010. More than 100 servicers do not add a risk premium. In a SIGTARP analysis of a sample of 51 denied HAMP applications, SIGTARP found that if the servicer had not used a risk premium, more than half (27) of the homeowners in SIGTARP’s sample would have tested positive in the NPV test (which would require the servicer to offer a HAMP modification).


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The fact that more than 100 servicers do not find it necessary to add a risk premium suggests that the four servicers that do can put an end to this practice, which protects the investors at the expense of homeowners. Of the three largest HAMP servicers, only Bank of America, NA (“Bank of America”) and Wells Fargo Bank, NA (“Wells Fargo”) use a risk premium, both choosing to use the maximum 2.5%. Bank of America justified its risk premium to SIGTARP by saying that investors wanted a higher discount rate. The third-largest servicer, JPMorgan Chase Bank, NA (“JPMorgan”), told SIGTARP that it initially used the maximum risk premium because HAMP was new and had no performance results, but discontinued it because servicers and investors became more comfortable with HAMP over time and it wanted to align its practices with the Federal National Mortgage Association (“Fannie Mae”) and Freddie Mac, which do not use a risk premium. There is a simple fix for Treasury to remove this obstacle to homeowners getting into HAMP – tell servicers that risk premiums are no longer allowed.

� Errors Inputting Homeowner Information and Failure To Maintain

Documentation in SIGTARP’s Sample: Any model will be only as good as its inputs. SIGTARP found in its sample that servicers made errors using NPV inputs and did not properly maintain records of all NPV inputs during the period of our review. Within SIGTARP’s judgmental sample of 149 HAMP applications, SIGTARP found that the servicers could provide both accurate inputs and documentation for only two HAMP applications.21 SIGTARP found that servicers failed to comply with HAMP guidelines on maintaining records on NPV inputs, which is crucial for compliance and to protect homeowners’ rights to challenge servicer error. For 19 denied HAMP applicants, the servicer was not able to provide all of the inputs used in the NPV test. In some instances where there was documentation, it did not support the NPV inputs the servicer used. For 149 denied HAMP applications, SIGTARP found that approximately 19% of the inputs were either entered incorrectly or could not be supported by the servicers’ records. Because of the servicers’ failure to maintain documentation of the NPV inputs, SIGTARP was unable to determine how many homeowners from its sample may have been wrongly denied a HAMP modification.

� Errors in Calculating Homeowner Gross Income and in Other Areas in

SIGTARP’s Sample: In 2010, GAO found that servicers’ error rates for calculating gross income were well above the servicers’ own established error rate thresholds, which were typically 3% to 5%. In 2010 and 2011, SIGTARP also found servicer errors or lack of documentation in calculating the homeowner’s gross income, which is a key input in the NPV test. SIGTARP also found errors in its sample related to credit scores, principal forgiveness,

21 SIGTARP’s sample consisted of 149 HAMP applications reviewed by 3 of the 10 largest servicers: Ocwen, Wells

Fargo, and GMAC Mortgage.


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dates of NPV tests, unpaid principal balance, amortization, principal and interest after modification, and the type of property valuation used. The extent to which servicers use incorrect data increases the risk of an improper decision to an unacceptable level. When servicers use erroneous information in the NPV test, homeowners may pay the price by being denied help under HAMP and ultimately may lose their homes.

� Poor Communication with Homeowners on Denial of HAMP Modifications in

SIGTARP’s Sample: In its sample, SIGTARP also found that servicers had poor communication with homeowners on the denial of a HAMP modification due to the NPV test. SIGTARP reviewed a sample of 26 denial letters sent by GMAC Mortgage, LLC (“GMAC Mortgage”), Ocwen Loan Servicing, LLC (“Ocwen”), and Wells Fargo, and found that all but 2 of the letters failed to comply with at least 1 requirement of HAMP guidelines. Wells Fargo sent denial letters to 4 homeowners between 32 and 147 business days (69 days on average) after its decision, well past the 10-day requirement. Six denial letters failed to list certain NPV inputs, which has serious consequences because without the inputs, homeowners cannot use the web-based NPV calculator required by Congress and specifically designed to allow homeowners to challenge their servicer about errors. Treasury told SIGTARP that it has recently made improvements in that area, according to a December 2011 sample of four large servicers.

SIGTARP’s findings of servicer errors with the NPV test and failure to comply with HAMP guidelines in its sample raise serious questions about the effectiveness of Treasury’s oversight of servicers. In March 2010, SIGTARP recommended that Treasury set performance benchmarks and publicly report on them to measure HAMP implementation and success. Despite this call for accountability on the part of servicers, Treasury did not release information on reviews of the 10 largest servicers until June 2011, more than 2 years after HAMP was launched. The results showed that four needed substantial improvement and the other six needed moderate improvement. Treasury also monitors servicer progress through its Making Home Affordable Compliance Committee meetings. According to Treasury, Freddie Mac briefs the committee on the status of the servicers in correcting issues. However, Treasury was unable to provide documentation of determination of appropriate action on significant delays or issues with a servicer’s remediation efforts. There were also issues with seven servicers in Freddie Mac’s second look reviews. For a sample of at least 100 loans per servicer, Freddie Mac examines the reason why a borrower was denied a HAMP modification and determines whether it agrees. In June 2011, Treasury published first quarter 2011 data showing that 3 of the 10 largest HAMP servicers ranked poorly in the second look reviews, meaning that homeowners were wrongly denied modifications, and 4 servicers had an unacceptable number of cases where Freddie Mac was unable


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to determine how the servicer reached the decision not to offer a permanent modification. Treasury also found that all 10 of the largest servicers used erroneous gross income amounts when evaluating borrowers for HAMP, with 6% error rates to 33% error rates. Despite the poor servicer assessments announced in June 2011, more than two years into HAMP, Treasury has never permanently withheld any TARP payments or clawed back any TARP payments to servicers. Greater transparency over HAMP servicers since the June 2011 servicer assessments has led to some improvements, although more transparency is needed. For example, according to the most recent assessments, three servicers still have gross income error rates of 6% to 10%, exceeding both Treasury’s benchmark of 5% and the servicers’ own benchmarks. Gross income is a crucial input in the NPV test. Treasury’s failure to establish benchmarks and publicly report on them prior to June 2011 represents a lost opportunity to make improvements earlier in servicer compliance. Greater improvement in servicers’ compliance is a key to homeowners getting help through HAMP. Treasury must be more rigorous in its compliance and enforcement (including permanently withholding TARP payments) against servicers that fail to follow HAMP guidelines.


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Recommendations

1. Treasury should stop allowing servicers to add a risk premium to Freddie Mac’s discount rate in HAMP’s net present value test.

2. Treasury should ensure that servicers use accurate information when

evaluating net present value test results for homeowners applying to HAMP and should ensure that servicers maintain documentation of all net present value test inputs. To the extent that a servicer does not follow Treasury’s guidelines on input accuracy and documentation maintenance, Treasury should permanently withhold incentives from that servicer.

3. Treasury should require servicers to improve their communication with

homeowners regarding denial of a HAMP modification so that homeowners can move forward with other foreclosure alternatives in a timely and fully informed manner. To the extent that a servicer does not follow Treasury’s guidelines on these communications, Treasury should permanently withhold incentives from that servicer.

4. Treasury should ensure that more detail is captured by the Making Home

Affordable Compliance Committee meeting minutes regarding the substance of discussions related to compliance efforts on servicers in HAMP. Treasury should make sure that minutes clearly outline the specific problems encountered by servicers, remedial options discussed, and any requisite actions taken to remedy the situation.


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Management Comments and SIGTARP’s Response Treasury provided an official written response to this report in a letter dated June 15, 2012, which is reproduced in full in Appendix E. Treasury disagreed with the findings in our report. Treasury responded that SIGTARP’s sample of 149 HAMP applications was too small, from too few servicers, and not recent enough to be representative of current operations. Treasury stated that use of a risk premium is traditional in expected cash flow modeling. Treasury said it would discuss the recommendations with SIGTARP. SIGTARP’s audit was conducted in accordance with Generally Accepted Government Auditing Standards (“GAGAS”). GAGAS 7.63 provides that “when sampling is used, the method of selection that is appropriate will depend on the audit objectives” and that “a targeted selection may be effective if the auditors have isolated certain risk factors or other criteria to target the selection.” As required by GAGAS 7.63, SIGTARP made a targeted selection after isolating certain risk factors and other criteria. As stated in the report, SIGTARP selected its judgmental sample from 3 of the 10 largest servicers, based on servicing portfolio size, SIGTARP Hotline complaints, amount of eligible incentives available to each servicer through HAMP, and other factors. SIGTARP validated more than 5,000 inputs that were used for the loans to determine the potential impact on the NPV decision. SIGTARP’s report is not based solely on the targeted sample, but on all information gathered. Sampling serves to validate information and conclusions reached by SIGTARP during interviews and other research as clearly set forth in detail in Appendix A. This includes that SIGTARP compared its targeted sample results to information found in Treasury’s service assessments, including one from March 2012, that found that some servicers are showing signs of improvement, but seven servicers still need moderate improvement in their compliance and that three servicers continue to have unacceptable gross income error rates. As such, SIGTARP recommended that to the extent a servicer does not comply with Treasury’s guidelines, Treasury should permanently withhold incentives from that servicer. As to the risk premium, 96% of the servicers do not add a risk premium. Only four servicers add a risk premium. The third-largest servicer, JPMorgan, discontinued the practice because investors became comfortable with HAMP. SIGTARP recommended that, based on this and other data, and the potential that this risk premium could result in negative NPV scores, Treasury should discontinue allowing a risk premium.


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Appendix A ‒ Scope and Methodology

We performed this audit under the authority of Public Law 110-343, as amended, which also incorporates the duties and responsibilities of inspectors general under the Inspector General Act of 1978, as amended. The Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) initiated this audit in response to a letter dated March 10, 2010, from Senator Jeff Merkley and eight other senators.22 Our audit objectives were to determine: � whether the mortgage servicers correctly applied the net present value (“NPV”) test23 under the

Home Affordable Modification Program (“HAMP”); � the extent to which the U.S. Department of the Treasury (“Treasury”) ensured that servicers

appropriately applied the NPV test per HAMP guidelines when they assessed homeowners for program eligibility; and

� the procedures servicers followed to communicate to homeowners the reasons they were denied HAMP mortgage modifications, as well as to identify the full range of loss mitigation options then available to those homeowners.

We conducted our audit work at Treasury’s Office of Financial Stability in Washington, D.C., Fannie Mae headquarters in Washington, D.C., Freddie Mac headquarters in McLean, Virginia, and the offices of three mortgage servicers: Ocwen, in West Palm Beach, Florida; Wells Fargo in Des Moines, Iowa; and GMAC Mortgage in Waterloo, Iowa. The scope of this audit covered both privately owned mortgages and Fannie Mae- and Freddie Mac-owned mortgages that were serviced by HAMP servicers. To determine the extent to which servicers correctly applied the NPV test, we assessed the accuracy of the servicers’ decisions to grant or deny HAMP mortgage modifications by verifying the accuracy of information servicers entered into the NPV model24 (“NPV inputs”) and re-performed the NPV test, but we did not validate the NPV model directly. We judgmentally selected the sample of three servicers based on servicing portfolio size; amount of eligible incentives available to each servicer through HAMP, SIGTARP Hotline complaints, and other factors.25 We then judgmentally sampled a total of 50 mortgages from each servicer based on a cross section of loans according to factors including geographic location, date the NPV test was run, and amount of unpaid principal balance. In addition, we reviewed eight Congressional constituent complaints. Our sample totaled 158 mortgages that were evaluated for HAMP by these servicers between August 4, 2009, and January 13, 2011. We tested 149 of the 158 sampled mortgages because necessary documentation was not available for 5, 3 of the constituents referred to us were not eligible under the program, and the servicers never evaluated the HAMP eligibility of 1 constituent’s mortgage (but the constituent later received a proprietary mortgage modification).

22 The other senators were Richard Durbin, Jack Reed, Herb Kohl, Sherrod Brown, Russell Feingold, Sheldon

Whitehouse, Mark Begich, and Maria Cantwell. 23 A full explanation of the NPV test and its importance in determining homeowner eligibility for HAMP mortgage

modifications is included in the Introduction of this report, on p. 1. 24 For more information on the NPV model and NPV test, see Appendix B – The Home Affordable Modification

Program’s Net Present Value Model. 25 Results from a judgmental sample cannot be projected to the universe of data from which the sample was drawn.


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We examined supporting documentation for the selected NPV inputs for all mortgages tested to ensure that the inputs used by the servicers in the NPV test were accurate. We validated 36 of the 44 inputs for each mortgage tested, resulting in a total of 5,364 inputs tested. These inputs were judgmentally selected based on the potential impact that they would have on the NPV decision. The remaining inputs such as “HAMP servicer number” and “remaining term” were not validated because they have a lesser impact on the NPV decision. For the gross income NPV input, we recalculated each borrower's monthly gross income based on supporting documentation in accordance with program guidance and servicers’ own policies and procedures for calculating gross income. We also consulted with Freddie Mac for guidance on the gross income calculations. To analyze how a reduction in the discount risk rate premium from 2.5% to 0% (in increments of 0.5%) would affect each borrower’s NPV result, we submitted for testing all private loans in our sample using inputs based on servicer documentation to Treasury’s online NPV test, holding constant all inputs other than the risk premium. No GMAC Mortgage-serviced mortgages were retested because GMAC Mortgage does not add a risk premium. From the original sample of 50 Ocwen mortgages, 8 were excluded from testing because necessary documentation was missing from the servicer’s files, 2 were excluded because they were owned by Fannie Mae or Freddie Mac, 4 failed to return an NPV value, and 1 loan returned a positive NPV value, leaving 35 Ocwen mortgages that were tested. In addition to the original sample of 50 mortgages serviced by Wells Fargo, all constituent mortgages we reviewed were also serviced by Wells Fargo. From the 58 mortgages we sampled, 18 were excluded from testing because necessary documentation was missing from the servicer’s files, 13 were excluded because they were owned by Fannie Mae or Freddie Mac, 5 failed to return an NPV value, and 6 returned a positive NPV value, leaving 16 Wells Fargo mortgages that were tested. In total we tested all 51 loans that returned a negative NPV result – 35 from Ocwen and 16 from Wells Fargo – and all 51 were analyzed at each risk premium increment. We also surveyed seven servicers for their rationale for choosing a risk premium, as well as their analysis to support their decision. The seven servicers were GMAC Mortgage, Ocwen, Wells Fargo, Bank of America, CCO Mortgage, JPMorgan, and Saxon Mortgage Services, Inc. (“Saxon”). To gain an understanding of the NPV model and its proper application, we interviewed officials from Treasury, the mortgage servicers, industry groups, Fannie Mae, Freddie Mac, the Federal Deposit Insurance Corporation, and the Federal Housing Finance Agency, and we received a demonstration of Treasury’s base model from Fannie Mae. We interviewed Fannie Mae on its role in the creation of the NPV model and the NPV model’s mechanics. We also collected Treasury’s HAMP guidance, policies and procedures from the three sampled servicers, the Emergency Economic Stabilization Act of 2008, the Helping Families Save Their Homes Act of 2009, and relevant Treasury white papers providing additional guidance to servicers on the NPV test. We also obtained from Treasury feedback that it had received from servicers and industry groups on the NPV model, version 4.0. To determine the extent to which Treasury ensures that servicers are appropriately applying the NPV test per HAMP guidelines when assessing borrower program eligibility, we conducted interviews with Treasury officials, Fannie Mae, Freddie Mac, and three servicers. We also reviewed Treasury’s policies and procedures as well as the audit program that Freddie Mac uses to assess servicer compliance and associated workpapers, servicer participation agreements, Treasury guidance on HAMP, Treasury’s financial agent oversight policy, and sections of the Financial Agency Agreement between Treasury and Freddie Mac that were pertinent to the NPV test. In addition, we reviewed communications sent by Freddie Mac to servicers notifying them of issues that Freddie Mac had identified, as well as Treasury’s Making Home Affordable


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Compliance Committee meeting minutes for October 2009 to March 2012, showing what actions, if any, have been taken to address these issues. To determine the procedures used by servicers to communicate to borrowers the reasons they were denied HAMP mortgage modifications and their full range of loss mitigation options, we selected half of the original sample of 50 loans from each servicer for further detailed testing. In total, we tested 26 mortgages after excluding loans owned by Fannie Mae and Freddie Mac and those loans that were evaluated for HAMP by the sampled servicers before January 1, 2010, when Treasury issued guidance on denial communications. Our scope for this objective focused on whether servicer denial communications to borrowers complied with Treasury’s guidance. In addition, we reviewed Treasury’s guidance, discussed with servicers their policies and procedures for handling HAMP denials, and reviewed servicers’ mortgage documentation supporting foreclosure alternatives. We conducted this performance audit from March 2010 through May 2012, and in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides reasonable basis for our findings and conclusions based on our audit objectives.

Limitations on Data We obtained servicer populations of mortgages that were evaluated for HAMP, and the NPV test date and final NPV decision for each mortgage. We also obtained data provided by Fannie Mae to report on the status of modifications and the NPV inputs used. While we validated the accuracy of the NPV inputs in our sample using the steps described in the scope and methodology outlined above, we could not verify the completeness of the data provided by the servicers or Fannie Mae because we did not have direct access to extract the data from their systems. In addition, we could not independently confirm the total number of mortgages evaluated for HAMP by each servicer.

Use of Computer-Processed Data To perform this audit, we used data provided by Fannie Mae and the servicers on the status of modifications and the NPV inputs used. While we could not validate the completeness of the data (see explanation in the “Limitations on Data” section), we verified the accuracy of the data in our sample by obtaining related mortgage documentation. In addition, the NPV model has edits to prevent servicers from submitting data outside the range limit of the model. Those edits provide some assurance of the reasonableness of the data, but do not attest to the accuracy of the data submitted to the model. Accordingly, we did not rely on the model’s edits.


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Internal Controls We reviewed internal controls over the accuracy of data used in the NPV test by comparing servicers’ inputs to mortgage-related source documentation. We also reviewed Treasury and the sampled servicers’ controls over communications to borrowers by assessing Treasury guidelines and testing servicer compliance with those guidelines, specifically on timeliness, reason for denial, description of foreclosure alternatives and, if the loan was denied for a negative NPV, did each letter include a list of inputs and a statement that the borrower may request the date the NPV calculation was completed and values used for those inputs.

Prior Coverage Government Accountability Office, Report No. 11-288, “Troubled Asset Relief Program: Treasury

Continues to Face Implementation Challenges and Data Weaknesses in Its Making Home Affordable Program,” March 17, 2011

Congressional Oversight Panel, “Examining the Consequences of Mortgage Irregularities for

Financial Stability and Foreclosure Mitigation,” November 16, 2010 Government Accountability Office, Report No. 10-634, “Troubled Asset Relief Program: Further

Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs,” June 24, 2010

Congressional Oversight Panel, “Evaluating Progress on TARP Foreclosure Mitigation Programs,”

April 14, 2010 SIGTARP, Report No. 10-005, “Factors Affecting Implementation of the Home Affordable

Modification Program,” March 25, 2010 Congressional Oversight Panel, “Taking Stock: What Has the Troubled Asset Relief Program

Achieved?,” December 9, 2009 Government Accountability Office, Report No. 10-301, “Office of Financial Stability (Troubled

Asset Relief Program) Fiscal Year 2009 Financial Statements,” December 9, 2009 Congressional Oversight Panel, “An Assessment of Foreclosure Mitigation Efforts after Six

Months,” October 9, 2009 Government Accountability Office, Report No. 10-16, “Troubled Asset Relief Program: One Year

Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges,” October 8, 2009

Government Accountability Office, Report No. 09-837, “Troubled Asset Relief Program: Treasury

Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable,” July 23, 2009

Congressional Oversight Panel, “Foreclosure Crisis: Working Toward a Solution,” March 6, 2009


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Appendix B – The Home Affordable Modification Program’s Net Present Value Model

On March 4, 2009, Treasury issued guidelines that introduced its NPV model and explained how the model should be used to evaluate borrowers requesting a modification to their mortgage under HAMP. The model includes both a net present value test component (“NPV test”) and a tool that checks the reasonableness of the terms the servicer used when applying the HAMP modification waterfall (“waterfall check”). For privately owned mortgages, the NPV test determines whether a servicer participating in HAMP is required to offer the borrower a HAMP mortgage modification. The model compares the net present value of cash flows expected from a modified mortgage to the net present value of cash flows expected if the mortgage is not modified. If the value of the cash flows is greater with a mortgage modification than without, the servicer is required to offer a HAMP modification to the borrower. Otherwise, a HAMP modification is optional. For mortgages owned or guaranteed by Fannie Mae and Freddie Mac, servicers are required to offer a trial modification under HAMP when the difference in the cash flows is positive as well as when the difference in net present values of cash flows is negative – as long as the difference is negative by less than $5,000.26 In other words, even if the NPV test indicates that a modified mortgage would cost Fannie Mae or Freddie Mac up to $5,000 more than foreclosure, the servicer must still offer the modification. The NPV model also has a waterfall check. HAMP servicers are required to modify certain aspects of a borrower’s mortgage in the order outlined below, called a waterfall, until the borrower’s debt-to-income ratio reaches 31% without going below 31%.27 The reasonableness of the data used by the servicer to apply the waterfall is assessed by the model, although the model’s guidance states that the servicer is responsible for verifying a borrower’s program eligibility and modification terms. The waterfall steps are:

� First, the servicer calculates the current debt-to-income ratio based on the current mortgage payment and

gross monthly income. � Second, the servicer capitalizes any unpaid interest and fees28 (that is, the servicer adds them to the

outstanding principal balance). � Third, the servicer reduces the interest rate in incremental steps to as low as 2%. � Fourth, if the 31% threshold has still not been reached, the servicer extends the term of the mortgage to a

maximum of 40 years from the modification date.

If the four steps do not reduce the borrower’s debt-to-income ratio to the 31% threshold, the servicer may allow a borrower to defer, or forbear, principal payments, subject to certain limits. The forbearance amount

26 According to Fannie Mae, the mandatory mortgage modification threshold of $5,000 in negative cash flows went into

effect on December 1, 2009. 27 Under Treasury guidelines, there is no restriction on reducing the debt-to-income ratio below 31%, but the portion of

the reduction below 31% will not be reimbursed by Treasury. The 31% debt-to-income ratio level was chosen because Treasury considers it to be the standard across the industry for an affordable and sustainable modification. This standard is also a Federal Housing Administration underwriting target.

28 Late fees are not capitalized.


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is not interest bearing and results in a lump-sum payment due upon the earliest of the sale date of the property, the payoff date of the interest-bearing mortgage balance, or the maturity date of the mortgage.

Servicers are not required to forgive principal under HAMP. However, servicers may forgive principal in order to lower the borrower’s monthly payment to achieve the debt-to-income ratio goal of 31% on a stand-alone basis or before any of the other HAMP modification steps described above.


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Appendix C ‒ Acronyms and Abbreviations Acronym or

Abbreviation Definition

Bank of America Bank of America, NA CCO Mortgage CCO Mortgage, a division of RBS Citizens, NA COP Congressional Oversight Panel Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act Fannie Mae Federal National Mortgage Association Freddie Mac Federal Home Loan Mortgage Corporation GAO Government Accountability Office GMAC Mortgage GMAC Mortgage, LLC HAMP Home Affordable Modification Program HPO Homeownership Preservation Office JPMorgan JPMorgan Chase Bank, NA LLC Limited Liability Corporation NA National Association NPV Net present value Ocwen Ocwen Loan Servicing, LLC Saxon Saxon Mortgage Services, Inc. SIGTARP Office of the Special Inspector General for the Troubled Asset Relief Program TARP Troubled Asset Relief Program Treasury U.S. Department of the Treasury Wells Fargo Wells Fargo Bank, NA


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Appendix D ‒ Audit Team Members This audit was conducted and the report was prepared under the direction of Kurt W. Hyde, Deputy Special Inspector General for Audit and Evaluation, and Kimberley A. Caprio, Assistant Deputy Special Inspector General for Audit and Evaluation, Office of the Special Inspector General for the Troubled Asset Relief Program. Staff members who conducted the audit and contributed to the report include Patrice Wilson, Lindsay Steward, Philip Mastandrea, Andrew Lopresti, Clayton Boyce, and Cynthia Broome.


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Appendix E ‒ Management Comments


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SIGTARP Hotline

If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the Troubled Asset Relief Program, please contact the SIGTARP Hotline.

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February 2012

NCLC®NATIONAL CONSUMER

LAW C E N T E R®

Rebuilding AmeRicAHow StateS Can Save MillionS oF HoMeS tHrougH ForeCloSure Mediation

© Copyright 2012, National Consumer Law Center, Inc. All rights reserved.

about tHe autHor

Geoff Walsh is a staff attorney at the National Consumer Law Center (NCLC) who focuses on foreclosure prevention, consumer bankruptcy, and other consumer credit issues. He is a contributing author to NCLC’s Foreclosures, Consumer Bankruptcy Law and Practice, Credit Discrimination, and Student Loans. He has written several other studies on foreclosure mediation programs, including a 2009 NCLC report, Foreclosure Mediation Programs, Can They Save Homes? He has provided written testimony and engaged in policy advocacy at the federal and state levels on the topic of foreclosure mediation. He has also served as an instructor at trainings and legal education seminars on foreclosure prevention and bankruptcy topics, including trainings for foreclosure mediators in a half dozen states. He is an active member of the National Association of Consumer Bankruptcy Attorneys. Geoff previously worked as an attorney with Vermont Legal Aid, Inc. and as a staff attorney with Community Legal Services, Inc. in Philadelphia, Pa., where he also specialized in housing and consumer litigation. Geoff earned his B.A. from University of Michigan and is a graduate of Temple University Law School.

aCknowledgMentS

We thank the Open Society Institute for its support that allowed us to research and write this paper.

We also thank Sara Benjamin for her research, Carolyn Carter and Arielle Cohen for their comments on this report, Jan Kruse and Beverlie Sopiep for their significant help in organizing the content, Denise Lisio and Vivian Abraham for their editing, and Julie Gallagher for her assistance with layout and design.

7 wintHrop Square, boSton, Ma 02110 5 617-542-8010 5 www.NCLC.org

about tHe national ConSuMer law Center

The National Consumer Law Center®, a nonprofit corporation founded in 1969, assists consumers, advocates, and public policy makers nationwide on consumer law issues. NCLC works toward the goal of consumer justice and fair treatment, particularly for those whose poverty renders them powerless to demand accountability from the economic marketplace. NCLC has provided model language and testimony on numerous consumer law issues before federal and state policy makers. NCLC publishes an 18-volume series of treatises on consumer law, and a number of publications for consumers.


LAW C E N T E R®

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rebuilding america 5 1©2012 national Consumer law Center www.nclc.org

table oF ContentS

Executive Summary 4

I. Introduction: The Current State of the Foreclosure Crisis 11

II. Foreclosures Remain Preventable 11A. Affordable Loan Modifications as Sustainable Alternatives to Foreclosures 11B. The Need for Strict Oversight of Servicers’ Loss Mitigation Reviews: 12

The Lessons from HAMPC. HAMP’s History Shows That Servicers Are Capable of Making Affordable 15

Loan ModificationsD. The Major Problems with Servicers’ Loss Mitigation Reviews and How 17

Mediation Programs Can Fix Them

III. The Evidence Is In: Effective Interventions at the State and Local Level 20 Prevent Unnecessary ForeclosuresA The Reinvestment Fund’s Report on Philadelphia’s Foreclosure Diversion 20

ProgramB. The Impact of Housing Counseling on Loss Mitigation Outcomes 22

IV. The Future of Loss Mitigation: The FHFA Alignment Guidelines 23A. The FHFA Alignment Guidelines: Background 23B. Speeding Up and Standardizing Pre-Foreclosure Loss Mitigation Review 23C. Speeding Up and Standardizing the Dual Track Foreclosure Process 23D. The Impact of the Alignment Guidelines on Foreclosure Mediation and 24

Conference ProgramsE. The Alignment Guidelines Highlight the Need for Conference and Mediation 26

Programs

V. Judicial Enforcement of Mediation Program Requirements 27A. Judicial Enforcement of Mediation Rules: The Nevada Courts 27

1. Nevada Courts and Sanctions Orders 272. The Nevada Courts Address the Limits of Sanctions 29

rebuilding americaHow StateS Can Save MillionS oF HoMeS tHrougH

ForeCloSure Mediation

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©2012 national Consumer law Center www.nclc.org2 5 rebuilding america

B. More State Courts Are Enforcing Mediation Program Rules 301. Connecticut 302. Indiana 303. Maine 304. New York 315. Vermont 31

VI. Mediation Programs Require Servicers to Show Authority to Foreclose 31

VII. Conference and Mediation Programs Can Be Financially 33 Self-SupportingA. The Programs Provide Substantial Benefits to States and Communities at 33

Little or No CostB. Supporting Legal Services Attorneys and Housing Counselors through 37

Revenues from Filing Fee Surcharges

VIII. Foreclosure Delays: Mediations Do Not Prolong Foreclosures 38A. Mediation and Conference Programs Can Operate Within Existing 38

Foreclosure Time FramesB. Foreclosure Delays: The New York Experience 39

IX. Recommendations Regarding Foreclosure Mediation Goals for 2012 41 and Beyond

X. Conclusion 44

Appendix A: New Foreclosure Conference and Mediation Programs in 2011 45

Appendix B: Foreclosure Conference and Mediation Programs: Summaries of 49 Documentation Requirements for Lenders and Borrowers

Endnotes 52

Tables

Table 1: Affordability of Modified Loans (2008–2011) 12Table 2: Modified Loans Default Rate (2008–2010) 13Table 3: HAMP vs. Other Loan Modification Redefault Rates 13Table 4: The Impact of One Servicer on HAMP’s Implementation: 16

Bank of AmericaTable 5: Taking Stock: How Mediation Programs Reduce Home Foreclosures 19Table 6: Foreclosure Mediation Fees, Selected States 35

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©2012 national Consumer law Center www.nclc.org rebuilding america 5 3

SeCtion by SeCtion State reFerenCeS

I. Introduction: The Current State of the Foreclosure Crisis 11

II. Foreclosures Remain Preventable 11A. Affordable Loan Modifications as Sustainable Alternatives to Foreclosures 11B. The Need for Strict Oversight of Servicers’ Loss Mitigation Reviews: The Lessons 12

from HAMPC. HAMP’s History Shows That Servicers Are Capable of Making Affordable Loan Modifications 15D. The Major Problems with Servicers’ Loss Mitigation Reviews and How Mediation Programs 17

Can Fix Them: CT, DC, IN, ME, NV, NY, VT, WA

III. The Evidence Is In: Effective Interventions at the State and Local Level Prevent 20 Unnecessary ForeclosuresA. The Reinvestment Fund’s Report on Philadelphia’s Foreclosure Diversion Program: PA 20B. The Impact of Housing Counseling on Loss Mitigation Outcomes: PA 22

IV. The Future of Loss Mitigation: The FHFA Alignment Guidelines 23A. The FHFA Alignment Guidelines: Background 23B. Speeding up and Standardizing Pre-Foreclosure Loss Mitigation Review 23C. Speeding Up and Standardizing the Dual Track Foreclosure Process: 23

FL, IL, MA, MD, MN, NJ, TX, VAD. The Impact of the Alignment Guidelines on Foreclosure Mediation and Conference 24

Programs: NYE. The Alignment Guidelines Highlight the Need for Conference and Mediation Programs 26

V. Judicial Enforcement of Mediation Program Requirements 27A. Judicial Enforcement of Mediation Rules: The Nevada Courts: NV 27B. More State Courts Are Enforcing Mediation Program Rules: CT, IN, ME, NY, VT 30

VI. Mediation Programs Require Servicers to Show Authority to Foreclose: 31 DC, HI, ME, NV, NY, VT, WA

VII. Conference and Mediation Programs Can Be Financially Self-Supporting 33A. The Programs Provide Substantial Benefits to States and Communities at Little or No Cost: 33

AZ, CA, CT, DC, FL, HI, IL, IN, MD, ME, MI, NV, VT, WAB. Supporting Legal Services Attorneys and Housing Counselors through Revenues from 37

Filing Fee Surcharges: FL, MD, ME, NV, NY, PA, WA

VIII. Foreclosure Delays: Mediations Do Not Prolong Foreclosures: 38 CT, DC, FL, IL, MA, MD, ME, NJ, NV, NY, OH, PA, RI, VT, WAA. Foreclosure Mediation and Conference Time Frames 38B. Foreclosure Delays: The New York Experience: NY 39

IX. Recommendations Regarding Foreclosure Mediation Goals for 2012 and Beyond: 41 CT, DC, FL, IL, MD, ME, NV, NY, OH, PA, RI, VT, WA

X. Conclusion 44

Appendix A: New Foreclosure Conference and Mediation Programs in 2011: 45 DE, DC, FL, HI, WA

Appendix B: Foreclosure Conference and Mediation Programs: Summaries of 49 Documentation Requirements for Lenders and Borrowers: CT, DE, DC, FL, HI, ME, MD, NV, NY, OH, VT, WA

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When the U.S. foreclosure crisis began four years ago, analysts predicted that up to 13 mil-lion families would lose their homes before the crisis was over.1 The predictions appear to be coming true. By the beginning of 2011, lend-ers had completed foreclosures of 2.7 million homes with mortgages taken out during the subprime boom years from 2004 to 2008.2 As of the fall of 2011, nearly four million homes were either in foreclosure or had mortgages that were seriously in default.3 Current predic-tions are that, in addition to the loans already foreclosed and those now facing foreclosure, another eight to ten million mortgages are likely to default and enter foreclosure before the current foreclosure crisis is over.4

We are now approaching the mid-point of a very prolonged crisis. Over the past four years, policymakers at the federal, state, and local levels have implemented various mea-sures in an attempt to counteract the devastat-ing effects of so many foreclosures. This is an appropriate time to step back and take stock of what efforts have been effective. This report looks at one strategy: foreclosure conference and mediation programs. It is now clear that these measures have worked.

Foreclosure mediation and conference programs can save homes from foreclosure. If these programs are strengthened and expanded, they can prevent millions of fore-closures that will otherwise take place over the next several years.

This report follows up on an earlier study of foreclosure mediation programs prepared by the National Consumer Law Center in 2009.5 Our 2009 report recommended pro-gram designs and best practices for mediation programs. Recommendations from the report have since been adopted in a number of states. The report raised some questions about the

lack of data supporting the effectiveness of foreclosure mediation programs. Those ques-tions are in large part answered in this report. The National Consumer Law Center also pre-pared two annual updates to its 2009 report on foreclosure mediation programs.6 These reports contain statistical data on foreclosure conference and mediation programs and are available at the National Consumer Law Center website. The same website contains detailed state by state summaries and links to state program information, including texts of current and pending legislation, guides to pro-grams, and other publications related to fore-closure conference and mediation programs.

Servicers are capable of making affordable and sustainable loan modifications.Loan modifications are viable alternatives to foreclosures. Looking solely at outcomes from modifications made early in the foreclosure crisis, there may have been some doubt about this point. Mortgages modified during 2008 redefaulted at an alarming rate. Over half the loans modified during 2008 were in serious default within a year of modification. By the beginning of 2010, barely one quarter of the loans modified in 2008 were current. These outcomes should not be surprising. Most mod-ifications made in 2008 did not decrease home-owners’ monthly payments at all. Instead, the majority of modifications made then either raised payments or left them unchanged.

After 2008, this trend changed. To a much greater degree than before, recent loan modifi-cations have taken into account how much the homeowner can afford to pay. Many modifi-cations, particularly those under the federal government’s Home Affordable Modifica-tion Program (HAMP), set the homeowner’s

eXeCutive SuMMary

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control a major share of the home mortgage servicing market. Unfortunately, their behavior tends to set the standard for the industry.

When the Obama Administration unveiled HAMP in early 2009, it predicted that the program would provide affordable modifica-tions for three to four million households by the time the program was scheduled to end in December 2012. Instead, by the the end of 2012, it is likely that just over one million households will have been approved for per-manent HAMP modifications. Another two to three million homeowners who met basic eligibility requirements and tried to obtain a HAMP modification will have been denied one.

Regrettably, these approvals and deni-als often had more to do with who a home-owner’s servicer happened to be than with the homeowners’ qualifications for HAMP. Some servicers approved HAMP modifications at rates that were two or three times higher than other servicers did. The arbitrariness of these deci-sions, affecting the vital interests of so many families, has been a major impetus for the cre-ation of foreclosure mediation programs.

Foreclosure mediation programs and loan modificationsServicers denied affordable loan modification to millions of borrowers through a process of calculated chaos. Common elements of this strategy included:

•Losing documents

•Failing to follow promised time frames

•Failing to notify homeowners of reasons for servicers’ actions

•Giving invalid or blatantly false reasons for denials

•Providing ineffective review of decisions

•Foreclosing while reviewing for a modi-fication or while the borrower was com-plying with a trial modification

monthly housing payment so that it does not exceed a certain percentage of household income. HAMP rules set the acceptable ratio of the borrower’s housing payment to income at thirty-one percent.

By the end of 2011, most new loan modifi-cations were reducing homeowners’ monthly payment for principal and interest by at least one-fifth. Less than ten percent of recent modi-fications have increased the payment or left it unchanged. Not surprisingly, the redefault rates on more recent modifications look much different than the rates from the 2008 modifi-cations. For modifications made during 2010, redefaults within one year of modification occurred at about one-half the rate they did under the 2008 modifications.

Even in recent years, not all modifications have been the same. In dollar terms the aver-age HAMP modification has been reducing the borrower’s monthly payment by twice the amount of the average non-HAMP modi-fication. As a consequence, the redefault rate for HAMP modifications has been at about half the level for recent modifications overall. Despite its many problems, HAMP showed that, by applying a test that balanced afford-ability for the borrower with the long term financial interests of the owners of the loans, it was possible to fashion sustainable modifica-tions for one million home mortgages.

Without effective interventions on behalf of homeowners, servicers will deny millions of modifications and foreclose instead.The history of the HAMP program has shown two things. One is that mortgage servicers are capable of making affordable loan modifications. The other is that many servicers are simply unwilling to modify loans on a scale that will have a significant impact on long term fore-closure trends. This is particularly true for the largest servicers, including Bank of America, JP Morgan Chase, and Wells Fargo. These banks

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An important feature of most foreclosure conference and diversion programs is that they connect homeowners in foreclosure with housing counselors. Another study released in 2011 documented the impact of a borrower’s working with housing counselors on the likeli-hood that the borrower will lose the home to foreclosure. The study found that homeowners who received counseling were 1.7 times more likely to avoid a foreclosure sale than those who did not. The counseled homeowners had a forty-five percent higher probability of avoiding redefault than borrowers who obtained loan modifications without counselor assistance.

The clear lesson to be learned from these two studies is that allowing home-owners facing foreclosure to proceed alone when they interact with servicer staff and their attorneys is a recipe for disaster. Some form of third party intervention is essential to prevent unnecessary foreclosures and to keep paying borrowers in their homes.

Foreclosure mediation and conference programs have learned from past experience and continue to improve their effectiveness.In about one-half of the states, lenders can foreclose without any court oversight at all. These are referred to as “non-judicial” foreclo-sures. During 2011, four jurisdictions enacted new foreclosure mediation statutes: the District of Columbia, Delaware, Hawaii, and Washington. It is noteworthy that non-judicial foreclosures are the predominant means of foreclosure in three of these jurisdictions. This brings to six the number of non-judicial foreclosure juris-dictions with mediation programs. Without the intervention from mediations, non-judicial foreclosures in these localities would take place without any third party oversight at all.

Newer foreclosure mediation initiatives have learned from the experiences of older programs. The more recent laws, such as those

The Treasury Department announced rules to prohibit many of these practices in the HAMP program. However, the rules were never routinely enforced.

Data now shows that mediation programs and similar interventions can increase the number of sustainable loan modifications.Federal oversight of servicers’ practices in reviewing homeowners for eligibility for loan modification has failed. This failure leaves states in the position of having to take over the task. Since early 2008, mandatory foreclosure diversion and mediation programs have been implemented in at least nineteen states. While procedures vary from program to program, they typically include mechanisms to counter-act the most common deficiencies in servicers’ loss mitigation reviews. The programs can establish protocols for the exchange of docu-ments and require that servicers adhere to time frames for making decisions. Program rules can ensure that homeowners receive accurate notice of decisions and have an effec-tive recourse for review. Most importantly, the programs can prevent servicers from moving ahead to a foreclosure sale until the review process has ended.

Do these mechanisms prevent unneces-sary foreclosures? A recent study of the Phila-delphia foreclosure diversion program by the Reinvestment Fund looked carefully at results obtained for homeowners participating in that program since 2008. The study found that as of March 2011 only 3.5% of homeowners who had participated in the program since Septem-ber 2008 lost their homes through foreclosure sales. Borrowers who participated in the con-ferences were far more likely to remain in their homes than those who did not. The mediation process did not require significant use of court resources and did not slow down the overall foreclosure process for lenders.

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programs often function at no cost to state and local governments. Many programs, par-ticularly several of the more recently imple-mented ones, are completely self-supporting. Relatively small surcharges ranging from $40 to $400 added to court filing or recording fees cover these programs’ operating costs. In sev-eral states such as Delaware, Washington, and Nevada, funds collected from filing fee sur-charges also support housing counseling and legal services for homeowners in mediation. Fees collected under Nevada’s foreclosure mediation law generate substantial revenues that flow to the state’s general fund, reducing the state’s overall budget deficit.

Conference and mediation programs do not prolong foreclosures. Many lenders and servicers delayed comple-tion of foreclosures during 2010 and 2011, building up significant backlogs of homes in foreclosure status. Foreclosure conference and mediation programs did not contrib-ute to these backlogs. On the contrary, most programs work within the time frames for foreclosures under a state’s existing laws. The recent study of Philadelphia’s diversion program found that the typical case spent fifty-three days in the conference program. The average time frame for completion of an uncontested foreclosure in Philadelphia with-out a conference is ten months.

Recommendations Regarding Foreclosure Mediation Goals for 2012 and BeyondThis National Consumer Law Center report concludes with nine recommendations for the future of foreclosure conference and media-tion programs.

1. States that do not have a foreclosure con-ference or mediation program should adopt one quickly. As of the beginning of 2012, foreclosure conference

in the District of Columbia and Washington State, provide clear authority for courts to enforce program rules. Over the past two years, courts in a number of states, including Connecticut, Indiana, Maine, Nevada, New York, Ohio, and Vermont, have sanctioned servicers for various deficiencies in their con-duct in foreclosure conference and mediation programs. For example, courts imposed sanc-tions when servicers did not appear with an authorized representative who could make decisions on loss mitigation questions. Courts have sanctioned lenders who delayed unduly in deciding on applications for a loss mitiga-tion option or failed to give reasonable expla-nations for their decisions. Sanctions have included monetary penalties, orders for ser-vicers to bring in a qualified representative to negotiate, orders tolling accrual of interest and fees during periods of delay, and orders to modify a loan. When a servicer does not com-ply with program rules, a court can refuse to allow a foreclosure sale. In a non-judicial fore-closure jurisdiction, a mediation administrator can decline to permit a sale to proceed.

The question of whether servicers and lenders have authority to foreclose when they say they do has recently received much atten-tion. Mediation and conference programs can address this issue because a representative of the true owner of the mortgage debt must be involved in negotiations. Many mediation and conference programs now have rules requir-ing that servicer representatives document their authority to participate on behalf of the party who owns the loan. Particularly in non-judicial foreclosure states, this oversight may be the only check on whether the appropriate party is conducting a foreclosure sale.

Many foreclosure conference and mediation programs are now self-supporting.The costs of foreclosures for homeowners, investors, and communities can be stagger-ing. By contrast, mediation and diversion

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who participate in mediations. Servicers should be prohibited by state law from shifting these costs to anyone else.

4. States should use foreclosure and confer-ence programs to maximize HAMP mod-ifications during 2012 and 2013. If servicers continue to approve new HAMP permanent modifications at the current rate of 25,000 to 30,000 monthly during 2012, this will leave up to 600,000 cur-rently eligible homeowners without HAMP modifications at the end of the year. In addition, many borrowers remain in trial plans that should be converted to permanent HAMP modifications. During HAMP’s final two years, states must adopt mediation programs with strong requirements for servicers to document their compliance with HAMP rules. These programs can hold servicers accountable for the commitments they made to modify eligible loans under HAMP.

5. States should adopt mediation and con-ference programs that prevent foreclo-sures of loans already modified under HAMP. Servicers are already foreclosing upon loans “permanently” modified under HAMP. This is occurring even when the homeowner is complying with all terms of the modified loan. In other cases, there are disputes over whether a default on a mod-ified loan agreement occurred. Homeown-ers need access to a review before a neutral third party so these disputes can be fairly resolved. There is a significant danger that, absent oversight, servicers will conduct foreclosure sales regardless of past modifications.

6. Mediation and conference programs must monitor how servicers propose their proprietary modifications. During 2010 and 2011, servicers who were obli-gated to offer HAMP modifications to all eligible homeowners often gave them one

or mediation programs are in place in nineteen states.7 These programs require that a lender or servicer review loss miti-gation options with a homeowner and neutral third party before a foreclosure can be completed. Thirteen of these states have a judicial foreclosure system, and six are non-judicial foreclosure jurisdictions. States without one of these programs should move promptly to implement one.

2. States should retain foreclosure confer-ence and mediation programs as perma-nent features of their foreclosure laws. Several foreclosure and conference pro-grams were implemented as temporary measures subject to a sunset date or future legislative review. These include the pro-grams in Connecticut, New York, Ver-mont, and Maine. The laws should be made permanent additions to the states’ foreclosure laws.

3. States should fund housing counseling and legal support for homeowners through filing fee surcharges that also fund mediation and conference pro-grams. Foreclosure conference and medi-ation programs perform vital tasks that mortgage servicers’ staff should be per-forming, but routinely do not. The pro-grams make sure that servicers review homeowners for loss mitigation options before foreclosing. Most servicers have demonstrated their unwillingness to devote competent staff to this work. It is reasonable to pass on to servicers the costs of having others do their job for them. In states including Nevada, Washington, and Maryland, foreclosure mediation pro-grams cover their administrative costs with revenue from surcharges added to fees servicers pay to record or file foreclo-sure documents. In these states the sur-charges also fund important counseling and support services for the homeowners

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renting almost invariably becomes the only available housing option. Today, renters are more than twice as likely as homeowners to spend more than half of their income for housing. The burden is particularly severe for low income fami-lies. Of low income families with children, nearly two-thirds who rent pay more than fifty percent of their income for housing. Homeowners in mediations must make decisions based on a clear understanding of what the likely future rental option means for them. Mediation programs should refer all homeowners to housing counselors who can present a realistic assessment of the rental option.

9. Preserve minority homeownership by wiping out unfair loan terms and servic-ing practices. Policymakers at the state level should see foreclosure conference and mediation programs as important tools for the preservation of minority homeownership. Minority households’ gains over the past decade in home-based wealth are vanishing. Disparate targeting of minorities with unaffordable loans has led to foreclosures disproportionately affecting the same minorities. Today, Afri-can American and Latino families are fac-ing a doubly high foreclosure rate, even when income differences are taken into account. Negotiations over loan modifica-tions create the opportunity to change the terms of many of these loans, making them affordable—as they should have been in the first place. Minority borrowers are also steered into less affordable non-HAMP modifications more frequently than non-minority borrowers. Minorities are denied modifications more often than other borrowers for reasons such as miss-ing documents. Mediations and confer-ences provide needed oversight over practices that continue to impact dispro-portionately upon minorities.

of their own proprietary modifications instead. Homeowners whose HAMP applications were denied or canceled for questionable reasons were frequently placed in these proprietary modifications. The proprietary modifications routinely contained more onerous terms, such as higher interest rates and less principal for-bearance, than HAMP modifications. Mediations must require full and accurate disclosure of the terms of all modification options so that borrowers can make informed choices about whether to accept them. In particular, servicers who partici-pate in the HAMP program must offer an eligible homeowner a HAMP modifica-tion before they solicit the homeowner for a proprietary modification.

7. Mediation and conference programs must ensure that the FHFA servicing guidelines do not lead to unnecessary foreclosures. Fannie Mae and Freddie Mac have implemented new servicing guidelines to comply with a directive from the U.S. Federal Housing Finance Agency (FHFA). The new guidelines encourage servicers to speed up foreclosures, partic-ularly after a case has been referred to an attorney. These guidelines will make it increasingly difficult to stop foreclosure proceedings to review for loss mitigation options once a foreclosure has begun. In many states, conference and mediation pro-grams will be the only effective alternative to the servicers’ dual track of considering loss mitigation while forging ahead to a foreclosure sale. Rules for mediations and conferences must be tightened to ensure that stays of all foreclosure actions remain in place pending a full loss mitigation review.

8. Borrowers in mediation must have accu-rate information about what to expect from an increasingly less affordable rental market. For foreclosed borrowers,

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conference program can achieve the latter goal with little or no cost to states. State policy-makers who ignore this option are needlessly exposing families and communities to severe, long-term hardships that can be avoided.

Absent this form of intervention, home-owners will continue to face mortgage servicers and their attorneys alone. And tragically, millions of needless foreclosures will occur, causing severe, permanent harm to homeowners, investors, and communities while stalling economic recovery in the United States. For these reasons, it is imperative that states without foreclosure conference and mediation programs adopt them and do so quickly.

Foreclosure mediation and conference programs have now been operating in some localities for over three years. Where the programs were structured effectively, they reduce foreclosures and increase sustainable loan modifications. In the remaining years of the foreclosure crisis policymakers at the state level face a clear choice. One option is to give mortgage servicers free rein to pursue millions of new foreclosures, regardless of how arbitrary or unnecessary each one may be. The other option is to subject servicers’ actions to reason-able scrutiny and encourage alternatives that are in the best interests of both investors in the loans and homeowners. The evidence is now in that a strong foreclosure mediation or

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i. introduCtion: tHe Current State oF tHe ForeCloSure CriSiS

When the U.S. foreclosure crisis began four years ago, analysts predicted that up to thir-teen million families would lose their homes before the crisis was over.8 The predictions appear to be coming true. By the beginning of 2011, lenders had completed foreclosures of 2.7 million homes with mortgages taken out during the subprime boom years from 2004 to 2008.9 As of the fall of 2011, nearly four million homes were either in foreclosure or had mort-gages that were seriously in default.10 Current predictions are that, in addition to the loans already foreclosed and those now facing fore-closure, another eight to ten million mortgages are likely to default and enter foreclosure before the current foreclosure crisis is over.11

Nearing the mid-point of a very long foreclosure crisis, there is still time to imple-ment strategies that have proven to be suc-cessful in mitigating some of the most harmful aspects of the crisis. As the crisis deepens and prolongs, simply ignoring effective counter-measures becomes a more difficult position to justify. This report will focus on one response that has proven to be an effective alternative to the unchecked drive to foreclose: foreclosure mediation and conference programs estab-lished under state and local laws.

ii. ForeCloSureS reMain preventable

A. Affordable Loan Modifications as Sustainable Alternatives to Foreclosures

The National Consumer Law Center released an initial report on foreclosure mediation pro-grams in September 2009.12 The report noted that these programs had significant potential

to promote loan modifications as an alterna-tive to foreclosures. However, we expressed concerns about the sustainability of the loan modifications that foreclosure mediation pro-grams were producing. As of the end of Sep-tember 2009, over half the loan modifications that had been approved one year earlier were ninety days or more in default.13 Most modifi-cations were doing little more than capitaliz-ing arrearages and leaving homeowners with monthly payments that were higher than they had been before a default. For example, loans modified during the second quarter of 2008 either increased monthly payments or left payments unchanged in almost sixty percent of the cases.14 Not surprisingly, by the begin-ning of 2010 barely one quarter of mortgages modified in 2008 were considered current.15 If mediations were simply furthering these types of resolutions, they could be pointless exer-cises. Our 2009 report emphasized the need to know more about whether these programs were producing sustainable, long term solu-tions for homeowners.

Since 2009, the dismal pattern of unaf-fordable loan modifications leading to rapid redefaults changed significantly. Two events played a part in this change. One was the implementation of the Home Affordable Mod-ification Program (HAMP) beginning in early 2009. HAMP required participating mortgage servicers to evaluate all homeowners facing foreclosure to see whether they qualified for an affordable loan modification. The program defined an affordable modification as one cal-culated to keep monthly housing payments at a level below thirty-one percent of household income. By the end of 2009, servicers responsi-ble for over eighty-five percent of loans facing foreclosure were participating in the HAMP program. The other development was a general change in servicers’ behavior with respect to their own proprietary loan modifications. Dur-ing 2009, servicers generally began to focus more than they had before on the affordability

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words, the proprietary modifications provided less than forty-five percent of the payment reduction that borrowers received under HAMP modifications. The proprietary modi-fications left borrowers with payments about $300 higher than those created by HAMP modifications.

All modifications approved under the HAMP program have passed a “net pres-ent value” (NPV) test. This test compares the likely benefit to the investors in the loan from completing a foreclosure as opposed to accepting an affordable loan modification. The test factors in the likelihood that the bor-rower will default on the modified loan in the future and a foreclosure will proceed. Despite significant payment reductions that appear in HAMP modifications, both in dollar terms and in percentage reduction in payments, all of these modifications were determined to have been in the best interests of investors using accepted industry standards. Servicers who proceed with foreclosures without perform-ing a net present value test, or in disregard of the test’s results, inflict needless losses on investors.18

B. The Need for Strict Oversight of Servicers’ Loss Mitigation Reviews: The Lessons from HAMP

The HAMP program had the potential to prevent several million foreclosures through sustainable loan modifications. Mortgage ser-vicers’ faulty implementation of the program prevented the achievement of this goal. An undeniable fact about HAMP is that it has shown that there are millions of borrowers fac-ing foreclosure who want to continue paying on their mortgages. These borrowers will turn nonperforming loans into performing loans if their payments can be made affordable. Bor-rowers interested only in a “strategic default” have no reason to pursue loan modifications. The HAMP program has also shown that some servicers willingly engage in good faith efforts

of their loan modifications. This change in approach was evident in both the increased affordability of loan modifications approved after 2008 and in their improved sustainability.

While the trend toward lower, more affordable payments was evident for all loan modifications made after 2008, the payment reductions for HAMP modifications were on average much more pronounced than the average for all modifications. During 2010 and 2011, borrowers’ payments dropped by at least twenty percent in nearly eighty percent of HAMP modifications. For all modifica-tions over this period, about fifty-five percent brought comparable reductions.17

In dollar terms, the payment reduction for a HAMP modification has typically been twice as deep as the decrease for non-HAMP modifications. For the quarter ending June 30, 2011, the average monthly principal and interest payment reduction for a non-HAMP modification was $231. The average reduction for a HAMP modification was $577. In other

TABle 1 Affordability of Modified loans

(2008–2011)Between 2008 and 2011, the impact of loan modifications on a typical homeowner’s monthly payment changed dramati-cally. Instead of the modification leaving the borrower’s pay-ment the same or increasing it, most modifications after 2009 decreased the borrower’s monthly principal and interest (P&I) payment by at least twenty percent.

Mortgage modified in:

Impact on p&I payment

aprIl– June 2008

aprIl– June 2009

aprIl– June 2010

aprIl– June 2011

20% reduction

18.1% 38.6% 56.4% 53.8%

Some reduction

40.9% 78.2% 90.1% 89.4%

Payment same or increased

59.1% 21.8% 9.9% 10.6%

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TABle 2 Modified loans Default Rate

(2008–2010)*Modified loans were also more sustainable. After 2008, the one-year post modification default rate for modified loans dropped by over one-half.

Redefault rate (percentage of loans over sixty days behind) at twelve months after modification:

When modIfIed redefault rate one year later

Second Quarter 2008 56.2%



*This is the most current data available. 2011 data will be available after June 2012.

TABle 3 HAMP vs. Other loan Modification

Redefault RatesLoans modified under the Home Affordable Modification Program (HAMP) were the most sustainable of all, as shown in this comparison of redefault rates for HAMP modifications and all modifications.16

Twelve month redefault rate (over sixty days):

Quarter of orIgInatIon hamp all loan modIfIcatIons

4th Quarter 2009 17.7 35.5

1st Quarter 2010 19.4 31.2

2nd Quarter 2011 17.3 31.4

is impossible to know how many borrowers were turned away by a curt verbal rejection or an unanswered phone call. According to one oversight agency’s calculation, as of August 31, 2010, 1.9 million borrowers had been evaluated for HAMP.20 Of these borrow-ers, thirty-eight percent were denied outright, twenty-seven percent were approved for a trial plan but had the plan cancelled, and one percent redefaulted on a permanent modifica-tion. This would suggest that about one-third of the homeowners who applied received a permanent modification.21 ProPublica exam-ined data on borrowers in default who applied for HAMP and concluded that that about one in five received a permanent modification.22

Based on the status of the HAMP pro-gram as it enters its final years, it is likely that about 1.2 million homeowners will receive permanent HAMP modifications by the time the program ends.23 If the percentage of appli-cants receiving modifications was generally as indicated above, this would point to a pool of applicants in the four to five million range, consistent with the Administration’s goal

to make sustainable modifications. Unfortu-nately many servicers, and particularly those with the largest market shares, choose not to make these efforts. Therefore, intervention is essential to bring the poorly performing servicers up to the standard they are capable of reaching. A summary of borrowers’ experi-ences with HAMP provides compelling rea-sons to encourage foreclosure conference and mediation programs.

According to U.S. Treasury Department reports, as of the end of September 2011, servicers had cancelled 766,203 trial HAMP modifications. Each of these cancelled modi-fications represented a borrower who had successfully negotiated the initial HAMP appli-cation process and qualified for a trial plan. As discussed below, servicers cancelled many of these trial plans on the basis of questionable claims of missing documents and for grounds not authorized under the program rules.

No one knows how many borrowers attempted to apply for HAMP, but were rebuffed at the initial application stage. Appli-cation data from servicers is not reliable.19 It

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but had their applications rejected through a grossly mismanaged system. These were individ-uals who obviously wanted to keep their homes, wanted to resume making payments, and have permanently lost that opportunity.

announced in early 2009 to modify up to four million mortgages under HAMP.

The real tragedy of the HAMP program was what happened to the three to four million bor-rowers who tried to obtain HAMP modifications

A Short History of HAMP’s Implementation

the obama administration announced the guidelines for the HaMp program in Febru-ary 2009. Servicers began reviewing applications shortly thereafter. approval of trial plans peaked in october 2009, with approximately 160,000 approved that month. a steady de-cline followed. in december 2009, servicers approved 118,000 new trial plans. by april 2010, the monthly number dropped to 31,000. thereafter, the numbers leveled off to about 25,000 new trial plans approved monthly during the second half of 2011.

Conversions of trial plans to permanent HaMp modifications reached their highest level in april 2010. Servicers approved 70,000 permanent modifications that month. the numbers of new permanent modifications fell sharply thereafter, and by September 2010 had leveled off to a rate of between 25,000 and 30,000 permanent modifications monthly. this rate continued through 2011.

during 2010 and 2011, the u.S. treasury department made several changes to the HaMp application procedures. revised guidelines set time frames for servicers’ decisions and re-quired written notices to borrowers regarding eligibility determinations. as of June 2010, treasury rules required that borrowers document their income before servicers approved trial plans. in February 2011, treasury announced a new requirement for servicers to pro-vide net present value test inputs to borrowers who had been denied modifications because they failed the test. the dodd-Frank act directed that a HaMp net present value calculator be made available online, so that borrowers and their counselors could assess eligibility for HaMp. in May 2011, after nearly a year’s delay, the treasury department provided this on-line net present value test calculator.

Many of these rule changes looked helpful on paper. in practice, they had little effect. Ser-vicers widely ignored the requirements for written notices, time frames for making decisions, and release of net present value test inputs. the requirement for verified income for trial plans, effective in June 2010, is often cited as the reason for the decline in new trial pay-ment plans after mid-2010. However, this decline was already underway months before the new documentation change went into effect. Hundreds of thousands of borrowers whose trial plans were approved during the fall of 2009 simply had their plans canceled during the spring of 2010. this occurred through a process with no effective oversight. when servicers gave reasons for the cancellations, they typically cited claims that borrowers had not pro-vided income documentation or that the documentation they provided had grown stale.

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Fargo, and CitiMortgage) have all been HAMP participants.30

These four servicers controlled the appli-cation outcomes for a significant portion of homeowners eligible for HAMP. According to Treasury’s monthly servicer performance report for March 2010, these four servicers were responsible for 2,142,297 HAMP eligible loans.31 As of the end of November 2011, these same servicers had 494,398 permanent HAMP modifications in place.32 Since the inception of the program they had canceled 569,363 trial plans. They also reported that they had offered HAMP modifications to 335,586 homeowners who simply declined the offers. Outright denials of all forms of HAMP modi-fications have generally exceeded the numbers of trial plans offered. Assuming that the out-right denials by these servicers equaled the modifications they approved, this would mean that the servicers likely denied at least another half million applicants, giving them no form of modification. In total, the four servicers were responsible for the outcomes of well over one million homeowners who sought help under the HAMP program and ended up without a modification.

Government records reveal significant dis-parities in servicer performance under HAMP. For example, at the end of the program’s first full year, Ocwen had converted nearly eigh-teen percent of its eligible delinquent loans to permanent HAMP modifications, while CitiMortgage had permanently modified only nine percent of its eligible loans. By the same point in time, Bank of America, the largest participating servicer, had permanently modi-fied only three percent of its 1,086,512 eligible loans in default.33

A ProPublica survey concluded that a bor-rower whose loan was serviced by JP Morgan Chase had half the chance of getting a per-manent modification compared to the chance of a borrower whose loan was serviced by a different bank, American Home Servicing.34

Despite growing evidence that affordable loan modifications are sustainable, servicers still do not engage in any loss mitigation communications with more than half of all borrowers with seriously delinquent loans.24 The number of new loan modifications of all types has been steadily decreasing.25 With 3.9 million loans at least ninety days delin-quent or in foreclosure, servicers and lenders are proceeding at a pace of about 75,000 loan modifications monthly.26 Roughly three per-cent of loans in serious default are being modi-fied.27 Two out of three new modifications are proprietary, and one-third are HAMP modifications.

Over the past two years, the number of both proprietary and HAMP modifications has been decreasing steadily. The U.S. Office of the Comptroller and Currency (OCC) and the U.S. Office of Thrift Supervision’s (OTS) quarterly surveys review the status of sixty-two per-cent of the home mortgage market. Accord-ing to these reports, lenders modified 233,853 mortgages during the third quarter of 2010, of which 58,790 were HAMP modifications. For the third quarter of 2011, the total number of modifications dropped to 137,539, and 53,941 of these were HAMP modifications.28 Despite the burgeoning supply of loans in foreclosure during 2011, the quantity of new loan modifi-cations diminished to a paltry number.

C. HAMP’s History Shows That Servicers Are Capable of Making Affordable Loan Modifications

Nearly all mortgage servicers have been par-ticipants in the HAMP program. Servicers of loans owned or insured by the GSEs Fannie Mae and Freddie Mac were required to com-ply with HAMP rules in foreclosing upon these loans. In addition, 145 servicers, respon-sible for ninety percent of all non-GSE loans, entered into HAMP servicer participation agreements.29 The four largest servicers (Bank of American, J.P. Morgan Chase Bank, Wells

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application process and satisfied the income and net present value test requirements for HAMP. In addition, another 91,966 borrowers applied for HAMP, were offered modifications that reduced their mortgage payments, but according to the Bank refused to accept the offers. As will be discussed below, oversight reports cast much doubt on the reliability of the procedures that led to the Bank’s cancel-ations of trial plans and the claims that bor-rowers simply refused the Bank’s offers to lower their payments.

Other mortgage servicers performed the tasks associated with HAMP eligibility review much more effectively than Bank of America. Servicers are clearly capable of performing loss mitigation reviews appropriately. How-ever, the current system has not provided incentives for many of them, particularly the major players, to do so. For years to come, substantial regulation will be needed to ensure that all servicers meet the standards for fair-ness and accuracy that we know they are capable of achieving. Conference and media-tion programs at the state and local level will be an important source of this accountability.

Essentially, the happenstance of who a home-owner’s servicer was made it more or less likely that the homeowner would succeed in obtaining a HAMP modification.

Homeowners do not choose their mort-gage servicers. After a borrower has taken out a mortgage loan, servicing rights for the loan are bought and sold, often many times. It is difficult to imagine another major industry, especially one performing tasks tied to such a basic need, that would be permitted to func-tion so arbitrarily over captive segments of the public. An airline that repeatedly sent flights to the wrong airport or a phone service that repeatedly misdirected calls would not keep a customer base. The need for effective regula-tion of servicers, particularly the largest ones, has grown to be compelling.

The larger servicers such as Bank of America, Wells Fargo, and JP Morgan Chase primarily service mortgages they do not own. The loans they service are often owned by trusts managed for groups of investors. On the other hand, servicers who service their own portfolio loans, loans which they originated and continue to own, have modified more often and been more likely to modify with features such as principal cancellation.35 The modified portfolio loans have the best rates of avoiding redefault.36

Bank of America’s track record under HAMP presents a stark outline of the impact of one servicer’s poor performance on hun-dreds of thousands of homeowners.

Several aspects of this summary are troubling. According to the data, 330,805 borrowers that the Bank found qualified for HAMP trial plans were never given perma-nent modifications. This figure breaks down to 238,839 borrowers whose trial plans were can-celed and 91,966 others who the Bank claims refused to accept trial plan offers. The Bank reports lack of documentation as the major reason for the cancellations. The cancellations reflect borrowers who went through a difficult

TABle 4 The Impact of One Servicer on HAMP’s

Implementation: Bank of AmericaThe Treasury Department estimated that as of March 2010 Bank of America had a pool of 1,085,894 loans eligible for HAMP.37 Below are the numbers Treasury provided eighteen months later, summarizing Bank of America’s cumulative performance under HAMP as of September 201138:

• 505,416 trial plan offers made

• 413,450 trial plans started

• 91,966 borrowers declined trial plan offers

• 238,839 trial plans canceled

• 174,611 permanent modifications begun

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What Mediation Can Do. Mediation program rules can list specific documents bor-rowers and lenders must provide. They can set time frames for document exchanges. This can include transmission of documents to a third party, such as a conference coordinator, or use of a portal. For example, in New York an important function of repeated listings of cases for conference sessions has been to oversee document transfers and apply pres-sure when needed to ensure that documents are accounted for. Courts in Maine, Ver-mont, Connecticut, and Indiana have issued orders to enforce schedules for document exchanges.42 In most programs, a foreclosure may proceed if a borrower does not comply with obligations to provide documents. Sanc-tions for servicers’ repeated loss of documents can include monetary penalties or disallow-ance of foreclosure.

2. Failure to Follow Time Frames. Servicers routinely fail to adhere to time frames for review of loss mitigation applications once a borrower’s application is complete. Servicers consistently delay implementation of conver-sions of HAMP trial plans to permanent modi-fications. HAMP rules require conversions of trial plans to permanent modifications after borrowers make three or four monthly trial payments. In a status survey as of Septem-ber 30, 2011, the Government Accountability Office found that forty-four percent of all active HAMP trial plans had been in place for six or more months.43 The Special Inspector General for TARP reported that ninety-six per-cent of counselors saw trial plans lasting lon-ger than three months, and that seven months was typical.44 Forty-three percent of surveyed counselors said that servicers did not disclose reasons for these substantial delays.

What Mediation Can Do. Mediation programs such as those in New York, Indi-ana, and Maine set time frames for servicers to respond to proposals. Courts may impose

D. The Major Problems with Servicers’ Loss Mitigation Reviews and How Mediation Programs Can Fix Them

Many government oversight agencies and pri-vate research organizations have documented the deficiencies in servicers’ implementation of the HAMP program.39 The same faulty practices appear in the servicers’ handling of all loss mitigation protocols.

Foreclosure mediation and conference programs serve as effective controls over many common forms of servicer misconduct related to loss mitigation programs. Below is a list of the most frequently noted problems bor-rowers encounter when they attempt to access loss mitigation options through servicers. Fol-lowing each item is a summary of actions that foreclosure mediation and conference pro-grams have taken to counteract these servicer behaviors:

1. Lost Documents. In survey after survey, housing counselors report that mortgage ser-vicers lose loan modification application docu-ments. Counselors must constantly resend the same documents, sometimes up to six times.40 Homeowners acting alone, without the help of experienced housing counselors, inevitably fare much worse. Servicers rou-tinely delay application decisions, and then demand updates of financial information already sent because earlier documents are no longer current. This process repeats itself again and again. Variations of the behavior include demands for redundant and unnec-essary paperwork from borrowers, such as documents not required under the rules of a particular loss mitigation program. The Gov-ernment Accountability Office has noted that the documents runaround was a major reason for HAMP trial plan cancelations.41 After fore-closures have occurred, it is often impossible to untangle what happened to these thwarted applications.

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During the mediation process, servicers can be held accountable for failure to send notices to borrowers informing them of any significant change of status.

4. Inconsistent and Invalid Reasons for Rejections/Cancellations of Loss Mitigation Options. The Treasury Department has not collected accurate data on the facts behind servicers’ denials of HAMP applications. The Government Accountability Office found this information lacking for eighty-five percent of HAMP denials.47 Upon review, servicers’ reasons for denials often turn out to be errone-ous.48 Servicers deny loan modifications for patently wrong reasons, such as claims that the servicer does not participate in HAMP or that an investor owning a loan does not per-mit modifications.49 Based on these inaccurate claims of ineligibility, servicers have chan-neled borrowers into burdensome non-HAMP modifications or have foreclosed.

What Mediation Can Do. In confer-ences before third parties a servicer can be held accountable for giving inconsistent and invalid reasons for denials of a loss mitiga-tion options. Courts have sanctioned servicers who engaged in a pattern of giving unfounded reasons for rejection of these options in media-tions and conferences.50 Mediation statutes and rules, such as those in effect in Vermont, Washington, and the District of Columbia, require servicers to document any claim of investor limitation on modifications.51 A Con-necticut court ordered a servicer to produce documentation for mediation showing its efforts to have the investor waive limits on modifications.52 Mediators should be familiar with resources for verifying whether a loan is covered by a particular federal loss mitigation program. They can ensure that negotiations take place under the appropriate set of rules that apply to the loan.

5. Ineffective Reviews. Borrowers and housing counselors have consistently found internal

sanctions for failure meet deadlines. In non-judicial foreclosure states, mediation admin-istrators can refuse to approve the scheduling of a sale if a servicer acts in bad faith by failing to adhere to a schedule for deciding upon a request for a loss mitigation option.

3. Failure to Comply with Notice Require-ments. Guidelines for HAMP and other major loss mitigation programs, including those for GSE-related and FHA loans, require that servicers give borrowers written notices of key changes in the status of their applications during the review process. These programs require that servicers provide written notices to coincide with actions such as the solicita-tion to apply for loss mitigation, receipt of an application, a decision on an application, and a claim of missing documents. The notices must specify the reasons for denials and describe review procedures. HAMP rules require that notices to applicants denied for failing the net present value test include the inputs used for the calculation. Since the HAMP program began, oversight agencies have noted the widespread failure of servicers to comply with basic notice requirements.45

What Mediation Can Do. A loss mitiga-tion program’s own published notice require-ments provide clear benchmarks for review of a servicer’s conduct at mediation and in con-ference sessions. Federally insured loan pro-grams such as those of the FHA, VA, and the Rural Housing Service have published hand-books with rules that specify when notices must be sent to borrowers. Fannie Mae, Fred-die Mac, and the Treasury Department (for the HAMP program) have published similar guidelines. In mediations and conferences, servicers can be required to demonstrate that they gave appropriate and timely notices to borrowers. Several mediation programs have adopted rules requiring that servicers bring to mediation records of all past loss mitigation activity, including notices sent to borrowers.46

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solicitation. Servicers largely ignored the rule. New loss mitigation guidelines for the GSEs announced as part of FHFA’s alignment pro-cess entrench the dual track approach for the long term future.57

What Mediation Can Do. Despite poorly enforced federal guidelines, state media-tion and conference rules can bar lenders from moving ahead with foreclosures while negotiations and loss mitigation reviews are

review and escalation procedures used by the servicers and the GSEs to be ineffective. These review procedures lack standards and bench-marks for performance.53 According to a GAO survey, three-fourths of housing counselors found the official HAMP reviews to be ineffec-tive or not helpful.54 HUD oversees servicing of FHA-insured mortgages. An FHA National Servicing Center has failed to control ser-vicers’ pervasive disregard of FHA servicing guidelines. The recently announced Federal Housing Finance Agency (FHFA) alignment guidelines for GSE-related loans will likely generate a repeat of the same botched system of review that failed to rein in servicers partici-pating in HAMP.

What Mediation Can Do. Mediation and conference programs supplement the largely ineffective servicer and federal agency review systems. Conference and mediation programs retain the ultimate leverage of being able to bar foreclosure under state laws unless the servicer complies with loss mitigation review standards defined by the program’s rules. Courts with an oversight role over confer-ences can order servicers to comply with rules for loss mitigation review and sanction non-compliance.

6. Dual Track: Foreclosure While Under Review. Foreclosures while loan modifica-tion reviews are underway or trial plans are in effect have been one of the major problems plaguing all formal loss mitigation programs. In a recent survey, ninety-four percent of counselors reported seeing this “dual track” for foreclosures.55 The practice has been the focus of many lawsuits, citing repeated fore-closure sales scheduled while borrowers were in the application process or were complying with trial plans.56 Under a Treasury HAMP rule effective June 1, 2010, servicers were told not to refer cases to foreclosure until after they had either determined the borrower’s eligibil-ity for HAMP or made reasonable efforts at

TABle 5 Taking Stock: How Mediation Programs Reduce

Home ForeclosuresForeclosure mediation and conference programs serve as effective controls to help reduce improper foreclosures. This table documents how programs can resolve some of the most common problems homeowners encounter when applying for loan modification programs, as successfully used in select states.

servIcer problems foreclosure medIatIon solutIons

Lost documents Rules/orders specify documents needed and time lines for exchanges

Failure to follow time frames for reviewing applications

Set time frames and penalties for failing to adhere to deadlines

Failure to comply with notice requirements

Servicer must document all decisions in accordance with mediation rules

Inconsistent or invalid denial of loan modifications

Servicer must document basis for decisions, including calculations and borrower data used

Ineffective reviews Servicer complies with program rules or risks ability to foreclose and penalties

Foreclosing while reviewing application (dual track)

Foreclosure is barred while negotiations are active

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increased the likelihood that homeowners would obtain sustainable loan modifications had not been examined in any systematic way. Since then, a research group undertook an extensive investigation of one foreclosure mediation program in order to see if these hoped-for results were in fact being achieved. The study concluded that the mediation program was very successful in achieving its objectives.

The Reinvestment Fund, a Philadelphia-based research firm, conducted this study. The Reinvestment Fund developed a methodology for a comprehensive review of the Philadelphia Common Pleas Court’s Foreclosure Diversion Program. The Philadelphia program was one of the first major attempts to implement a requirement that lenders negotiate with home-owners over loss mitigation options before completing a foreclosure. The program has been underway for over three years, since mid-2008.

The Reinvestment Fund evaluated several aspects of the Philadelphia Diversion program. It looked at the magnitude of the foreclo-sure problem in the city, the results achieved through the program, its effect on the courts, the impact on the numbers of completed sales, the sustainability of settlements, and the evi-dence of racial or neighborhood disparities in patterns of access to any benefits of the pro-gram. The Reinvestment Fund released an ini-tial report of its findings in June 2011.59

By way of background, the Reinvestment Fund’s report noted that Philadelphia has a population of 1.5 million. Pennsylvania is a judicial foreclosure state.60 Since 2008, lenders have commenced on average between 5000 and 6000 foreclosures of owner-occupied resi-dential properties yearly in the city.61

The Administrative Judge of the Philadel-phia Common Pleas Court released the outline of the Foreclosure Diversion program in April 2008. At that time he ordered a stay of pend-ing foreclosure sales. Initially, homeowners

underway. Effective mediation rules have controlled foreclosure activity in non-judicial states such as Nevada as well as in judicial foreclosure states such as New York and Con-necticut. To maximize effectiveness, the rules should allow for retained jurisdiction in the conference program so that the matter can be brought back into the system if a servicer proceeds with a sale contrary to an agreement reached in a conference.

iii. tHe evidenCe iS in: eFFeCtive interventionS at tHe State and loCal level prevent unneCeSSary ForeCloSureS

A. The Reinvestment Fund’s Report on Philadelphia’s Foreclosure Diversion Program

In our September 2009 Report on foreclosure mediation programs, we noted the lack of evidence as of that time showing the effective-ness of these efforts. The policy assumption behind mediation programs was that they should increase the likelihood that all parties would come to resolutions that met their best interests. Advocates for the programs hoped that settlements reached in mediations would show a pattern of increasingly frequent settle-ments that restored a regular cash flow to lenders and kept borrowers in their homes. However, data showing high redefault rates for loans that had been modified during 2008 raised the question of whether the mediation settlements were in fact keeping borrowers in their homes. Of loan modifications made dur-ing 2008, only twenty-seven percent were cur-rent in payments one year later.58

As of late 2009, the question of whether participation in foreclosure mediation programs

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Residential foreclosures filed in Philadel-phia after September 8, 2008 were assigned automatically to the diversion program. Looking at the status of these automatically assigned cases as of March 2011, the Reinvest-ment Fund made the following findings:

•Seventy percent of homeowners eligible to participate in the diversion program appeared for their conciliation sessions.62

•Of the homeowners who appeared for conferences in foreclosure cases filed since September 2008, only 3.5% have had a foreclosure sale of their home ordered.63

•Eligible homeowners who participated in conferences reached an agreement in thirty-five percent of the cases.64

•Court intervention in conference pro-ceedings was seldom necessary. In sixty-three percent of the diversion cases the court needed to enter an order only once. In eighty percent of the cases the court intervened two or less times.65

•On average, cases remained in the diver-sion program for fifty-three days, well within the ten-month time frame typical for the completion of a foreclosure in which the homeowner never appears.66

•Looking at diversion-eligible cases before and after the program’s incep-tion, twenty-seven percent of these borrowers lost their homes before implementation of the diversion pro-gram, but only 5.7% during a subse-quent six-month comparison period during which settlement conferences were available.67

•87.5% of homeowners who reached agreements in diversion between June 2008 and June 2009 were still in their homes as of March 31, 2011 (at least twenty-one months after the dates of their agreements).68

in pending cases could opt into the diversion program. Participation in the program became automatic and mandatory for all cases filed in Philadelphia after September 8, 2008.

Since September 2008, homeowners in Philadelphia have been assigned a date for a conciliation conference when they are served with a foreclosure complaint. Various non-profit and city-funded organizations provide outreach for the diversion program and refer homeowners to housing counselors and attor-neys. Although about ninety-five percent of homeowners do not have direct representation in the conferences, all have access to limited consultations with attorneys. All can receive ongoing assistance from housing counselors. Volunteer attorneys serve as mediators, called a “Judge Pro Tem,” who provide oversight in instances where intervention is needed to move a case along. A supervising judge is available to provide further oversight and to intervene in the event of a party’s sig-nificant noncompliance with the program’s expectations.

The Reinvestment Fund examined court records of nearly 1600 cases eligible for the Philadelphia Diversion Program from its inception in mid-2008 through March 2011. The study collected data on what happened to each homeowner from the filing of a foreclo-sure complaint to the termination or suspen-sion of legal action. In addition, it looked at homeowners’ status one year after they par-ticipated in the diversion program and at lon-ger intervals thereafter. The study examined data drawn from documents filed in court, including loan information and case histories. Nearly 28,000 orders had been entered in the cases. From computerized property informa-tion databases, the authors collected property and transaction histories, including loan char-acteristics and changes in the status of each loan. Based on this data, the authors were able to create a long term record of a participating homeowner’s circumstances.

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Counseled borrowers obtain modifications that are more affordable. On average, borrow-ers who received loan modifications through housing counselors reduced their monthly payments by $267 more than borrowers who obtained loan modifications without the help of counselors.72

Counseled borrowers obtain modifications that are more sustainable. The study compared the counseled borrowers who obtained loan modifications with uncounseled borrowers who also received modifications. The study looked at the percentages of loans in each group that were at least ninety days in default after one year. The data showed that counseled borrow-ers who obtained loan modifications had forty-five percent better odds of avoiding renewed default than the uncounseled group.73

Overall, the counseled borrowers had fifty-three percent better odds of removing their loans from default through modifica-tion.74 Significantly, borrowers who received counseling first, and then a loan modification, did best. Sixty-six percent of these borrowers sustained their modification, and only twelve percent entered redefault. Borrowers who obtained modifications without counseling sustained the modifications only eight percent of the time, and fifty-six percent of them had already ended up in foreclosure.75

There is a view proffered by some in the lending industry that massive foreclosures are inevitable and that the appropriate response to the foreclosure crisis is to speed up the process and allow it to run its course. The evidence from the Reinvestment Fund’s study of the Philadelphia courts’ diversion program and the Urban Institute’s counseling study shows that this view is wrong. Properly conducted interventions on behalf of homeowners can save millions of homes from foreclosure for the long term. Without these interventions, millions of unnecessary foreclosures will take place.

•The study found no evidence of dispa-rate treatment of homeowners based on race, home value, or neighborhood.69

B. The Impact of Housing Counseling on Loss Mitigation Outcomes

Mediation programs such as the Philadelphia court’s diversion program help to level the playing field for homeowners and lenders. The Philadelphia diversion program, like many similar programs around the country, relies heavily upon connecting homeowners with housing counselors in order to achieve this balance. Homeowners who interact with a servicer’s staff on their own fare much worse than homeowners who work with knowledge-able advocates. The benefits of housing coun-seling and mediation programs are related in that both take individual homeowners out of a sphere of isolation in their interactions with servicers.

An ongoing study by the Urban Institute provides clear evidence of the benefits of housing counseling.70 As part of a congres-sionally mandated study, the Urban Institute has been examining data comparing a group of 180,000 borrowers who received counseling with a similar sized group of borrowers with similar loan and personal financial characteris-tics who did not. The study shows statistically significant positive effects from counseling:

Counseled borrowers are more likely to avoid foreclosure sale. Borrowers who received counseling were 1.7 times more likely to cure their mortgage defaults than those who did not. The study defined a cure as taking the loan out of the foreclosure process and avoid-ing a foreclosure. For the group of 180,000 counseled borrowers this meant that over the two-year study period 32,000 of them avoided foreclosures that occurred for those in the uncounseled group.71

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solicitations are to follow a specified time frame. At prescribed intervals, servicers must review their loss mitigation efforts for each loan in default. If a loss mitigation option has not been approved or is not under con-sideration 120 days after the onset of a delin-quency, the servicer must refer the case to foreclosure.78

The alignment guidelines direct the GSEs to create financial incentives for servicers to follow the new default servicing rules. The GSEs must set targets for a percentage of each servicer’s delinquent borrowers who submit loss mitigation applica-tion forms. Servicers who exceed the target numbers receive finan-cial rewards and those who fail to meet the standard can face penal-ties.79 The incentive payments and penalties are not based on the implementation of loss mitigation options. Rather, the only criterion for rewards and penalties is the number of completed application forms the servicer col-lects from delinquent borrowers.

C. Speeding Up and Standardizing the Dual Track Foreclosure Process

Fannie Mae and Freddie Mac were tradition-ally the strongest advocates for the “dual track” system under which servicers proceed with foreclosures while they review borrow-ers for loss mitigation options. The alignment guidelines formalize this dual track for cases referred to foreclosure attorneys or trustees.80 At the same time, the guidelines require servicers to adhere to new time frames in the foreclosure process once a case has been referred for foreclosure.

The new alignment rules seek to speed up dual track foreclosures in two ways. First, the guidelines provide for only one very limited

iv. tHe Future oF loSS Mitigation: tHe FHFa alignMent guidelineS

A. FHFA’s Servicing Alignment: Background

The Federal Housing Finance Agency (FHFA) is the federal authority responsible for over-sight of Fannie Mae and Freddie Mac follow-ing the entry of the two GSEs into government conservatorship. In April 2011, FHFA issued a directive for the “alignment” of the GSEs’ rules for servicing delinquent home mort-gages.76 The FHFA directive required Fannie Mae and Freddie Mac to establish consistent delinquency management standards for loans they own or insure. Later in 2011, Fannie Mae and Freddie Mac amended their single fam-ily loan servicing guidelines to implement the FHFA alignment directive.77 The GSEs new default servicing guidelines went into effect generally as of October 1, 2011.

Fannie Mae and Freddie Mac’s servicing guidelines typically have a substantial impact on the entire mortgage servicing industry. It is likely that the new alignment guidelines will set an industry standard for many years to come. As will be discussed, the alignment guidelines present both opportunities and challenges for foreclosure mediation programs.

B. Speeding Up and Standardizing Pre-Foreclosure Loss Mitigation Review

Servicers have always had the capacity to review troubled borrowers for loss mitiga-tion, both before and after they refer a case to an attorney for foreclosure. The FHFA align-ment guidelines direct servicers to focus their efforts on the period of time before they refer a delinquent loan to a foreclosure attorney. According to the guidelines, promptly after a delinquency has begun servicers must solicit borrowers to complete a standardized loss mitigation application form. The servicers’

properly conducted interventions on behalf of homeowners can save millions of homes from foreclosure for the long term.

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For example, the allowable time frame to com-plete a foreclosure in Maryland is 205 days, and in Massachusetts it is 200 days. In the fall of 2011, the time from commencement of a foreclosure to sale was running 594 days in Maryland and 517 days in Massachusetts.86

The GSEs can assess penalties against a servicer for slow foreclosure performance as measured by data reports required under the alignment guidelines. In limited circum-stances, when the servicer can show a delay was caused by circumstances beyond its con-trol, the delay in a case may not be counted in assessing the servicer’s overall performance. For example, delays caused by a bankruptcy filing or by operation of the servicemember protections are considered beyond the ser-vicer’s control. The guidelines also allow for delays due to participation in mediation or certain unavoidable court delays. The lat-ter presumably would excuse servicers from delays caused solely by court backlogs. How-ever, the servicer bears the burden of showing the absence of any fault of its own in causing a delay. As will be discussed, these criteria have a number of implications for mediation and conference programs.

D. The Impact of the FHFA Alignment Guidelines on Foreclosure Mediation and Conference Programs

New standardized loss mitigation standards. As part of the FHFA realignment process, Fannie Mae and Freddie Mac revised their substantive loss mitigation guidelines, par-ticularly in the area of loan modifications. Loans owned or insured by Fannie Mae and Freddie Mac will continue to be eligible for HAMP modifications through 2013. However, after the expiration of the HAMP program at the end of 2013, the GSEs’ only loan modifica-tion option will be the one described in the new guidelines. This loan modification model could become the industry standard.

mandatory foreclosure stop once a case has been referred to an attorney. Within five work-ing days of receipt of a foreclosure referral the attorney must send a solicitation letter with a loss mitigation application form to the bor-rower. If the borrower does not return the completed form within thirty days for evalu-ation, the foreclosure may proceed without delays to review any future loss mitigation requests from the borrower.81 The guidelines expressly provide that in jurisdictions with foreclosure conference or mediation programs, the attorney need not send this post-referral solicitation letter to the borrower.82

The alignment guidelines’ second method for speeding up foreclosures involves the estab-lishment of allowable foreclosure time frames for each state. Servicers must ensure that their attorneys complete foreclosures within these time frames, or the servicer will face penal-ties.83 The allowable time frame consists of two parts: a 150-day period for the pre-referral solicitation and review and a second period calculated specifically for each state. This second period represents a state-specific time from referral to the attorney to completion of a fore-closure sale. These state-specific time frames run from 120 days in some non-judicial foreclosure states such as Texas, Virginia, and Min-nesota to much longer periods in some judicial foreclosure states such as Florida (450 days), New Jersey (450 days), and Illinois (330 days).84

The clear intent of the alignment rules is to speed up the foreclosure process for GSE loans. This is particularly true for judicial foreclosure states. For example, in the fall of 2011 the average time frame from commence-ment of a judicial foreclosure to completion of sale was 748 days in Florida, 974 days in New Jersey, and 527 days in Illinois.85 However, as noted above, the allowable foreclosure time for each of these states under the alignment guidelines is several months shorter. These disparities exist for non-judicial states as well.

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Homeowners often seek this help for the first time when they receive a foreclosure com-plaint in a judicial foreclosure state or notice of a scheduled sale in a non-judicial foreclo-sure jurisdiction. Under the FHFA alignment guidelines, any requirement that a servicer stop foreclosure proceedings to review for loss mitigation ends once the borrower has not responded within thirty days to a solicita-tion form sent by the servicer’s attorney. The servicer’s attorney sends this form to the bor-rower five days after receiving the foreclosure referral. In most cases, by the time a home-owner receives a court complaint or notice of foreclosure sale, this thirty-day period will have passed. Thus, when homeowners con-sult with attorneys or housing counselors and learn about their legal rights for the first time, the foreclosure process will be locked in place. Servicers and their attorneys will be unwilling to stay proceedings during any later loss miti-gation review.

It is unlikely that the pre-foreclosure refer-ral loss mitigation protocol under the align-ment rules will have any real effect. Fannie Mae and Freddie Mac oversee the servicers’ compliance with these guidelines. These same GSEs were charged with similar oversight of servicers for the HAMP program. HAMP had similar requirements for a loss mitigation eligibility review before a referral to an attor-ney for foreclosure. The GSEs’ track record for enforcement of the HAMP guidelines has been notoriously poor. It is unlikely that the GSEs will be any more effective in enforcing the new alignment rules. As occurred under HAMP, many cases will enter mediation and conferences without any loss mitigation review having been conducted.

Two provisions of the FHFA alignment rules refer specifically to foreclosure mediation programs. One states that in jurisdictions with mediation or conference programs the foreclo-sure attorney need not send homeowners the

Unfortunately, the non-HAMP loan modi-fication model included in the new FHFA alignment guidelines offers borrowers an option that is much less flexible and afford-able than a modification under HAMP. The new modification guidelines are not driven by a case-by-case assessment of affordability.87 Instead they allow for capitalization of arrear-ages, a fixed interest rate generally at five per-cent, and a term extension to 480 months from the modification date. The new formula allows for only very limited principal forbearance for certain underwater mortgages.

The GSEs new loss mitigation guidelines also require that servicers consider various non-modification options, such as repayment and forbearance plans, before they review a borrower for a loan modification.88 As before, the GSEs’ published guidelines set the terms for the conduct of short sales and the accep-tance of deeds in lieu of foreclosure. Mediators and those presiding over foreclosure confer-ences will need to become familiar with these new loss mitigation rules and hierarchies. They will likely play an important role in many future settlement discussions.

The dual track and the threat of penalties. Several aspects of the FHFA alignment guide-lines contribute to an environment in which servicers will be less inclined than before to take time to review loss mitigation options once foreclosure has begun. In particular, the guidelines expressly authorize a dual track once the case has been referred to a foreclo-sure attorney and impose financial penalties upon servicers who fail to meet foreclosure time frames.

The alignment guidelines’ emphasis on pre-foreclosure loss mitigation review, rather than review after a case has been referred to foreclosure, is problematic. Homeowners tend to consult with attorneys or housing counsel-ors after foreclosure proceedings have begun.

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The new rule could be used to hold servicers accountable for these delays. On the other hand, particularly if the mediation program does not hold servicers to clear standards of performance, the rule could encourage a cur-sory approach to mediation, one in which ser-vicers go through the motions of participation in order to beat the clock and minimize the likelihood of sanctions.

E. The Alignment Guidelines Highlight the Need for Conference and Mediation Programs

The main impact of the new GSE servicing guidelines will be to combine a pre-foreclo-sure loss mitigation review with a foreclosure process geared to move quickly and without interruption once the case has been referred to an attorney for foreclosure. Unfortunately, the pre-foreclosure review is unsupervised and completely within the servicer’s control. With the phasing out of HAMP, even the pretext of a formal obligation to stop foreclosures while considering borrowers for loss mitigation after referral to an attorney will cease to exist. The mediation and conference programs created under state and local law will then be the only counterweight against the drive to speed up foreclosures. Homeowners in jurisdictions without these protections will be particularly vulnerable to these new servicing mandates. Existing programs need to ensure that require-ments for a stay of legal proceedings and prohibitions on scheduling sales are part of a mediation or conference program’s rules.

post-referral loss mitigation solicitation form.89 Since returning this form is the only way to trigger a mandatory foreclosure stop after referral to foreclosure, this means that in juris-dictions with mediation or conference pro-grams the dual track will be in place as soon as the case is referred to a foreclosure attorney.

The rationale for this exception for juris-dictions with mediation and conference pro-grams is presumably that these programs create an independent basis under state law to stop foreclosure proceedings. This assumption is not accurate. Some foreclosure and confer-ence programs do not automatically stay fore-closure proceedings or do so in very limited ways. More significantly, in many jurisdictions with mediation and conference programs, only a small percentage of eligible homeown-ers participate in them, often as low as ten or twenty percent.90 The exception in the align-ment rule sweeps broadly and can preclude the opportunity for a post-referral stay in all cases in jurisdictions that have conference and mediation programs.

A different alignment guideline refers specifically to mediation and conference programs. According to this provision, a requirement to participate in a mediation or conference program may be a ground for a servicer to avoid penalties for delaying fore-closures beyond the otherwise applicable state time frame.91 The alignment rule absolves the servicer of consequences of a mediation-related delay if the servicer shows that the delays were not within its control.

The authority to excuse delays due to mediation could potentially promote more efficient use of foreclosure conference and mediation programs. The rule encourages a servicer’s counsel to comply with mediation rules in order to show that any delays were not the servicer’s fault. In states such as New York, conferences are often continued five or six times due to servicers’ lack of preparation.

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a Mediation Administrator before proceeding to a sale. The certificate must state that the beneficiary of the deed of trust participated in good faith in mediation or that the home-owner declined to participate. The mediation certificate must be recorded before the trustee exercises the power of sale contained in a deed of trust.

Nevada’s mediation statute contains two provisions designed to ensure that the party purporting to negotiate on behalf of the owner of a mortgage loan has the authority to do so. The statute mandates that “the beneficiary of the deed of trust shall bring to the mediation the original or a certified copy of the deed of trust, the mortgage note and each assignment of the deed of trust or mortgage note.”97 In addition, the foreclosing party must partici-pate in mediation through a person authorized by the beneficiary to settle. According to the statute, “[i]f the beneficiary of the deed of trust is represented at the mediation by another person, that person must have authority to negotiate a loan modification on behalf of the beneficiary of the deed of trust or have access at all time during the mediation to a person with such authority.”98

During the first year of the Nevada pro-gram’s operation, mediators and lower courts enforced these requirements unevenly. How-ever, in two en banc decisions decided in 2011, the Nevada Supreme Court flatly rejected this approach of casual enforcement.99 Instead, the court set the terms for robust implementation of the mediation statute.

The Pasillas and Leyva decisions are sig-nificant for two reasons. First, they send a message to mediators and lower courts that the requirements of a mediation statute mean something. Second, and primarily in Leyva, the court emphasized that in order to conduct a valid power of sale foreclosure under state law the party seeking to foreclose must have a proper assignment of the deed of trust and the right under the Uniform Commercial Code

v. JudiCial enForCeMent oF Mediation prograM requireMentS

As mediation programs have become more established, the courts have been more involved in enforcing program rules. This has occurred in the context of both non-judicial and judicial foreclosures. In particular, some courts in Nevada, New York, Connecticut, Maine, and Vermont have been active in enforcing conference and mediation rule.

A. Enforcement of Mediation Rules: The Nevada Courts

1. Nevada Courts and Sanctions Orders

Since the inception of the foreclosure crisis, Nevada has consistently ranked at the top of any listing of states with the highest foreclo-sure rates. Property values have plummeted there, leaving many residents with homes deeper underwater than anywhere else in the country. Nevada enacted a foreclosure media-tion statute in 2009.92 Although Nevada is a non-judicial foreclosure jurisdiction, the state’s law created a mechanism for court oversight of mediations.

Nevada’s non-judicial foreclosures follow procedures similar to those of many states. A trustee authorized to enforce a deed of trust serves and records a Notice of Default.93 Three months later, the trustee may record a notice of sale.94 After notices have been published once per week for three weeks, the foreclosure sale can take place.95 These procedures are the actions of private parties and occur without judicial supervision or control.

The Nevada foreclosure mediation stat-ute superimposed new requirements on this process. Now, with service of the Notice of Default the trustee must provide a form allow-ing the homeowner to elect mediation.96 If the homeowner chooses to participate in media-tion, the trustee must obtain a certificate from

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improperly allowed foreclosures to proceed without strict compliance with the mediation statute. Significantly, the Nevada Supreme Court ruled that the lower courts erred in not imposing appropriate sanctions given the lenders’ clear violations of the statute.102

The Leyva court concluded that Article 3 of the Uniform Commercial Code governed enforcement of the promissory note secured by the deed of trust.103 A borrower had the right to know that the party foreclosing was an entity “entitled to enforce” the note in accordance with U.C.C. § 3-301. According to the Leyva court, because Wells Fargo could not provide documentation that it was a party entitled to enforce the note, “it has not demon-strated authority to mediate the note.”104

In Leyva, Pasillas, and subsequent deci-sions, the Nevada Supreme Court emphasized the mandatory nature of sanctions when a lender fails to satisfy the mandates of the mediation statute. According to the court, vio-lations of any one of four basic requirements of the law must result in the mediator’s rec-ommendation that sanctions be imposed. The four occurrences that trigger sanctions are: (1) failure to attend the mediation; (2) failure to participate in the mediation in good faith; (3) failure to bring to mediation the documents required by statute and court rules; and (4) failure to demonstrate that the lender’s repre-sentative has authority to modify the loan or direct access to a person with this authority.105

Notably, these violations of the Nevada statute mandate not only denial of a certifica-tion allowing foreclosure, but also obligate the court to determine an appropriate sanction. The statute addresses the court’s role in the event of non-compliance with the statutory requirements. It provides that, “The court may issue an order imposing such sanctions against the beneficiary of the deed of trust or the rep-resentative as the court determines appropri-ate, including, without limitation, requiring a loan modification in the manner determined

to enforce the promissory note. In the court’s view, proof of authority to foreclose was not a hyper-technical formality. It was directly related to the goal of mediation: to minimize foreclosures by ensuring that the borrower negotiated with a person who had authority to modify the loan.

In Pasillas a representative of a mortgage servicer appeared at mediation with copies of the deed of trust and note signed by the home-owner and the original lender.100 Two pages of the note were missing. The representative failed to bring any documents showing assign-ment of the deed of trust to HSBC, alleged to be the current assignee. Nor did the representative produce any record of negotiation or transfer of the promissory note to HSBC. The representa-tive stated that he did not have authority to modify the loan and would need authoriza-tion from investors to do so. He did not have access to these investors at mediation.

In Leyva, a servicer representative simi-larly came to mediation with copies of the deed of trust and promissory note. He did not bring documents showing an assignment of the deed of trust or transfer of the note to Wells Fargo, the entity he claimed had the right to enforce the obligation. Instead the representative brought a notarized statement from a Wells Fargo employee stating that Wells Fargo was in possession of the deed of trust and mortgage note and all assignments of the documents.101 Wells Fargo contended that it had substantially complied with the mediation statute, and substantial compliance was all the statute required.

In both cases the servicers argued that they had negotiated in good faith, but were unable to modify the loans or offer other loss mitigation alternatives. The district courts found sanctions unwarranted and directed that the mediation program administrator give certificates allowing the foreclosure sales.

The Nevada Supreme Court held in related appeals that the district courts

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a permanent modification, claiming later that an investor restriction barred modification. In the course of mediation, Wells Fargo’s repre-sentative discovered that Wells Fargo did not own the loan, but was only the servicer. The Wells Fargo representative did not know who owned the loan.

The homeowners sought judicial review of Wells Fargo’s conduct in mediation. After hearings, the Nevada District Court imposed a series of sanctions against Wells Fargo. First, the court imposed a $7500 sanction against Wells Fargo because it failed to comply with the mediation requirement to provide docu-ments accurately reflecting the ownership of the loan. The court assessed a further sanction of $10,000 due to Wells Fargo’s appearance at mediation through a representative who had no authority to modify the loan. According to the court, Wells Fargo harmed the borrowers by offering a modification, encouraging them to default in order to qualify for the modi-fication, and then denying the modification because of an alleged investor restriction. The same conduct harmed the mediation process by wasting time on sessions attended by a lender representative without authority.

As a sanction for the lender’s bad faith, the court ordered the loan modified along the lines of a permanent HAMP modification incorporating the terms of the proffered trial modification. This modification effectively reduced the borrowers’ monthly payment by $268. The court assessed an additional $10,000 sanction for Wells Fargo’s bad faith participa-tion in mediation. According to the court, it had the power to modify the loan on the basis of its equitable powers, powers the court had regardless of the mediation statute. Finally, the court noted that, as the HAMP modifica-tion did not reduce the note principal, the modification did not violate any constitutional limitations under the Contracts Clause or amount to an improper regulatory taking of property.

proper by the court.”106 The Pasillas court interpreted this language to mandate that a court determine an appropriate sanction when a lender failed to satisfy any one of the four enumerated requirements. Later decisions by the Nevada Supreme Court have reiter-ated this view.107 In determining the appro-priate sanction, the Nevada Supreme Court directed lower courts to consider factors such as “whether the violations were intentional, the amount of prejudice to the non-violating party, and the violating party’s willingness to mitigate any harm by continuing meaningful negotiations.”108

2. The Nevada Courts Address the Limits of Sanctions

The Nevada courts have yet to explore the full extent of the sanctions that may be imposed for violation of mediation rules. The state’s Supreme Court has held that it would not be an appropriate sanction to bar all future efforts by the lender to foreclose the same deed of trust.109 At the same time the court noted, “While sanctions conceivably could be imposed that would wipe out the lender’s security—we do not decide this issue since it is not presented—it would be up to the peti-tioner to allege and establish the propriety of such drastic sanctions.”110 A less drastic sanc-tion, ordering a loan modification, is expressly authorized by the Nevada mediation stat-ute.111 In a pending appeal, Renslow v. Wells Fargo Bank, the Nevada Supreme Court will be addressing the propriety of this sanction.112

The homeowners in Renslow entered into a HAMP trial payment plan with Wells Fargo. The borrowers had been told by a Wells Fargo agent not to make three payments in order to qualify for HAMP. The borrowers acted on this instruction and were approved for a trial plan agreement. They eventually made seven monthly HAMP trial plan payments. Despite the borrowers’ compliance with the HAMP trial plan, Wells Fargo refused to implement

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order a lender to extend a previously offered loan modification; toll accrual of all or partial interest; and impose monetary sanctions that reduce the outstanding loan principal.114

2. Indiana

When directives to appear for conferences and to produce documents are issued in the form of court orders, this sets the stage for effec-tive enforcement. For example, some courts overseeing conferences under Indiana’s pilot program for supervised conferences regu-larly incorporate conference obligations into form court orders. On this basis the court can impose monetary sanctions in the event that a lender fails to appear with an authorized representative as required by its order. The court’s order can direct dismissal of the fore-closure action if appropriate documentation, such as a properly endorsed note, is not pro-duced by a specific conference date.115

3. Maine

Maine’s foreclosure mediation statute autho-rizes courts to impose sanctions upon finding that a party did not mediate in good faith.116 A mediator may refer a matter to court for con-sideration of sanctions.117 The sanctions can include assessment of costs and fees or dis-missal of the foreclosure action with or with-out prejudice.118 Maine courts have found lack of good faith in a number of instances, includ-ing a servicer’s refusal to provide guidance on its standards for review of a loan modification request,119 assertion of inconsistent positions on whether or not the homeowner qualified for a HAMP modification,120 and failure to disclose an investor restriction allegedly bar-ring a HAMP modification.121 Sanctions have included tolling of interest and costs, and requiring the lender to pay the homeowner’s attorney fees and lost wages due to unneces-sary mediation appearances.122

In appealing the Nevada District Court’s ruling in Renslow, Wells Fargo has raised broad challenges to constitutionality the Nevada mediation statute. Wells Fargo argues that the provisions of the statute authorizing sanctions and barring non-judicial foreclosure violate the Contracts Clause and the Takings Clause of the United States and the Nevada constitutions. Wells also contends that the structure of the mediation program violates the state constitution’s separation of powers doctrine. According to Wells, the legislature could not delegate to the courts the author-ity to administer a mediation program that involved disputes that were not “cases and controversies.” Wells argues for a definition of “case and controversy” limited to formal legal actions initiated in a court.

In response, the borrowers have noted that far more significant contract impair-ments and regulatory takings have been found consistent with the Contracts and Takings clauses.113 The HAMP modification at issue in Renslow had been proposed by Wells Fargo and complied with a formula that ensured that it met the best interests of investors in the loan. With respect to the separation of pow-ers claim, courts have traditionally exercised broad equitable authority to review all fore-closures of redemption rights arising out of mortgages and deeds of trust. Under Nevada’s statute, the courts exercise this authority upon the petition of one of the parties affected by the foreclosure. According to the homeowners, a proceeding initiated on this basis satisfies the case and controversy requirement.

B. More State Courts Are Enforcing Mediation Program Rules

1. Connecticut

Trial courts enforcing Connecticut’s foreclo-sure mediation statute have entered orders that inter alia: direct the servicer to request a waiver of investor restrictions on modification;

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lender appeared for mediation, but a repre-sentative of the lender authorized to modify the loan was not available. The lender failed to provide HAMP net present value test inputs during mediation as required by the media-tion statute. The failure to provide required documentation and appear through an autho-rized representative violated the statute’s express requirements for good faith participa-tion.130 The court rejected the lender’s argu-ment that federal HAMP guidelines somehow preempted state mediation programs’ enforce-ment of HAMP guidelines. On the contrary, the court noted that the state’s mediation law provided an effective means to enforce federal HAMP guidelines. As a sanction the court ordered a tolling of interest, fees, and costs for the year that had passed since the lender representative failed to participate as required in mediation. The court directed the mediation to continue while staying the expiration of the post-judgment redemption period.

vi. Mediation prograMS require ServiCerS to SHow autHority to ForeCloSe

In most foreclosures, no one routinely looks at the documents lenders file in courts and land records. This lack of oversight has been a major factor contributing to the pervasive use of defective paperwork in foreclosures. In non-judicial foreclosure states it is common for there to be no oversight at all. Courts in judi-cial foreclosure states rely heavily upon the overwhelming majority of foreclosures pass-ing through as uncontested defaults. The lack of eyes on the papers encourages the omission and misrepresentation of key documents. Con-ferences can provide a counterbalance to this lax oversight. While foreclosure conferences tend to focus on loss mitigation issues, the question

4. New York

In a prior National Consumer Law Center report, we summarized decisions by New York trial courts that enforced requirements for foreclosing lenders to negotiate with bor-rowers in good faith.123 The sanctions the New York courts imposed upon lenders included barring foreclosure, tolling accrual of inter-est and fees, imposing substantial monetary penalties, and ordering conversion of a trial modification to a permanent modification.124 New York courts have continued to apply var-ious sanctions against noncompliant lenders and servicers. These include orders requiring decisions on loan modification applications according to a fixed time frame, orders that lender representatives appear personally to explain loss mitigation decisions, and suspen-sion of the accrual of interest.125 For example, in JP Morgan Chase Bank v. Berrio,126 the court found that the lender failed to negotiate in good faith as required by the conference statute127 and ordered the forfeiture of inter-est for the nine month period during which the lender had caused conference sessions to be continued eight times. The lender had demanded unnecessary documents, had lost documents, and had allowed a HAMP trial payment plan to remain unconverted through-out this time without explanation.

5. Vermont

Trial courts in Vermont have enforced the requirements of that state’s mediation statute through a variety of sanctions. Finding that the lender appeared at mediation through a servicer representative who negotiated with-out authority, a Vermont trial court ordered the lender to implement a loan modification consistent with the terms that had been pro-posed earlier in negotiations.128 The court then dismissed the foreclosure action. In Citibank v. Mumley, a Vermont trial court imposed sanc-tions of a different kind.129 An attorney for the

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enforcement by the courts, but do not specifi-cally address enforcement through the media-tion process. However, failure to comply with these rules, coupled with a servicer represen-tative’s inability to render decisions on loss mitigation options, should build a record for the determination that a lender did not partici-pate in mediation in good faith.

New York is another judicial foreclosure state with a conference law. In response to the robo-signing scandal, the New York court sys-tem issued an administrative order in October 2011 requiring lenders’ attorneys to file certifi-cations that they had taken reasonable steps to verify the accuracy of documents relied upon to foreclose.135 Because the order carries impli-cations for attorney disciplinary action, it has had a significant effect on foreclosure practice. Upon the issuance of the order, foreclosure fil-ings in New York dropped dramatically. It is not clear to what extent the foreclosure confer-ences may have contributed to the slowing of new foreclosure actions during 2011. The like-lihood that eighty percent of defendants will appear in court for a conference session likely had an impact on lenders’ attorneys faced with preparing these certifications.

The laws in effect in Nevada, Hawaii, and the District of Columbia have set the strictest requirements for lenders to show authority to foreclose. All three are primarily non-judicial foreclosure jurisdictions that recently enacted foreclosure mediation statutes. Nevada’s mediation statute provides that: “the benefi-ciary of the deed of trust shall bring to the mediation the original or a certified copy of the deed of trust, the mortgage note and each assignment of the deed of trust or mortgage note. If the beneficiary of the deed of trust is represented at the mediation by another person, that person must have authority to negotiate a loan modification on behalf of the beneficiary of the deed of trust or have a access at all times during the mediation to a person with such authority.”136

of who has authority to foreclose clearly has a place in these discussions. By statute or rule, nearly all conference and mediation programs require the participation of an individual authorized by the owner of the loan to decide questions related to loss mitigation questions.

The requirements to document authority to foreclose vary significantly from program to program. For example, the state of Wash-ington, a non-judicial foreclosure jurisdiction, recently attempted to incorporate a standing requirement into its mediation statute. The result was not particularly effective. On the one hand, the new statute defines a failure to mediate in good faith to include the lender’s failure to provide “proof that the entity claim-ing to be the beneficiary is the owner of any promissory note or obligation secured by the deed of trust.”131 However, the section goes on to allow a lender to satisfy this requirement by producing its own affidavit stating that it is the actual holder of the promissory note.132

In Maine and Vermont, both judicial fore-closure states, recent amendments to general foreclosure pleading rules created require-ments to show authority to foreclose that should carry over into mediations. The Maine foreclosure statute now provides that the fore-closing party must “certify proof of ownership of the mortgage note and produce evidence of the mortgage note, mortgage and all assign-ments and endorsements of the mortgage note and mortgage.”133 Under amendments to Vermont’s foreclosure rule the plaintiff must “attach to the complaint copies of the original note and mortgage deed and proof of owner-ship thereof, including copies of all original endorsements and assignments of the note and mortgage deed . . . and shall plead in its complaint that the originals are in the pos-session and control of the plaintiff or that the plaintiff is otherwise entitled to enforce the mortgage note pursuant to the Uniform Com-mercial Code.”134 The new Maine and Ver-mont provisions set a framework for rigorous

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of beneficial interests. While these changes are recent, there has been some indication that lenders are moving to the alternative of judicial foreclosures as a means to avoid the requirement to file an affidavit (required only in non-judicial foreclosures) showing authority to foreclose. Ultimately this option may not provide an escape for lenders, as courts could easily require a similar affidavit in judicial proceedings.

vii. ConFerenCe and Mediation prograMS Can be FinanCially SelF-Supporting

A. The Programs Provide a Substantial Benefit to States and Communities at Little or No Cost

Analysts have produced estimates for the direct and indirect costs of foreclosures dur-ing the current crisis. These costs fall into several categories. First, the owners of the mortgage debt invariably lose out every time a foreclosure is completed. Today, 22.5% of homes nationally are worth less than the mort-gages they secure and another five percent are considered in the “near negative equity” category.142 In some states the proportion of homes that are completely underwater is much higher: Nevada (sixty percent), Ari-zona (forty-eight percent), Florida (forty-five percent), Michigan (thirty-five percent), and California (thirty percent).143 Losses incurred with each foreclosure in these states will be particularly steep.

Even when a property is not underwater, lenders suffer substantial losses from each foreclosure. The owners of mortgage debt typ-ically lose over fifty percent of the value of the debt when a first mortgage is foreclosed. In foreclosing on a home with a loan balance at the national median in 2008, investors lost an average of $145,000 per home foreclosure.144

The Nevada Supreme Court’s foreclosure mediation rule set out additional requirements to show authority to foreclose. The rules require that the foreclosing party provide a statement under oath certifying a copy of and actual possession of the original mortgage note, deed of trust, and each assignment of the deed of trust and each endorsement of the mortgage note.137 Conclusory affidavits of compliance with the Uniform Commercial Code’s “lost note” rule138 will not be accepted. Instead, the lender must obtain a court order stating that it has complied with the U.C.C.’s requirements for proof of a lost note.139 The Nevada statute effectively combines an explicit documentation requirement with the relevant inquiry for mediation—is the lender’s representative authorized to act on behalf of the owner of the mortgage loan?

Two recent developments have made it more likely that lenders who cannot establish authority to foreclose in Nevada will find their path to sale barred at mediation. First, two

decisions by the Nevada Supreme Court in July 2011 mandated strict enforcement of the media-tion statute’s “authorized representative” require-ment.140 These decisions are discussed in Part V of this Report. The other development is a 2011 amendment to Nevada’s non-judicial foreclosure statute.141 The statute now

requires, as a condition to exercise of a valid power of sale, that the assignments of mort-gages and beneficial interests under a deed of trust be recorded. In commencing a foreclo-sure, the beneficiary or trustee must record a notarized affidavit describing the prior benefi-ciaries, the status of possession of the note, the authority of the trustee to exercise the power of sale, and the chain of title and recordings

in foreclosing on a home with a loan

balance at the national median

in 2008, investors lost an average

of $145,000 per home foreclosure.

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including the costs of mediators, the number of sessions required per case, and the overall number of mediations occurring in a particu-lar program. The New York State conferences and the Philadelphia diversion program rely upon existing court personnel and volunteer attorneys. Both programs are highly effective, but strain court resources. A few mediation programs receive direct or indirect government funding. For example, Connecticut has pro-vided five million dollars in funding for its program over the past three years. Cook County, Illinois funded its mediation program with a three million dollar appropriation in 2011. Cook County’s funding is directed heavily toward legal assistance and outreach related to foreclosure mediation. The State of New York has similarly funded counseling and legal assistance related to foreclosure conferences.

Recently, the trend has been to design foreclosure conference and mediation pro-grams to be financially self-sufficient. Pro-grams in seven states and the District of Columbia were set up with this goal.149 So far they appear to be achieving the objective. In fact, several mediation programs not only cover their own costs, but also generate funds to support other housing preservation efforts, such as housing counseling and legal services.

Mediation programs have achieved finan-cial self-sufficiency by assessing surcharges to the fees that lenders pay to file foreclosure-related documents with public offices. These are typically surcharges to a court filing fee or to a recording fee related to a non-judicial fore-closure. In existing foreclosure mediation and conference programs, these assessments range anywhere from $40 to $400 per foreclosure.

The sums collected from these filing fee surcharges typically fund mediation program administration costs. In addition, most pro-grams pay mediators. Mediators may be paid per session or for a partial day’s service. For example, in Maine mediators are paid $175 for a half-day’s services and $300 for a full day.

Public and non-profit institutions have been major investors in mortgage-backed securities. It is not surprising that these investors have been among the most vocal critics of mortgage servicing practices that promote speedy fore-closure sales at the expense of careful reviews of loss mitigation options.145

The decrease in the property’s value once it enters REO status146 is one direct cost of a foreclosure. The indirect costs can be more extensive. These indirect costs include loss in value to neighboring properties, lost tax rev-enue from the depreciated property values, and the costs governments incur in inspecting and maintaining foreclosed properties. Local governments incur costs ranging from unpaid water and sewer bills to police services related to foreclosed properties.

Studies have attempted to quantify the aggregate direct and indirect costs associated with the foreclosure crisis.147 Using methodol-ogies developed by the Joint Economics Com-mittee, the California Reinvestment Coalition recently estimated these costs for California.148 The study concluded that an average fore-closure caused a drop in a home’s value of twenty-two percent. On a statewide basis this came to an aggregate loss of $207 billion in values of foreclosed properties since the crisis began. These foreclosures impacted neighbor-ing properties to cause an additional statewide loss of $424 billion in real estate values. As a result, governmental entities lost $3.8 billion in property tax revenue. Local government costs for added services to care for these properties cost the state another twenty to thirty billion dollars. If even a small portion of these fore-closures could have been avoided, the state could have saved billions of dollars.

Given their own stake in the foreclosure crisis, state and local governments are look-ing more and more to lenders and servicers to support the costs of finding viable alterna-tives to foreclosure. How much do mediations cost? The answer depends on many variables,

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In the first year of its implementation, Nevada’s recording fee surcharge brought in between six and eight million dollars. A substantial portion of these funds went to the general state revenues, reducing the state’s deficit. In Washington, officials anticipate that the $250 recording fee surcharge will generate about eight million dollars per year. The state intends to use about eighty percent of these funds to support housing counselors. In both Nevada and Washington the $400 fee assessed to the parties upon an election to participate in mediation adequately compensates media-tors, and the programs have not experienced any shortage of mediators willing to serve at these rates.

Under Florida’s mandatory program, media-tors charged $350 for up to two sessions. Some programs, such as Indiana and Maine, are able to pay all costs for mediators out of filing fee surcharges. In other jurisdictions, a second fee in addition to the filing fee surcharge is assessed when a borrower elects to participate in mediation. The District of Columbia and Maryland require that borrowers pay a $50 mediation fee when they submit a request for mediation. In Hawaii, Nevada, and Wash-ington the borrower and lender split a fee ($400 in Washington and Nevada and $600 in Hawaii) when the borrower elects mediation. The intent behind the two-tier fee approach is to generate sufficient income based on all fore-closure filings to maintain the program while allocating additional costs to the parties who actually participate in mediation.

The terms of loan documents and state laws typically allow the lender to shift its fore-closure-related costs to the borrower. These costs may be included in the amount of a foreclo-sure judgment or added to a deficiency claim. Of the jurisdictions listed above, only Vermont has enacted an express statutory prohibi-tion restricting assessment of the lender-paid mediation costs against the borrower.150 Under Vermont’s law, half of the mediator’s costs may be shifted to the borrower by inclusion in a foreclosure judgment, but may be collected only if there is a foreclosure sale surplus.151

Maryland, Maine, Indiana, Florida, Wash-ington, Nevada, and the District of Columbia implemented financially self-sustaining con-ference and mediation programs. Nevada’s funding example has served as the model for the similarly structured programs in Washing-ton and Hawaii. Nevada collects a $200 sur-charge from each filing of a notice of default in land records. Between $43 and $45 of each $200 fee covers the costs of the mediation pro-gram. Of the remaining $155, $150 goes to the state’s general fund and $5 is designated for legal services to the indigent.

TABle 6 Foreclosure Mediation Fees,

Selected States

state

fIlIng fee surcharge other charges

District of Columbia

$300 $50 borrower fee upon election

Florida $400 $350 by lender if mediation conducted

Hawaii $350 $600 split by borrower and lender

Indiana $50 no charge

Maine $200 no charge

Maryland $300 $50 by borrower upon election

Nevada $200 $400 split by parties upon election

Vermont None Lender pays mediator

Washington $250 $400 split by parties upon election

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Foreclosure and Conference Programs Pay Their Own Way

District of Columbia: the lender pays $300 for each notice of default recorded against a residential mortgage. the fees go toward Fore-closure Mediation Fund that pays for the costs of administration of the program. this is a dedi-cated fund, and does not revert to general fund. penalties for non-compliance with mediation rules go into the fund. the borrower must pay $50 when it elects mediation.

Florida: under the former statewide program, the lender paid $400 upon filing the complaint ($275 non-refundable to the program and $125 to support counseling services). the counseling portion was refundable if not used. lender paid an additional $350 if mediation took place. lender’s fees could be taxed as a cost in final judgment.

Hawaii: the borrower must submit a $300 fee with the election of mediation form. within four-teen days of notification of the borrower’s elec-tion, the lender must submit a $300 payment for its share of mediation costs. a mortgage foreclosure dispute resolution special fund was established with fees and fines collected. in ad-dition, lenders pay $100 to record documents in bureau of Conveyances and $250 to file a copy of a foreclosure notice. these funds go to department of Commerce and Consumer af-fairs toward the mediation fund. Fines of up to $1000 for any program violation are deposited with the fund.

Indiana: Fifty dollars is added to the complaint filing fee for costs to the court for running the program, with a portion to pay mediators in counties where mediations are supervised. Me-diators are paid for various tasks, up to a maxi-mum of $135 per mediation. the $50 fee is covering costs of the program.

Maine: a $200 administrative fee is added to charges for filing all foreclosure complaints. the fees fund the foreclosure diversion program.

Maryland: a new $300 charge is assessed to the lender at the filing of an order to docket a complaint to foreclose on a residential mortgage.

this pays for program costs, counseling, out-reach, and foreclosure prevention services. the borrower must submit a $50 filing fee with a request for mediation. these fees generate rev-enue over mediation program costs to pay for homeowner support programs. in its first year, it was estimated that the program would produce $2.7 million in revenue, but would need only $800,000 for its own operation.

Nevada: a $200 filing fee surcharge is as-sessed for each recording of a notice of default and election to sell. approximately $150 goes to the state general fund, $45 goes to pay media-tion program costs, and $5 goes to support legal aid for the indigent. if the borrower elects media-tion, the lender and borrower split a $400 flat mediator fee.

Vermont: the lender pays the costs of media-tion at a rate agreed upon by parties and the mediator. the lender can recover all its media-tion costs from a sale surplus, including its at-torney fees. if there is no surplus, no attorney fee shifting is allowed, but the lender may shift one-half of mediator costs.

Washington: two hundred fifty dollars are added to the recording fee to cover mediation program costs. Fees cover costs of the media-tion program and the surplus goes to support housing counselors. the lender and borrower evenly split a $400 mediator fee that covers up to three hours of mediator time.

Six statutes operate under a general framework: the lender pays a surcharge for filing a foreclo-sure-related document. this funds the mediation program’s operating expenses. the surcharge is collected for all foreclosures, whether or not me-diation takes place. For the cases in which me-diation does take place, an additional charge to pay for the mediator is assessed. the lender and the borrower typically share this mediator cost. this has been the basic funding model for the programs in the district of Columbian, Florida, Hawaii, Maryland, nevada, and washington.

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program. Support from specialized legal ser-vices staff is the most effective way to equalize the positions of homeowners and servicers in mediation.

Funding for full time attorney staff to assist homeowners in mediation programs must be a high priority. Legal services in some states, such as Nevada, Maine, and New York, provide organized support for mediation pro-grams. These services include limited screening and referral of the most appropriate cases to pro bono counsel. While over ninety-five percent of homeowners proceeding through Philadelphia’s program do so without direct attorney represen-tation, most have had their case reviewed by an experienced legal services attorney.

New York programs have developed the most extensive attorney support systems for conferences. In many New York counties, local legal services attorneys conduct group sessions for homeowners and represent a high proportion of individuals through the conference process. Statewide in New York, thirty-three percent of homeowners appear for conferences with attorney representa-tion.154 In the counties in and around New York City, forty-one percent of homeowners were represented in conferences in 2011. In Richmond County (Staten Island), the percent-age of conferences in which the borrower was represented has reached eight-five percent.155 Unfortunately, attorney representation in other programs around the country does not approach the levels in New York. Instead, in most programs homeowners appear without attorney representation in the overwhelming majority of cases.156

A number of state programs fund hous-ing counseling for mediation participants directly from filing fee surcharges. States that have funded counselors in this way include Washington, Nevada, Maryland, and Florida. States should also consider funding counsel-ing and attorney support for borrowers out of penalties assessed against lenders for bad faith

B. Supporting Legal Services Attorneys and Housing Counselors through Revenues from Filing Fee Surcharges

Lenders invariably participate in conference and mediation programs through attorneys. Yet, in most instances, nearly all homeowners appear in these programs without attorneys. Even in states requiring foreclosures to pro-ceed through the courts, it is not unusual for eighty to ninety percent of homeowners to be unrepresented in conferences and media-tions.152 Leaving borrowers to interact directly with servicers’ staff and their attorneys leads to unnecessary foreclosures and redefaults.

Given the scarcity of attorney assistance for homeowners, housing counselors play an essential role in preparing homeowners for mediations. As discussed, participation in counseling has been shown to have a sig-nificant impact both on the likelihood that a borrower will avoid foreclosure and on the sustainability of the non-foreclosure alterna-tive.153 Housing counselors, in effect, do the work that competent servicer staff should be doing. It is not unreasonable to require mortgage servicers to pay some of the cost of providing housing counselors for mediations. Counselors are alleviating a harm caused by servicers’ decisions to under-staff and poorly train their loss mitigation staff.

States have explored a number of options for funding legal services for homeowners related to foreclosure mediation and confer-ence programs. For example, the Nevada law specifically directs that $5 from each $200 fee for recording a notice of default be allocated to legal services programs. The $5 charge is expected to generate $200,000 of funding for legal services programs in its first year. A $25 surcharge to the same Nevada filing fee could provide one million dollars annually for legal services. Funding at such a level could fund a legal services unit set up specifically to support a foreclosure mediation or conference

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eventually led the Florida Supreme Court to suspend the conference program.162 In Mary-land fewer than 300 cases were mediated during 2010. In New Jersey less than twenty percent of eligible cases went through media-tion. It is highly unlikely that participation in mediations or conferences at these levels had an effect on slowing the overall foreclosure time frames in these states. In Pennsylvania and Illinois, two other states with long average foreclosure times, mediation programs oper-ated only in selected counties. On the other hand, Massachusetts, considered the state with the eighth longest foreclosure time, is a non-judicial foreclosure jurisdiction without a mediation program.

The Reinvestment Fund’s study of the Philadelphia foreclosure diversion program, previously discussed, provides an accurate analysis of the effect of a foreclosure media-tion program on existing foreclosure time frames.163 The Reinvestment Fund concluded that the conferences in Philadelphia did not delay foreclosures. A case typically stayed in the diversion process for fifty-three days. The standard duration for a foreclosure in Phila-delphia, from filing a court complaint to sale and assuming a default judgment, no litiga-tion and no mediation, had been ten months. Thus, the diversion process could begin and end easily without extending the pre-existing foreclosure time frame.

A. Mediation and Conference Programs Can Operate Within Existing Foreclosure Time Frames

Most other mediation and conference pro-grams have been structured in a similar way to fit within pre-existing foreclosure time frames, as demonstrated in this summary of the time frames of typical programs.

A substantial delay in the foreclosure pro-cess without an intervention that directs the parties to effective loss mitigation solutions

participation in conferences and mediation sessions. The statutes in the District of Colum-bia and Hawaii authorize penalties collected from lenders to be directed toward general program operations. However, statutes could easily be drafted to direct that these penalties be allocated to homeowner support services.

Servicers have shown their unwillingness to allocate sufficient resources to conduct ade-quate loss mitigation reviews. Therefore, as a condition to exercise of remedies under state foreclosure laws, servicers must be assessed the costs necessary to ensure that others who are qualified to do so perform this essential work.

viii. ForeCloSure delayS: MediationS do not prolong ForeCloSureS

During 2011, the time to complete foreclosures grew to unprecedented lengths.157 According to RealtyTrac, as of the end of September 2011, foreclosures nationwide were taking an aver-age of 336 days to complete.158 In New York, New Jersey, and Florida it was taking over two years to complete the foreclosure pro-cess.159 In Maryland, Connecticut, and Penn-sylvania the typical foreclosure time exceeded eighteen months. According to the lending industry, as of September 2011 almost forty-percent of borrowers in foreclosure had not made a payment in two years.160

Foreclosure conference and mediation programs had little, if anything, to do with these delays. Florida, Maryland, and New Jersey have been cited as examples of states where foreclosure timelines have grown to disturbing lengths. In Florida there were 456,000 foreclosures pending when the state’s Supreme Court recommended mandatory foreclosure conferences in December 2009.161 Yet, during 2010 and 2011, only three to five percent of cases eligible for mediation com-pleted the process. This low participation rate

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foreclosure rates in the state. Yet, court records indicate that the process of scheduling new cases for conferences virtually came to a standstill in these two boroughs during 2011. This did not happen because borrowers were somehow using the system for delay. It occurred because attorneys for lenders consis-tently refused to file the Request for Judicial Intervention forms after they served com-plaints. During 2011, no requests for judicial intervention were filed in almost ninety per-cent of the foreclosures filed in Brooklyn and Queens.166 This left the homeowners named as defendants in these cases in a state of limbo, with interest, costs, and fees accruing for over a year. Their cases were not referred to loss mitigation conferences or to housing counsel-ors and legal services attorneys.

In late 2011, legal services attorneys in New York filed a class action lawsuit in fed-eral court seeking redress from the lenders’ failure to move foreclosure cases along into the conferences. The proposed class of home-owners asserts claims against the well-known Baum law firm, a firm that represented lenders in forty percent of the foreclosure cases pending in the New York City courts.167 The homeown-ers raise claims under the Fair Debt Collection Practices Act and the New York consumer fraud statute. Their complaint challenges the law firm’s practice of filing foreclosure com-plaints, but refusing to file the paperwork required to send the cases to conferences. These conferences could produce modified loans that would restore cash flows to the owners of the loans. Instead, the actions of the servicers and their attorneys have made these favorable outcomes much less likely.

does not help homeowners. As homeowners sit in limbo, interest, costs, and fees accrue. Sustainable modifications become more dif-ficult to achieve. During 2010 and 2011 many mortgage servicers, for reasons of their own, delayed the completion of many foreclosures. This may have been due in part to servicers’ concerns about defective documentation of their authority to foreclose. However, there is no evi-dence that state and local programs requiring review of loss mitigation options caused the widespread pattern of foreclosure delays.

B. Foreclosure Delays: The New York Experience

With an unprecedented average foreclosure time of 987 days and a law mandating fore-closure conferences for all cases, New York would appear to be the prime example of a state with pro-consumer laws that unduly delay foreclosures to the detriment of all par-ties involved. However, the facts do not bear out this characterization.

Conferences in New York foreclosure cases take place under a law enacted in 2008 and amended in 2009 to apply to all residen-tial foreclosures.164 Settlement conferences are now to be scheduled in all foreclosure cases involving residential properties in New York. However, the event that triggers the schedul-ing is the plaintiff-lender’s filing of a proof of service of the foreclosure complaint together with a special form called a “Request for Judi-cial Intervention.”165 The filing of the Request for Judicial Intervention initiates not only the scheduling of a conference, but also the refer-ral of the homeowner to housing counseling and legal assistance. If the lender serves a fore-closure complaint but does not file the Request for Judicial Intervention, a conference will not be scheduled and the homeowner will not be directed to counseling and legal assistance.

New York City boroughs, such as Brook-lyn and Queens, have some of the highest

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Foreclosure Mediation and Conference Time Frames in Selected Jurisdictions

Connecticut: the court sends out notice of a me-diation session within five days of when the answer to the complaint is due. the first session should be thirty-five days from notice, and parties then have sixty days to complete mediation (with thirty days more if the court so orders or the parties agree).

District of Columbia: the first mediation session is no later than forty-five days from the mailing of the notice of default. Mediation is to be completed within ninety days of mailing of the notice of de-fault, plus thirty more days upon mutual consent.

Florida: under the former statewide program, me-diation was to be completed within 60 to 120 days of filing of the foreclosure complaint. the lender was to comply with mediation obligations before obtain-ing default, summary judgment, or proceeding to trail (unless limitation waived by the homeowner).

Illinois (Cook County): a case management con-ference is to be held sixty days after the complaint is filed. the program is “designed to work within the time frames set forth in the illinois Mortgage Foreclo-sure law, and not interfere with the statutorily avail-able time limits (e.g. redemption date, etc) for minimal impact to both sides in the foreclosure action).”

Maine: the case is sent for mediation upon the defendant’s filing of an answer or entering an ap-pearance. no judgment may be entered until the lender has obtained a certification that mediation has been completed.

Maryland: Mediation may be requested when the order to docket (the document commencing a fore-closure action) is filed. if mediation is requested, it must be completed within sixty days from the date the office of Hearings and appeals receives the borrower’s request for mediation. For cause, the office of Hearings and appeals may extend the mediation period for thirty more days.

Nevada: State law requires a ninety-day period between recording a notice of breach and the ex-ercise of power of sale. Mediation must take place within this ninety-day period.

New York: when filing proof of service of the com-plaint, lender must file a special request for court action that refers the case to a conference. an ini-tial conference is to be held within sixty days of the filing of the request for judicial intervention. the court will then schedule further conferences as ap-propriate. because of lenders’ failure to file timely requests for judicial intervention, this time frame has not been followed in practice.

Ohio (Cuyahoga County): the court must approve a referral to mediation. a pre-mediation conference will be scheduled and held within thirty days of the referral. a full mediation should be scheduled and held within ninety days of the pre-mediation con-ference. the program rules provide, “in total, a file should be in the Foreclosure Mediation program for a total of 120 days, unless good cause can be shown otherwise.”

Rhode Island: a conference must be scheduled no later than twenty-one days after issuance of a notice of intent to foreclose. the conference must be completed within sixty days of the notice of in-tent to foreclose.

Vermont: State law provides a six-month redemp-tion period after entry of a judgment, and this period must expire before a sale can take place. Mediation can be requested up to four months after entry of judgment, but the mediation does not stay the running of redemption period.

Washington: under pre-mediation law, the bor-rower could request a ninety-day period for an informal conference with the lender before a notice of default could be served. under the 2011 me-diation law, the case can be referred to mediation before the conference period ends. the lender may serve a notice of default, but may not record a notice of sale the during mediation period. Media-tion sessions must be held within forty-five days of referral to mediation, unless the parties agree otherwise.

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iX. reCoMMendationS regarding Mediation goalS For 2012 and beyond

In our 2009 report on foreclosure media-tion, National Consumer Law Center recom-mended a number of practices and structures to strengthen the programs. Below are addi-tional recommendations based on develop-ments since the 2009 report.

1. States that do not have foreclosure con-ference or mediation programs should adopt them quickly. As of the beginning of 2012, foreclosure conference or mediation programs are in place in nineteen states.168 These pro-grams require that a lender or servicer review loss mitigation options with a homeowner and neutral third party before a foreclosure can be completed. Thirteen of these states have a judicial foreclosure system, and six are non-judicial foreclosure jurisdictions. States without programs should move promptly to implement them.

2. Ensure that foreclosure conference and mediation programs are retained as permanent features of state foreclosure laws. Several foreclosure and conference programs were implemented as temporary measures subject to a sunset date or future legislative review. These include the programs in Connecticut, New York, Vermont, and Maine. The imple-mentation dates and sunset provisions for the larger mediation and conference programs are summarized.

Aspects of some of these programs could certainly be improved through amendments or rule changes. However, these laws perform an essential function in correcting an imbal-ance that otherwise exists in these critically important proceedings. All should become permanent additions to the states’ statutes and court rules.

Timelines for Implementation and Sunset of Foreclosure and

Conference Programs

Connecticut: effective July 1, 2008. Sunset July 1, 2014.

District of Columbia: effective March 12, 2011. no sunset.

Florida: Effective with State Supreme Court order of December 28, 2009. Program suspended December 2011.169

Illinois (Cook County): effective april 12, 2010. no sunset.

Maine: effective statewide January 2010. report and legislative review by February 15, 2013.

Maryland: effective July 1, 2010. no sunset.

Nevada: effective July 1, 2009. no sunset.

New York: effective statewide February 13, 2010 until February 13, 2015.

Ohio (Cuyahoga County): effective June 2008. no sunset.

Pennsylvania (Philadelphia County): applicable automatically to all residential foreclosures begin-ning September 2008. Made permanent by de-cember 17, 2009 by order of court.

Rhode Island (City of Providence): effective September 2009. no sunset.

Vermont: effective July 1, 2009. Scheduled to sunset with expiration of HaMp program on de-cember 31, 2012.

Washington: effective July 2010. no sunset.

3. States should fund housing counseling and legal support for homeowners through filing fee surcharges that also fund mediation and conference programs. Foreclosure confer-ence and mediation programs perform vital tasks that mortgage servicers’ staff should

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significant danger that, absent oversight, ser-vicers will complete foreclosure sales regard-less of past modifications.

6. Monitor proprietary modifications. During 2010 and 2011, servicers who were contractu-ally obligated to offer HAMP modifications to all eligible borrowers often gave borrow-ers one of their proprietary modifications instead. Borrowers whose HAMP applica-tions were denied or canceled were frequently placed in these proprietary modifications as an alternative.172 In many cases the denials and cancelations themselves were improper. The proprietary modifications routinely con-tained more onerous terms, such as higher interest rates and less principal forbearance, than HAMP modifications.173 Borrowers often agreed to more burdensome proprietary mod-ifications based upon misrepresentations that they were more beneficial or faster to imple-ment than HAMP modifications. Once HAMP expires, the servicers’ proprietary modifi-cations will become even more prevalent. Therefore, mediations must require full and accurate disclosure of the terms of all modifi-cations so that borrowers can make informed choices about whether to accept them.

7. Ensure that the FHFA servicing guidelines do not lead to unnecessary foreclosures. Fan-nie Mae and Freddie Mac are implementing new servicing guidelines to comply with a directive from the Federal Housing Finance Agency (FHFA).174 These guidelines will likely have a significant impact on the entire servic-ing industry. The new guidelines encourage servicers to speed up foreclosures, particularly after a case has been referred to an attorney. The new guidelines will make it increasingly difficult to stay foreclosure proceedings to review for loss mitigation after a foreclosure has begun. Conference and mediation pro-grams will be the only effective alternative to the servicers’ dual track of considering loss

be performing, but routinely do not. The programs make sure that servicers review homeowners for loss mitigation options before foreclosures. Most servicers have demon-strated their unwillingness to devote compe-tent staff to this work. It is reasonable to pass on to servicers the cost of having others do their job for them. In states including Nevada, Washington, and Maryland, foreclosure mediation programs cover their administra-tive costs with filing fee surcharges, and these surcharges also fund important counseling and support services for the homeowners who participate in mediations. Servicers should be prohibited by state law from shifting this cost to anyone else.

4. Maximize HAMP modifications during 2012. The HAMP program is scheduled to expire at the end of 2013. The Treasury Department has estimated that as of the end of 2011 there were 992,968 loans eligible for HAMP. If servicers continue to approve new HAMP permanent modifications at the current rate of 25,000 to 30,000 per month during 2012, this will leave up to 600,000 currently eligible homeowners without HAMP modifications at the end of this year. Servicers have joined the chorus of those proclaiming the HAMP program’s failure. Yet, this was a failure that the servicers themselves engineered. During HAMP’s final year, servicers must be held accountable for the commitments they made to modify eligible loans under the program.

5. Prevent foreclosures of loans already modi-fied under HAMP. Advocates have already noted a trend for servicers to foreclose upon loans already modified under HAMP.171 These are loans subject to permanent modifications and with borrowers in compliance with the modified terms. Servicers attempt to pass off these foreclosures as recordkeeping mistakes. However, given the large portion of borrow-ers without access to legal counsel, there is a

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subprime housing boom, the industry pushed loans with bad terms disproportionately on minorities. These loans, with high interest rates and other unfair terms, are now dispro-portionately subject to foreclosure. Disparate targeting of minorities with unaffordable loans has led to foreclosures disproportion-ately affecting the same minorities. Today African American and Latino families are facing a doubly high foreclosure rate, even when we account for income differences.178 Negotiations over loan modifications create the opportunity to change the terms of many of these loans, making them affordable—as they should have been in the first place. The stakes are high. Minority families that lose homeownership during the current crisis are likely to be relegated to decades of unafford-able and less stable rental housing.

Unfortunately, data from HAMP has not been encouraging. Minority Americans are steered into non-HAMP modifications more frequently than non-minority borrowers.179 Minorities are denied modifications more often than other borrowers for reasons such as missing documents. Efforts such as the Phila-delphia diversion program have shown that mediation programs can ensure that minority homeowners are treated equitably.180 Con-ferences can provide needed oversight over practices that continue to impact dispropor-tionately upon minorities.

mitigation while forging ahead to foreclosure sales. Rules for mediations and conferences must be tightened to ensure that stays of all foreclosure actions remain in place pending loss mitigation review.

8. Borrowers in mediation must have accu-rate information about what to expect from an increasingly less affordable rental market. As a result of their own business decisions, ser-vicers are now facing enormous backlogs of foreclosures. The lending industry will be pushing with increased vigor for changes to state laws that speed up resolution of what it sees as inevitable foreclosures. In the industry’s view, necessary “corrections” in the homeown-ership landscape need to take place. Several aspects of these “corrections” are worth not-ing. For foreclosed borrowers, the only real housing option is renting. Renters are more than twice as likely as homeowners to pay more than half of their income for housing.175 The burden is particularly severe for low income families. Of low income families with children, nearly two-thirds pay more than fifty percent of their income for housing.176 For Americans who can obtain a new mortgage or refinance an existing one, homeownership has never been so affordable. However, a dual housing market is growing, with those lower on the income scale forced into increasingly more expensive rental housing. Government support for affordable rental housing has been declining. More than ever before, achieving a housing payment based on an affordable percentage of household income is critically important. Homeowners in mediations must make decisions based on a clear understand-ing of what the rental option means for them.

9. Preserve minority homeownership by wiping out unfair loan terms. As the homeownership rate in America declines, minority house-holds’ gains over the past decade in home-based wealth are evaporating.177 During the

Minority families that lose homeownership during the current crisis are likely to be relegated to decades of unaffordable and less stable rental housing.

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Additionally, foreclosure conference and mediation programs have proven their effec-tiveness with little or no cost to states. States that have not done so need to learn from the experiences of other jurisdictions that have developed these programs. Creativity and hard work at the state and local level has pro-duced an invaluable body of experience from which others can now learn, and the benefits of foreclosure conference and mediation pro-grams are documented. Absent this form of intervention, homeowners will continue to face mortgage servicers and their attorneys alone. And tragically, millions of needless foreclosures will occur, causing severe, per-manent harm to homeowners, investors, and communities while stalling economic recovery in the United States.

For these reasons, it is imperative that states without foreclosure conference and mediation programs adopt them and do so quickly.

X. ConCluSion

Foreclosure mediation and conference pro-grams have now been operating in some localities for over three years. Where the pro-grams have been structured effectively, they reduce foreclosures and increase sustainable loan modifications. In the remaining years of the foreclosure crisis policymakers at the state level face a clear choice. One option is to give mortgage servicers free rein to pursue mil-lions of new foreclosures, regardless of how arbitrary or unnecessary each one may be. The other option is to subject servicers’ actions to reasonable scrutiny and encourage alter-natives that are in the best interests of both investors in the loans and homeowners. The evidence is now in that a strong foreclosure mediation or conference program can achieve the latter goal. State policymakers who ignore this option are needlessly exposing families and communities to severe, long-term hard-ships that can be avoided.

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APPendiX A new ForeCloSure ConFerenCe and

Mediation prograMS in 2011

Notable Features: The statute directs borrow-ers to work with housing counselors and complete forms at various times. However, participation in the program remains auto-matic regardless of the borrower’s compliance with these directives. So long as the borrower appears for a scheduled session, the media-tion can proceed with the mediator taking into account the borrower’s failure to comply with any program rules in making recommenda-tions. The statute allows for oversight over entry of judgment, transfer of documents, and implementation of trial agreements. The law does not specifically authorize findings of good faith or allow mediators to impose sanctions. Presumably borrowers can raise issues related to the lender’s loss mitigation performance as demonstrated in mediation as a defense to foreclosure when appropriate.

Recent Developments: As of the end of 2011, the procedures and forms were being finalized for implementation of the program beginning in January 2012.


Statute: D.C. Code § 42-815, et seq. (“Saving D.C. Homes from Foreclosure Act”), effective March 12, 2011. The District of Columbia is a non-judicial foreclosure jurisdiction. The new law directed the D.C. Department of Insur-ance, Securities and Banking to implement a foreclosure mediation program. Under the program rules, a borrower receives notice of the right to opt in to mediation along with the notice of default (the initial step in a non-judicial foreclosure). The borrower has thirty days to elect mediation by submitting a loss

Delaware

Statute: House Bill No. 58, adding Del. Code Title 10 § 5062C, effective January 2012. Dela-ware is a judicial foreclosure state. This leg-islation replaces a superior court foreclosure mediation system in effect since 2009 with an “Automatic Residential Foreclosure Media-tion Program.” Under the new law, the courts maintain authority to establish additional pro-cedures and prescribe forms for the program. The new statute requires that all residential foreclosure cases be treated as assigned to mediation. The borrower receives notice of the mediation process with the complaint. The initial notice directs the borrower to complete a certificate of participation and meet with a housing counselor in thirty days. A judg-ment of foreclosure may not be entered until after the mediation date, even if the borrower did not file a timely answer. After a session, the mediator and the parties sign a media-tion record. The mediator may make recom-mendations. However, the mediator may only dismiss an action if the lender failed to appear twice. A mediator may not continue sessions beyond a date seventy-five days from the notice of mediation without the lender’s consent. When the borrower files a certificate of participation, or when a continued session is scheduled after a borrower has initially appeared, the lender must pay a $300 program fee. These fees pay for the projected cost of the mediation program, with any funds remaining at the end of a quarter to be given to housing counselors and legal services organizations that work with the mediation program.

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2010. Homeowner participation rates were consistently low, often with less than fifteen percent of eligible homeowners participating. The record of settlements reached in media-tions was poor. In some circuits settlements were reached in less than four percent of the cases that went through mediation. In certain circuits the rate was lower.182

In September 2011, the Florida Supreme Court directed a workgroup to make recom-mendations about the future of the statewide foreclosure mediation model.183 Based on this workgroup’s assessment, the Supreme Court terminated the mediation program by an order dated December 19, 2011.184 The workgroup’s assessment confirmed what many consumer advocates had been observing about the pro-gram: mediators seldom enforced program rules and sessions were marked by a “take it or leave it” stance from lenders’ representa-tives. The Supreme Court’s workgroup sum-marized the program’s deficiencies as follows:

A number of factors skewed the success rate of the program downward. The pub-lic comments received provided evidence that servicers on a broad scale resisted providing representatives at mediation with full authority to settle and refused to consider more than a narrow range of settlement options, most of which were of little value to borrowers. Servicers had economic incentive not to settle and to keep foreclosure cases in limbo to avoid the expenses that accompany home own-ership. An analysis of a sample of Elev-enth Circuit foreclosure cases that ended in impasse at mediation showed that 78.5% of the cases remained open up to two years after impasse . . . . In addition because the managed mediation program was not well publicized as a court referred program, borrows mistrusted the program and were uncertain about its legitimacy. These factors contributed to the low rate of borrower contact.185

mitigation application and a fifty dollar fee. Absent an agreement for extension, media-tion must be completed within ninety days of service of the notice of default. A Mediation Administrator issues a mediation certificate if the lender participated in good faith or the borrower failed to elect mediation. The lender must record the mediation certificate in order to conduct a valid non-judicial sale. The pro-gram is funded through a $300 fee assessed upon filing a notice of default.

Notable Features: The D.C. law authorizes penalties of $500 for a lender’s failure to pro-duce required documents. The documents the lender must provide include evidence of standing, documentation of consideration of loss mitigation options, and a loan modi-fication analysis including data inputs and results of the FDIC loan modification calcula-tion. Good faith participation in mediation is defined as evaluation of the borrower’s eligibility for all alternatives to foreclosure and offering the borrower a loan modification with the best terms for which the borrower is eligible. The lender must provide a written explanation of any rejected proposal.

Recent Developments: Amendments to the law passed in early 2011 clarified when a foreclo-sure sale is “void” as conducted without com-pliance with the mediation procedures. Very few cases went through the D.C. mediation program in 2011.

Florida’s Termination of its Mandatory Mediation System

In December 2009, the Florida Supreme Court directed the state’s twenty circuit courts to implement a uniform program for foreclosure mediation.181 The program model called for courts to refer all residential foreclosures to mediation. Each judicial circuit contracted with a private non-profit organization to manage mediations. Circuit courts imple-mented these programs gradually during

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Notable Features: The statute requires that lenders show a loan modification analysis using the FDIC net present value calculation. At mediation the lender must provide copies of the note, mortgage, and related endorse-ments and assignments. A violation of the mediation statute constitutes a violation of the state’s unfair and deceptive acts and practices statute. Lenders serving a notice of default must pay $250 to a dedicated dispute resolu-tion fund.

Recent Developments: Shortly after enactment of the statute containing the mediation law, Fannie Mae and Freddie Mac directed their servicers to cease all non-judicial foreclo-sures in Hawaii and proceed only by judicial foreclosure. Most services followed suit. The mediation provisions do not apply to judicial foreclosures. It is not clear which aspects of the 2011 legislation triggered this action. The legislation that created the mediation pro-gram required that foreclosing parties record specific documentation indicating the party’s authority to foreclose. Designating a viola-tion of the mediation statute as an unfair and deceptive practice may also have contributed to the lenders’ decisions to avoid non-judicial foreclosures and bypass the entire mediation process.

Washington

Statute: SSHB 1362 (“Foreclosure Fairness Act”) amending Wash. Rev. Code § 61.24 et seq., effective July 22, 2011. Washington is a non-judicial foreclosure state. The state’s Department of Commerce administers the new mediation program. Prior to enactment of the mediation law, borrowers were entitled to request a ninety-day delay to confer with the lender before the lender could record a notice of default to begin a foreclosure. The confer-ences during this ninety-day period were informal and not supervised by a third party. The new law adds a supervised mediation

In terminating the program, the Supreme Court recognized that the circuit courts retained authority under state court rules to refer cases to mediation on a case by case basis. The Florida experience provides a number of lessons for mediation programs generally. The lack of enforceable standards to compel servicers to negotiate in good faith left ser-vicers in control of the program. Borrowers lacked a simple and effective means to access the courts to compel enforcement of program rules. Although some of the non-profit media-tion administrators engaged in concerted outreach efforts, these appear not to have been comprehensive enough to overcome borrow-er’s suspicions about the official nature of the program.

Hawaii

Statute: Act, S.B. No. 651, amending Haw. Rev. Stat. § 667-1, operative October 1, 2011. The new law applies to the state’s non-judicial foreclosures. The mediation program is to be run by the Hawaii Department of Com-merce and Consumer Affairs with assistance from state’s judiciary. Under the new law, the Department receives a copy of each notice of default served by lenders. Upon receipt of the notice of default, the Department serves the borrower with a notice of election to partici-pate in mediation. The borrower has thirty days to elect to participate and pay a $300 fee. Upon the borrower’s election, the lender must also pay a $300 mediation fee. A timely request for mediation stays foreclosure pro-ceedings. The opening of a mediation case may be recorded in land records. Mediation is to conclude sixty days from the first scheduled session, but a mediator may keep the stay in effect upon a lender’s unjustified non-com-pliance with mediation rules. Sanctions for unjustified non-compliance can be a penalty of up to $1500 or continuation of the stay on foreclosure.

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attorney cannot request mediation on their own. However, the law does not impose any significant limitations on the counselor or attorney’s discretion in referring a case to mediation. The parties in mediation must con-duct a net present value test comparing the benefit to investors from foreclosure with the likely benefit from an affordable loan modi-fication. The lender’s proceeding to foreclose despite a net present value test result favor-ing modification constitutes a basis to enjoin non-judicial foreclosure. The statute defines what constitutes a lenders’ good faith par-ticipation in mediation. The lender’s failure to comply with these standards is a violation of the state’s unfair and deceptive practices act. A $250 assessment added to the charge for recording a notice of default has funded the program’s costs, plus provided funds for housing counselors and legal services.

Recent Developments: Fees collected from the recording surcharges have created a surplus that will assist in funding housing counseling.

process to the existing conference option. At the conclusion of the ninety-day conference period any housing counselor or attorney may refer the case to mediation. The lender may not record a notice of sale (the step in the fore-closure process after recordation of a notice of default) until the mediator has issued a report. A session is to be scheduled within forty-five days of a referral to mediation unless the par-ties agree otherwise. In the report, the media-tor indicates whether the lender conducted a loss mitigation review in good faith. The law gives the borrower the right to enjoin a non-judicial foreclosure if the lender did not par-ticipate in mediation in good faith. Good faith is defined to include disclosure of data from loan modification guidelines, such as those under HAMP or the FDIC net present value calculation.

Notable Features: The law requires that the referral of a case to mediation be made by an attorney or housing counselor. Borrowers who have not consulted with a counselor or

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Borrower: Borrower must provide tax returns and income information,loss mitigation application, most recent tax return, W-2s, last two pay stubs and docu-ments of non-wage income.Florida (Collins Center-managed circuits; pro-gram terminated December 2011)Lender: Twenty-five days before session bor-rower may request: “documentary evidence that the Plaintiff is the owner and holder in due course of the note and mortgage sued upon,” a “statement of the plaintiff’s posi-tion on the net present value of the mortgage loan,” payment history, and the most recent appraisal available to lender.

Borrower: Must complete income and expense statement, hardship statement.

Hawaii

Lender: At least fifteen days before the session must provide “copy of the promissory note signed by the mortgagor, including endorse-ments, allonges, amendments, or riders to the note evidencing the mortgage debt,” copies of the mortgage and other documents evidencing the mortgagee’s right to foreclose, financial records, and correspondence that confirm the mortgage loan is in default.

Borrower: At least fifteen days before the ses-sion must provide: financial and income docu-mentation (pay stubs), records of past loan modification activity, and certification of hous-ing counseling.

Connecticut

Lender: Fifteen days before the first session, must provide authorized representative con-tact information and twelve-month account history.

Borrower: Must complete Mediation Informa-tion Form (revised as of August 2011, listing income and expenses, hardship statement) and send documents: proof of income (pay stubs, bank statements for two months), two years’ tax returns, proof of occupancy, and IRS Form 4506T-EZ.

Delaware

Rules under development, program to go into effect in January 2012.


Lender: Five days before mediation must pro-vide payment history, itemization of amounts claimed, results of loss mitigation analysis, copy of mortgage, note, every assignment of mortgage, and evidence lender has standing to commence foreclosure. Also, information on the location of the note, copy of pooling and servicing agreement, and documents sub-stantiating any clam the borrower is not eli-gible for a loss mitigation option. Under Rule 2714.1, must provide: itemization of cure and payoff amounts, payment history records with fees and costs, and documentation of consid-eration of loss mitigation options including FDIC loan modification analysis.

APPendiX b ForeCloSure ConFerenCe and Mediation prograMS:

SuMMarieS oF doCuMentation requireMentS For lenderS and borrowerS

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evaluative methodology used to determine eligibility or lack of eligibility of the home-owner for a loan modification; (c) a confiden-tial proposal to resolve the foreclosure; (d) an appraisal (or BPO at mediator’s discretion) done no more than sixty days before the com-mencement date of the mediation; and an esti-mate of the ‘‘short sale’’ value of the residence that lender may be willing to consider as a part of the negotiations if a loan modification is not agreed upon. The requirement for a certified copy of the original mortgage note, deed of trust, and each assignment of the deed of trust and each endorsement of the mortgage note is only satisfied when the mediator receives a statement under oath signed before a notary public which provides: (a) the name, address, capacity, and authority of the person making the certification; (b) the person making the cer-tification must be in actual possession of the original mortgage note, deed of trust, and each assignment of the mortgage note and deed of trust; and (c) the attached copies of the mort-gage note, deed of trust, and each assignment of the mortgage note and deed of trust must be true and correct copies of the originals in the possession of the person making the certi-fication; (d) the certification must contain the original signature of the certifying party and the original seal and signature of the notary public. Each certified document must contain a separate certification. In the event of the loss or destruction of the original mortgage note, deed of trust, or assignment of the mortgage note or deed of trust, the mediator will recog-nize a judicial order entered pursuant to Nev. Rev. Stat. § 104.3309 providing for the enforce-ment of a lost, destroyed, or stolen instrument.

Borrower: Must provide (a) a financial state-ment form; (b) a housing affordability form; and (c) a confidential proposal document to resolve the foreclosure.

Maine

Lender: Must provide borrower with loss mitigation application information, completed form with net present value inputs, copies of the mortgage note, the mortgage deed, and all assignments and endorsements of the mort-gage note and the mortgage deed or statement of why copies cannot be produced.

Borrower: Must complete lender’s financial application form or provide an explanation of why missing information could not be provided.

Maryland

Lender: Dept. of Labor, Licensing, and Regu-lation Real Property Law § 7-105 Rule .09 requires: the Final Loss Mitigation Affidavit, the borrower’s loss mitigation application, any documents relied on in performing loss mitigation analysis, summary of reasons for denial of loan modification or loss mitigation, relevant sections of investor guidelines if the denial of a loan modification or other loss mit-igation program was based on investor guide-lines, payment history, escrow activity history if applicable, property valuation documenta-tion, correspondence log of account activities from time of first contact with borrower after loan went into default, and contact informa-tion for representative.

Borrower: Signed federal tax returns for last two years, proof of income, budget and expenses, second lien status, and previous loan modification data if applicable.

Nevada

Lender: Under Nevada Supreme Court Fore-closure Mediation Rule 11, at least ten days prior to mediation lender must at a minimum provide: (a) the original or a certified copy of the deed of trust, the mortgage note, and each assignment of the deed of trust and each endorsement of the mortgage note; (b) the

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Borrower: Twenty days before session, must provide information on household income and other information required by HAMP.

Washington

Lender: Fifteen days before session, must pro-vide account status records (current loan bal-ance, itemized statement of arrearage, fees and charges, last twelve months payment history), copies of the note and deed of trust, proof of authority to foreclose, all borrower-related and mortgage-related input data used for any net present value analysis under HAMP or the FDIC calculation, any loss mitigation analysis applicable to federally insured loans, an expla-nation regarding any denial of a loss mitiga-tion option, the most recent appraisal, the portion of any pooling and servicing agree-ment alleged to restrict loan modifications, a statement detailing efforts to obtain waiver of such restriction, and the most recent available appraisal or other broker price opinion relied upon.

Borrower: Must provide documentation of all current and future income, debts and obliga-tions, and tax returns for the past two years.

New York

(County courts may set their own require-ments. Listed below are the requirements under state statute and rule.)

Lender: As recommended under N.Y. C.P.L.R. 3408 and Rules for New York Supreme Courts § 202.12-a (c), must provide the lender’s work-out application forms or packet, payment history, an itemization of cure and payoff amounts, copies of recent paperwork regard-ing reinstatement, settlement offers, and loan modifications, and the mortgage and note.

Borrower: As recommended under N.Y. C.P.L.R. 3408, must provide current income and expense documentation, tax return, docu-ments from previous workout attempts, settle-ment proposal, and property tax statement.

Ohio (Cuyahoga County)

Lender: Must provide completed lender ques-tionnaire, payment history, documentation of past settlement efforts, correspondence with borrower, and itemized reinstatement and payoff amounts.

Borrower: Must provide completed owner questionnaire, documentation including any lender-specific financial worksheet, a monthly budget, pay-stubs or proof of income for the two most recent and consecutive months, the last two months’ bank statements, the last two years’ tax returns, a hardship letter and a loss mitigation worksheet (based upon the Foreclo-sure Mediation Case Management Directive).

Vermont

Lender: Must provide documentation of con-sideration of all applicable loss mitigation options, including data used in and outcome of any HAMP-related net present value calcu-lation, and a copy of the pooling and servic-ing agreement if lender claims terms prohibit modification.

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1. Goldman Sachs Global ECS Research, Home Prices and Credit Losses: Projections and Policy Options 16 (Jan. 13, 2009). See also Credit Suisse Fixed Income Research, Foreclosure Update: Over 8 Million Foreclosures Expected 1 (Dec. 4, 2008).

2. Center for Responsible Lending, Lost Ground: Disparities in Mortgage Lending and Foreclosure (Nov. 2011).

3. Lender Processing Services, LPS Mortgage Monitor, November 2011 Mortgage Perfor-mance Observations (data as of October 2011).

4. Amherst Securities Group LP, Testimony of Laurie S. Goodman Before Subcomm. on Hous-ing, Transportation and Community Develop-ment, S. Comm. on Banking, Housing & Urban Affairs (Sept. 30, 2011).

5. National Consumer Law Center, State and Local Foreclosure Mediation Programs: Can They Save Homes? (September 2009) available at www .nclc.org/foreclosures-and-mortgages/ foreclosure-mediation-programs.html.

6. The 2010 and 2011 updates are available on the National Consumer Law Center website at www.nclc.org/foreclosures-and-mortgages/foreclosure-mediation-programs.html.

7. Links to all state laws are available on the National Consumer Law Center website, at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html.

8. Goldman Sachs Global ECS Research, Home Prices and Credit Losses: Projections and Policy Options 16 (Jan. 13, 2009). See also Credit Suisse Fixed Income Research, Foreclosure Update: Over 8 Million Foreclosures Expected 1 (Dec. 4, 2008).

9. Center for Responsible Lending, Lost Ground: Disparities in Mortgage Lending and Foreclosure (Nov. 2011).

10. Lender Processing Services, LPS Mortgage Monitor, November 2011 Mortgage Perfor-mance Observations (data as of October 2011).

11. Amherst Securities Group LP, Testimony of Laurie S. Goodman Before Subcomm. on Hous-ing, Transportation and Community Develop-ment, S. Comm. on Banking, Housing & Urban Affairs (Sept. 30, 2011).

endnoteS

12. National Consumer Law Center, State and Local Foreclosure Mediation Programs: Can They Save Homes? (Sept. 2009), available at www.nclc.org/foreclosures-and-mortgages/foreclosure-mediation-programs.html.

13. Office of Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report 32 (Third Quarter 2009).

14. Office of Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report 33 (First Quarter 2010). According to this OCC/OTS report, dur-ing the same period in 2008 lenders reduced payments by more than 20% in only 18.1% of the modifications.

15. Id. at 46.16. HAMP modifications have been making up

about one-third of all modifications. The OCC/OTS reports do not report a default rate only for all non-HAMP modifications. Instead, the reports include HAMP modifications with all non-HAMP modifications. Therefore, the actual redefault rate solely for non-HAMP modifications is likely higher than the figures given above reflect.

17. Office of Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report 31 (Second Quarter 2010); Office of Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report 33 (Second Quarter 2011).

18. See generally Diane Thompson, Foreclosing Modi-fications: How Servicer Incentives Discourage Loan Modifications, 86 Wash. L. Rev. 755 (Dec. 2011).

19. Government Accountability Office, Troubled Asset Relief Program Treasury Continues to Face Implementation Challenges and Data Weaknesses in its Making Home Affordable Program 31, GAO Report 11-288 (Mar. 2011)

20. Troubled Asset Relief Program Actions Needed by Treasury to Address Challenges in Implementing Making Home Affordable Pro-grams, United States Government Accountabil-ity Office Testimony Before the Subcomm. on Insurance, Housing and Community

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Now_servicers_modify.pdf.27. Paul Kiel, “Banks Modifying Tiny Percentage of

Mortgages in Need,” ProPublica, Nov. 22, 2010.28. Office of Comptroller of the Currency and

Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report 54, tbl. 49 (Third Quarter 2011); Office of Comptroller of the Cur-rency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report 53, tbl. 48 (Third Quarter 2010).

29. Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP, Quarterly Report to Congress 67 (Jan. 26, 2011).

30. Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP, Quarterly Report to Congress 163 (Oct. 26, 2010).

31. U.S. Treasury Dept., Making Home Affordable Program, Servicer Performance Report Through March 2010.

32. U.S. Treasury Dept., Making Home Affordable Program, Servicer Performance Report Through November 2011.

33. U.S. Department of the Treasury, Making Home Affordable Program, Servicer Performance Report Through March 2010, at 7.

34. Olga Pierce and Paul Kiel, “By the Numbers: A Revealing Look at the Mortgage Mod Melt-down,” ProPublica, Mar. 8, 2011.

35. Office of Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report 26 (Third Quarter 2011); Congressional Oversight Panel, April Oversight Report: Evaluating Progress on TARP Foreclosure Mitigation Programs 50–53 (Apr. 14, 2010).

36. Id. at 35.37. U.S. Department of the Treasury, Making Home

Affordable Program, Servicer Performance Report Through March 2010, at 7.

38. U.S. Department of the Treasury, Making Home Affordable Program, Servicer Performance Report Through September 2011.

39. United States Government Accountability Office, Troubled Asset Relief Program: Results of Housing Counselor Survey of Borrower Experiences in the HAMP Program GAO Report 11-367R (May 26, 2011); United States Government

Opportunity, H. Committee on Financial Ser-vices 13 (Mar. 2, 2011).

21. In the same testimony, the Government Accountability Office estimated that one-third of HAMP applicants were current in their pay-ments when they applied. It is possible that a survey of the results obtained only by home-owners who applied for HAMP while in fore-closure would show a smaller portion succeeding in obtaining modifications.

22. Olga Pierce and Paul Kiel, “By the Numbers: A Revealing Look at the Mortgage Mod Meltdown,” ProPublica, Mar. 8, 2011 (Based on servicers’ data, ProPublica estimates that through 2010 servicers responded in some way to 2.7 million borrowers seeking HAMP modifications. Ser-vicers denied 1.3 million requests outright without entering into trial plans. Servicers had cancelled another 700,000 trial plans.)

23. The Treasury Department reports that 883,076 loans were modified under HAMP through October 2011. U.S. Department of Treasury Making Home Affordable Program Report (Dec. 7, 2011). Assuming rates of new modifica-tions continue through 2012 at approximately the 25,000 per month rate at which they were modified during the latter half of 2011, 1.2 mil-lion permanent modifications appears to be a fair prediction of where the program will stand when it expires on December 31, 2012.

24. State Foreclosure Prevention Working Group, Memorandum on Loan Modification Perfor-mance (Aug. 2010) (consisting of representatives of twelve states’ attorneys general and Confer-ence of Bank Supervisors), available at www .coloradoattorneygeneral.gov/sites/default/files/SFPWG%20Report%205%20final.pdf.

25. According to HOPE NOW’s industry data, the number of proprietary mortgage modifications made in October 2011 was fifty-three. In Octo-ber 2010, the monthly total had been 100,850. HOPE NOW Industry Extrapolation and Metrics October 2010, October 2011.

26. Lender Processing Services, LPS Mortgage Monitor, November 2011 Mortgage Perfor-mance Observations (data as of October 2011); HOPE NOW November 2011 Data (Dec. 7, 2011), available at www.hopenow.com/news/Hope_

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in the HAMP Program GAO Report 11-367R at 8 (May 26, 2011); Congressional Oversight Panel, April Oversight Report: Evaluating Progress on TARP Foreclosure Mitigation Programs 54–57 (Apr. 14, 2010).

46. See Part IV, infra.47. United States Government Accountability

Office, GAO Report to Congressional Commit-tees, Troubled Asset Relief Program, Treasury Con-tinues to Face Implementation Challenges and Data Weaknesses in Its Making Home Affordable Program 31 (Mar. 2011) (GAO 11-288).

48. Paul Kiel and Olga Pierce, “Government’s Loan Mod Program Crippled by Lax Oversight and Deference to Bank,” ProPublica, Feb. 17, 2011.

49. Karen Weise, “When Denying Loan Mods, Loan Servicers Often Wrongly Blame Investors,” ProPublica July 23, 2010.

50. See National Consumer Law Center, Recent Developments in Foreclosure Mediation (Jan. 2011) (discussing recent trial court decisions from New York), available at www.nclc.org/ foreclosures-and-mortgages/foreclosure-mediation-programs.html.

51. Vt. Stat. Ann. tit. 12, § 4633(a )(5); Wash. Rev. Code § 61.24, et seq.; D.C. Code § 42-815 et seq.

52. See Part V. C. 4, infra. 53. Office of the Special Inspector General for the

Troubled Asset Relief Program, SIGTARP, Quarterly Report to Congress 163–77 (Oct. 27, 2011); Paul Kiel, “Secret Docs Show Foreclosure Watchdog Doesn’t Bark or Bite,” ProPublica, Oct. 4, 2011.

54. United States Government Accountability Office, GAO Report to Congressional Committees, Troubled Asset Relief Program, Results of Housing Counselors Survey on Borrowers Experience with the Home Affordable Modification Program 9 (May 26, 2011) (GAO 11-367R).

55. California Reinvestment Coalition, The Chasm Between Words and Deeds VI: HAMP Is Not Working (July 2010).

56. See, e.g., Bosque v. Wells Fargo, 762 F. Supp. 2d 342 (D. Mass. 2011); In re Bank of America Home Affordable Modification Litigation, 2011 WL 2637222 (D. Mass July 6, 2011); Koontz v. Wells Fargo, 2011 WL 1297519 (S.D. W. Va. Mar. 31, 2011).

57. The FHFA Servicing alignment initiative for

Accountability Office, GAO Report to Congres-sional Committees, Troubled Asset Relief Program, Treasury Continues to Face Implementation Chal-lenges and Data Weaknesses in Its Making Home Affordable Program (Mar. 2011) (GAO 11-288); United States Government Accountability Office, GAO Report to Congressional Commit-tees, Troubled Asset Relief Program, Further Action Needed to Fully and Equitably Implement Foreclosure Mitigation Program 14–28 (June 24, 2010) (GAO 10-634); Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP, Quarterly Report to Con-gress (Oct. 26, 2010); California Reinvestment Coalition, Race to the Bottom An Analysis of HAMP Modification Outcomes by Race and Eth-nicity for California (July 2011); California Rein-vestment Coalition, The Chasm Between Words and Deeds VI: HAMP Is Not Working (July 2010); Paul Kiel and Olga Pierce, “Homeowners Questionnaire Shows Banks Violating Govern-ment Program Rules,” ProPublica, Aug. 16, 2010.

40. See, e.g., California Reinvestment Coalition, The Chasm Between Words and Deeds VI: HAMP Is Not Working (July 2010); Olga Pierce and Paul Kiel, Loan Mod Program Left Homeown-ers’ Fate in Hands of Dysfunctional Industry, ProPublica, Feb. 17, 2011.

41. United States Government Accountability Office, GAO Report to Congressional Commit-tees, Troubled Asset Relief Program, Results of Housing Counselors Survey on Borrowers Experience with the Home Affordable Modification Program (May 26, 2011) (GAO 11-367R).

42. See Part V. C, infra and related web posting of court orders.

43. United States Government Accountability Office, GAO Report to Congressional Commit-tees, Troubled Asset Relief Program, Results of Housing Counselors Survey on Borrowers Experience with the Home Affordable Modification Program 8 (May 26, 2011) (GAO 11-367R).

44. Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP, Quar-terly Report to Congress 165 (Oct. 26, 2010).

45. United States Government Accountability Office, Troubled Asset Relief Program: Results of Housing Counselor Survey of Borrower Experiences

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Default Prevention (Reissued) 8–16 (Sept. 2, 2011); Freddie Mac, Bulletin No. 2011-11 (June 30, 2011).

79. Fannie Mae, Servicing Guide Announcement SVC-2011-08R, Delinquency Management and Default Prevention (Reissued) 16 (Sept. 2, 2011); Freddie Mac, Bulletin No. 2011-11, at 7 (June 30, 2011).

80. Fannie Mae, Servicing Guide Announcement SVC-2011-08R, Delinquency Management and Default Prevention (Reissued) 17–19 (Sept. 2, 2011); Freddie Mac, Bulletin No. 2011-16, at 5 (Sept. 12, 2011).

81. Fannie Mae, Servicing Guide Announcement SVC-2011-08R, Delinquency Management and Default Prevention (Reissued) 17–19 (Sept. 2, 2011).

82. Fannie Mae, Servicing Guide Announcement SVC-2011-18, Updates to Delinquency Manage-ment and Default Prevention Requirements (Oct. 26, 2011).

83. Fannie Mae, Servicing Guide Announcement SVC-2011-08R, Delinquency Management and Default Prevention (Reissued) 32 (Sept. 2, 2011); Fannie Mae, Servicing Guide Announcement SVC-2011-07, Updates to Foreclosure Time Frames and Imposition of Compensatory Fees (June 6, 2011).

84. The state specific time frames are listed on the GSE website at www.efanniemae.com/sf/guides/ssg/relatedservicinginfo/exhibits/index.jsp.

85. Press Release, Realty Trac, Foreclosure Activity on Slow Burn (Oct. 11, 2011), available at www .realtytrac.com/content/press-releases/third- quarter-and-september-2011-us-foreclosure-market-report-6880.

86. Id.87. Fannie Mae, Servicing Guide Announcement

SVC-2011-18, Updates to Delinquency Manage-ment and Default Prevention Requirements (Oct. 26, 2011); Fannie Mae, Servicing Guide Announcement SVC-2011-08R, Delinquency Management and Default Prevention (Reis-sued) 25 (Sept. 2, 2011); Freddie Mac, Bulletin No. 2011-16, at 5 (Sept. 12, 2011); Freddie Mac, Single Family Seller/Servicer Guide, Exhibit 83A: Determining State Foreclosure Time Line Performance Compensatory Fees (Oct. 1, 2011).

88. Loan Workout Hierarchy for Fannie Mae Con-ventional Loans, available at www.efanniemae

Fannie Mae and Freddie Mac is discussed in more detail in Part IV, infra.

58. Office of Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report (FirstQuarter 2010).

59. The Reinvestment Fund, Philadelphia Residen-tial Mortgage Foreclosure Diversion Program: Initial Report and Findings (June 2011), available at www.trfund.com/resource/downloads/ policypubs/Foreclosure_Diversion_Initial_Report.pdf.

60. Id. at 1.61. Id. at 7.62. Id. at 9.63. Id.64. Id. at 9–10.65. Id. at 11.66. Id. at 12.67. Id. at 13–14.68. Id. at 15.69. Id. at 17–20.70. Urban Institute, Neil Mayer, Peter A. Tatian, et

al., National Foreclosure Mitigation Counseling Program Evaluation: Preliminary Analysis of Pro-gram Effects (Sept. 2010 update).

71. Id. pp. 34-35. 72. Id. at 38.73. Id. at 42.74. Id. at 43.75. Id. at 46.76. New Release, Federal Housing Finance

Agency, Fannie Mae and Freddie Mac to Align Guidelines for Servicing Delinquent Mortgages (April 28, 2011), available at www.fhfa.gov/ webfiles/21190/SAI42811.pdf; New Release, Federal Housing Finance Agency, Fannie Mae and Freddie Mac to Align Guidelines for Ser-vicing Delinquent Mortgages, Frequently Asked Questions (Apr. 28, 2011), available at www.fhfa .gov/webfiles/21191/FAQs42811Final.pdf.

77. Fannie Mae, Servicing Guide Announcement SVC-2011-08R, Delinquency Management and Default Prevention (Reissued) (Sept. 2, 2011); Freddie Mac, Bulletin No. 2011-16 (Sept. 12, 2011); Freddie Mac, Bulletin No. 2011-11 (June 30, 2011).

78. Fannie Mae, Servicing Guide Announcement SVC-2011-08R, Delinquency Management and

http://www.nclc.org

http://www.efanniemae.com/sf/guides/ssg/relatedservicinginfo/exhibits/index.jsp

http://www.efanniemae.com/sf/guides/ssg/relatedservicinginfo/exhibits/index.jsp

http://www.realtytrac.com/content/press-releases/third-quarter-and-september-2011-us-foreclosure-market-report-6880




http://www.efanniemae.com/sf/servicing/pdf/loanworkoutfactsheet .pdf#nameddest=Modification

http://www.trfund.com/resource/downloads/policypubs/Foreclosure_Diversion_Initial_Report.pdf



http://www.fhfa.gov/webfiles/21190/SAI42811.pdf

http://www.fhfa.gov/webfiles/21190/SAI42811.pdf

http://www.fhfa.gov/webfiles/21191/FAQs42811Final.pdf

http://www.fhfa.gov/webfiles/21191/FAQs42811Final.pdf


P.3d ___, 2011 WL 6268239 (Nev. Dec. 15, 2011) (sanctions order cannot bar lender from com-mencement of new foreclosure by issuing new notice of default after withdrawing prior notice).

110. Id. at *4.111. Upon violation of the statutory mediation

requirements, “[t]he court may issue an order imposing such sanctions against the benefi-ciary of the deed of trust or the representative as the court determines appropriate, includ-ing, without limitation, requiring a loan mod-ification in the manner determined proper by the court.” Nev. Rev. Stat. § 107.086(5).

112. Renslow v. Wells Fargo Bank, Appeal No. 58283 (filed May 5, 2011) (appeal of Washoe County District Court Order Mar. 29, 2011 Flanagan J.).

113. Penn Central Transportation Co. v. New York City, 438 U.S. 104, 124 (1978) (takings clause); Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934) (contracts clause).

114. Copies of the orders from Connecticut trial courts are available on the National Consumer Law Center website at www.nclc.org/foreclosures- and-mortgages/foreclosure-mediation- programs.html.

115. Copies of two redacted orders from Indiana trial courts incorporating these terms are available on the National Consumer Law Cen-ter website at www.nclc.org/foreclosures-and-mortgages/foreclosure-mediation- programs.html.

116. Me. Rev. Stat. tit. 14, § 6321-A(12).117. Me. R. Civ. P. 93(j).118. Id.119. JP Morgan Chase v. Bouchles, Docket No.

Re-11-031 (Androscoggin Dist. Ct. Oct. 26, 2011) (order on mediator’s report of noncompliance).

120. Citimortgage, Inc. v. Dente, No. Biddc Re-10-215 (York Dist. Ct. May 19, 2011) (order).

121. HSBC Bank USA v. Bowie, No. Re-09-080 (York Dist. Ct. Feb. 10, 2011) (order).

122. JP Morgan Chase v. Bouchles, Docket No. Re-11-031 (Androscoggin Dist. Ct. Oct. 26, 2011) (order on mediator’s report of noncom-pliance) (tolling of interest and fees for period between mediation sessions); Bank of New

.com/sf/servicing/pdf/loanworkoutfactsheet

.pdf#nameddest=Modification.89. Fannie Mae, Servicing Guide Announcement

SVC-2011-18, Updates to Delinquency Manage-ment and Default Prevention Requirements 2 (Oct. 26, 2011); Freddie Mac Bulletin 2011–17 (Sept. 30, 2011).

90. See National Consumer Law Center, Recent Developments in Foreclosure Mediation (Jan. 2011), Appendix. Available at www.nclc.org/foreclosures-and-mortgages/foreclosure-mediation-programs.html.

91. Fannie Mae, Servicing Guide Announcement SVC-2011-08R, Delinquency Management and Default Prevention (Reissued) Frequently Asked Questions No. 45 (Sept. 28, 2011).

92. Nev. Rev. Stat § 107.086.93. Nev. Rev. Stat. § 107.080.94. Id.95. Id.96. Nev. Rev. Stat. § 107.086(2)(a)(3).97. Nev. Rev. Stat. § 107.086(4).98. Id.99. Pasillas v. HSBC Bank USA, 255 P.3d 1281

(Nev. 2011); Leyva v. National Default Servicing Corp., 255 P.3d 1275 (Nev. 2011).

100. Pasillas v. HSBC Bank USA, 255 P.3d 1281, 1283 (Nev. 2011).

101. Leyva v. National Default Servicing Corp., 255 P.3d 1275, 1277 (Nev. 2011).

102. Pasillas, 255 P.3d at 1281; Leyva, 255 P.3d at 1287.

103. Leyva, 255 P.3d at 1279.104. Leyva, 255 P.3d at 1281.105. Pasillas, 255 P.3d at 1286 (referencing Nev. Rev.

Stat. § 107.086(5)). 106. Nev. Rev. Stat. § 107.086(5).107. Heredia-Bonnet v. First Am. Loanstar Trustee

Services, L.L.C., 2011 WL 5006303, at *1 (Nev. Oct. 18, 2011) (sanctions imposed for failure to pro-duce deed of trust and assignment; court states “a violation of one of the four statutory require-ments must be sanctioned”); Malloy v. Wells Fargo Bank, 2011 WL 5009421 (Nev. Oct. 18, 2011) (same; failure to produce certified copy of mortgage note and failure to provide appraisal).

108. Pasillas, 255 P.3d at 1287.109. Holt v. Regional Trustee Services Corp., ___

http://www.nclc.org













09 FC (Franklin Sup. Ct. Aug. 17, 2011) (Mello J.). 129. Citibank, N.A. v. Mumley, Docket No. S 1087-

09 CnC (Chittenden Sup. Ct. Sept. 1, 2011) (Toor, J) (ruling on motion to vacate judgment and on motion for sanctions).

130. Vermont. Stat. Ann. tit. 12, §§ 4635(b), 4634(b)(6). 131. Wash. H.B. 1362 (2011).132. Referencing Wash. Rev. Code § 61.24.030(7)(a).133. Me. Rev. Stat. tit. 14, §§ 6321, 6321-A.134. 2010 Vt. H.B. 590, amending Vt. R. Civ. P. 80.1.135. Administrative Order No. 548-10, modified

March 2011 Admin Order No. 431-11, available at www.nycourts.gov/attorneys/pdfs/ AdminOrder_2010_10_20.pdf.

136. Nev. Rev. Stat. § 107.086.137. Nevada Supreme Court Mediation Rule 11.4.138. U.C.C. § 3-309.139. Nevada Supreme Court Mediation Rule 11.5.140. Pasillas v. HSBC Bank USA , 255 P.3d 1281

(Nev. 2011); Leyva v. National Default Servicing Corp., 255 P.3d 1275 (Nev. 2011).

141. Nevada A.B. 284 (2011).142. CoreLogic, New Corelogic Data Reveals Q2

Negative Equity Declines in Hardest Hit Mar-kets and 8 Million Negative Equity Borrowers Have Above Market Rates (Sept. 13, 2011).

143. Id.144. Alan M. White, Deleveraging the American

Homeowner: The Failure of 2008 Voluntary Mort-gage Contract Modifications, 41 Conn. L. Rev. 1107 (2009).

145. American Association of Mortgage Investors, White Paper, The Future of the Housing Mar-ket for Consumers After the Housing Crisis: Remedies to Restore and Stabilize America’s Mortgage and Housing Markets (Jan. 2011) available at http://the-ami.com/wp-content/uploads/2011/01/AMI_State_AG_Investigation_ Remedy_Recommendations_Jan_2011.pdf.

146. A property that is “Real Estate Owned” by the investor once foreclosure has been completed carries a recognized depreciated value.

147. Joint Economic Committee, Special Report, Sheltering Neighborhoods from the Subprime Foreclosure Storm (Apr. 2007); Urban Institute, Center on Metropolitan Housing and Com-munities: a Primer, G. Thomas Kingsley, Robin E. Smith, and David Price, The Impact

York Mellon v. Barden, No. Re 10-384 (Cum-berland Dist. Ct. Apr. 2, 2011) (order on report of noncompliance) (tolling of interest, costs and fees from date of receipt of complete loan modification packet five months earlier and continuing to final mediation report); Chase Home Finance, L.L.C. v. Sargent, No. RE-09-79 (York Dist. Ct. May 5, 2011) (order on defen-dant’s motion for sanctions) (tolling of inter-est, costs and fees from date of first session to submission of final report, attorney fees and lost wages of debtor to be paid by lender).

123. National Consumer Law Center, Recent Devel-opments in Foreclosure Mediation (January 2011) available at www.nclc.org/foreclosures-and-mortgages/foreclosure-mediation-programs .html.

124. Wells Fargo Bank, NA v. Myers, 913 N.Y.S.2d 500 (N.Y. Sup. Ct. 2010) (ordering conversion of trial plan to permanent modification); Emigrant Mortgage Co., Inc. v. Corcione, 900 N.Y.S.2d 608 (N.Y Sup. Ct. 2010) ($100,000 penalty and barring accrual of interest and fees for past period of bad faith negotiations); Wells Fargo Bank, N.A. v. Hughes, 897 N.Y.S.2d 605 (N.Y. Sup. Ct. 2010) (dismissing foreclosure action); BAC Home Loan Servicing v. Westervelt, 2010 WL 4702276 (N.Y. Sup. Ct. Nov. 18, 2010) (toll-ing of interest and costs).

125. U.S. Bank v. Bunyaka, No. 13110P/09 (Rich-mond Cty. Supreme Court May 31, 2011) (directing lender to make personal appear-ance to explain delay in modification deci-sion), subsequent decision (June 10, 2011) (tolling interest); Citimortage v. Mendez, No. 102157/08 (Richmond Cty. Supreme Court Dec. 6, 2011) (directing lender personal appearance), copy of decision/order available on the National Consumer Law Center’s fore-closure mediation website at www.nclc.org.

126. No. 31466/2009 (N.Y. Sup. Ct. Queens Cty. Oct. 31, 2011) (decision/order); Culley A.J.S.C., copy of decision/order available on the National Consumer Law Center’s website at www.nclc .org/foreclosures-and-mortgages/foreclosure- mediation-programs.html.

127. N.Y. C.P.L.R. 3408 (McKinney).128. LaSalle Bank Nat’l Ass’n v. Delaney, No. S 452-

http://www.nclc.org

http://www.nycourts.gov/attorneys/pdfs/AdminOrder_2010_10_20.pdf

http://www.nycourts.gov/attorneys/pdfs/AdminOrder_2010_10_20.pdf

http://the-ami.com/wp-content/uploads/2011/01/AMI_State_AG_Investigation_Remedy_Recommendations_Jan_2011.pdf










158. RealtyTrac, Foreclosure Activity on Slow Burn (Oct. 11, 2011). For the third quarter of 2011, RealtyTrac lists the ten states with the longest foreclosure time frames as: New York (986 days), New Jersey (974 days), Florida (749 days), Maryland (594 days), Connecticut (584 days), Pennsylvania (535 days), Illinois (527 days), Massachusetts (517 days), New Mexico (472 days), and Ohio (458 days). States with the shortest foreclosure times were Texas (86 days), Kentucky (94 days), and Virginia (102 days).

159. RealtyTrac, Foreclosure Activity on Slow Burn (Oct. 11, 2011).

160. Lender Processing Services, LPS Mortgage Monitor, October 2011 Mortgage Performance Observations (data as of September 2011).

161. Supreme Court of Florida, Final Report and Recommendations on Residential Mortgage Foreclosure Cases Admin Order AOSC 09-54, at 1 (Dec. 28, 2009).

162. “Slow Start to Florida’s Foreclosure Mediation,” Miami Herald, April 27, 2011.

163. Discussed in Part III, supra.164. N.Y. C.P.L.R. § 3408 (McKinney).165. N.Y. C.P.L.R. § 3408(d); N.Y. Uniform Rule

202.12-a.166. See survey of filings outlined in complaint in

Cole et al. v. Baum, No. CV-11-3779 (E.D.N.Y. 2011).

167. Cole et al. v. Baum, No. CV-11-3779 (E.D.N.Y. 2011).

168. Links to all state laws are available on the National Consumer Law Center’s website at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html.

169. See Appendix A, attached (discussing Florida Supreme Court action terminating state’s mandatory foreclosure mediation program).

170. Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP, Quar-terly Report to Congress 163 (Oct. 26, 2010).

171. Paul Kiel, “Even After Mortgage Modification, Shoddy Bank Practices Hurt Homeowners,” ProPublica, June 2, 2011.

172. Government Accountability Office, Troubled Asset Relief Program, Actions Needed by Treasury to Address Challenges in Implementing Making Home Affordable Programs, Testimony

of Foreclosure on Families and Communities: A Primer (July 2009).

148. California Reinvestment Coalition, Home Wreckers: How Wall Street Foreclosures re Devas-tating Communities (2011).

149. Florida, Hawaii, Indiana, Maine, Maryland, Nevada, Vermont, and Washington.

150. Vt. Stat. Ann. tit. 12, § 4637 .151. A distinct but related issue involves shifting

of the lender’s mediation-related attorney fees to the borrower. These fees need to be scruti-nized carefully, as courts should not permit attorney fees shifting related to lender-caused continuances. The better approach, as expressly codified under the New York and Vermont laws, is to explicitly bar lenders from any attorney fees shifting related to their par-ticipation in conferences or mediation.

152. Nabanita Pal, Brennan Center for Justice, Fac-ing Foreclosure Alone, The Continuing Crisis in Legal Representation (Nov. 4, 2011); Melanca Clark and Maggie Barron, Brennan Center for Justice, Foreclosures: A Crisis in Legal Repre-sentation (Oct. 6, 2009).

153. See Part III. B, supra.154. State of New York Unified Court System, 2011

Report of the Chief Administrator of the Courts, Pursuant to Chapter 507 of the Laws of 2009, at 4.

155. Based on 3,016 conferences held from January 2011 through November 2011, at which borrow-ers appeared with counsel for 2,561 of the con-ferences. Information provided by Jane Lincoln of the Richmond Supreme Court Nov. 30, 2011.

156. See Nabanita Pal, Brennan Center for Justice, Facing Foreclosure Alone, The Continuing Crisis in Legal Representation (Nov. 4, 2011); Melanca Clark and Maggie Barron, Brennan Center for Justice, Foreclosures: A Crisis in Legal Representation (Oct. 6, 2009).

157. RealtyTrac, U.S. Foreclosure Activity Hits 7-Month High in October 2011 (Nov. 9, 2011) (“[R]ecent state court rulings and new state laws keep changing the rules of the foreclo-sure game on the fly, creating more uncer-tainty in the housing market and threatening to prolong the road to a robust real estate recovery.”).

http://www.nclc.org




Lost Ground, 2011 Disparities in Mortgage Lend-ing and Foreclosures (Nov. 2011).

180. See Part III. A, supra (discussing Philadelphia Diversion Program).

181. In re Final Report and Recommendations of the Task Force on Residential Mortgage Fore-closure Cases, AOSC09-54 (Dec. 28, 2009).

182. The courts’ data did not record settlements reached before and after mediation sessions, perhaps leaving the official settlement rates unduly low.

183. In re Assessment Workgroup for the Managed Mediation Program for Residential Mortgage Foreclosure Cases, AOSC11-33 (Sept. 26, 2011).

184. In re Managed Mediation Program for Resi-dential Mortgage Foreclosure Cases No. AOSC11-44 (Dec. 19, 2011).

185. William D. Palmer, Chair Assessment Work-group for the Managed Mediation Program for Residential Mortgage Foreclosure Cases Report to Florida Supreme Court 4 (Oct. 21, 2011).

Before Subcommittee on Insurance, Housing, and Community Opportunity, H. Committee on Finan-cial Affairs (Mar. 2, 2011).

173. Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Quarterly report to Congress 169 (October 26, 2010).

174. See Part IV, supra.175. Joint Center for Housing Studies of Harvard

University, The State of the Nation’s Housing 2011, at 27 (2011).

176. Id at 28.177. Id. at 19.178. Debbie Gruenstein Bocian, Wei Li, Carolina

Reid, Center for Responsible Lending, Lost Ground, 2011 Disparities in Mortgage Lending and Foreclosures 4 (Nov. 2011).

179. California Reinvestment Coalition, Race to the Bottom: An Analysis of HAMP Modification Out-comes by Race and Ethnicity for California (July 2011); Debbie Gruenstein Bocian, Wei Li, Caro-lina Reid, Center for Responsible Lending,

http://www.nclc.org

Washington Office:1001 Connecticut Ave, NWSuite 510Washington, DC, 20036Phone: 202/452-6252Fax: 202/463-9462


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in the Marketplace for All

Boston Headquarters:7 Winthrop SquareBoston, MA 02110-1245Phone: 617/542-8010Fax: 617/542-8028www.nclc.org

http://www.nclc.org

J U N E 2 8 , 2 0 1 2

Home Affordable Modification Program (HAMP) and National Foreclosure Settlement Updates

HAMP - Authority 2

Servicers participate for the loans they own and for the loans they service on behalf of investors

Voluntarily signed Servicer Participation Agreements: http://www.treasury.gov/initiatives/financial-stability/housing-programs/mha/Pages/default.aspx

TARP Bailout $ after 4/17/09

Servicers that service GSE loans (Fannie Mae, Freddie Mac, VA, RD, FHA)

Must Comply with all Supplemental Directives

MHA Handbook 3.4 = Compilation of Supplemental Directives

http://www.treasury.gov/initiatives/financial-stability/housing-programs/mha/Pages/default.aspx





HAMP – Overview 3

What makes more sense for the investor: modification or foreclosure? Net Present Value (NPV test) – if pass, must modify

Borrowers, Servicers, and Investors earn small incentive

payments/principal reductions for successful HAMP modifications No payments for Trial Period Plan (TPP) payments Borrowers earn $1000 per year for first 5 years if current on

payments (HAMP Tier 1 only)

Recently extended through December 31, 2013 (first TPP payment must be before this date)

HAMP Tier 1– What Kind of Modification? 4

Capitalize all that’s accrued (except for late fees) to determine unpaid principal balance

PITIA (principal, interest, taxes, insurance, and association fees) reduced to equal 31% of the borrowers’ monthly gross income

Fixed for first 5 years

After first 5-year period, steps up 1% per year until it hits the Freddie Mac rate at the time of modification (currently 3.66%)

Late fees (that normally go to servicer) must be waived

Must not require a release or modification fee

Must escrow for taxes and insurance

HAMP Tier 1 - What Kind of Modification? 5

Standard Waterfall: 1. Lower interest rate by .125% to as low as 2% 2. Extend term up to 480 months (ex: 2051) 3. Non-interest bearing principal forbearance (balloon payment) –

up to the greater of (1) 30% of the UPB or (2) point where loan to value (LTV) = 100%

Principal Reduction Alternative (where LTV > 115%): 1. Forgive principal to the greater of 115% LTV or when new

PITIA=31%, then standard waterfall a. If reduction <5% of UPB, then standard waterfall b. If reduction >=5%, then waterfall steps are more flexible

2. Forgiveness is earned over the next three years 3. “Encouraged” to offer if worth more than std HAMP mod –

servicers also now receives additional incentives

HAMP Tier 1 Eligibility - Overview 6

1. Unpaid principal balance must be equal to or less than $729,750 (more for 2, 3 & 4 units)

2. Owner-occupied (1 t0 4 units)

3. Loan originated prior to 1/1/09

4. Servicer must be participating (incl. subs) or loan is owned/guaranteed by a GSE

5. Hardship (liberally defined) leading to default

6. Current PITIA (principal, interest, taxes, insurance & association fees) is more than 31% of gross monthly income

Evaluating Eligibility 7

Servicer Participation?

http://www.makinghomeaffordable.gov/contact_servicer.html

http://www.treasury.gov/initiatives/financial-stability/programs/housing-programs/mha/Pages/default.aspx

Google search any potential subsidiaries

Fannie Mae or Freddie Mac loan?

http://www.fanniemae.com/loanlookup/

https://ww3.freddiemac.com/corporate/

FHA/VA/RHS – check loan app/HUD-1

Hardship = cause of default or “imminent” default

Foreclosure = hardship

If meet basic eligibility, must evaluate for HAMP







http://www.fanniemae.com/loanlookup/

https://ww3.freddiemac.com/corporate/

Evaluating Eligibility - Income 8

“Gross Monthly Income” (MHA Handbook 3.4, § 5) Pre-tax employment wages

2 paystubs no older than 90 days ( with YTD income) Overtime/bonuses – should generally not be included in income unless likely to

continue Net profits for self-employed

Profit & Loss statements for most recent quarter or YTD Need not be prepared by a CPA

“Net income only” or non-taxable benefits (e.g., Social Security, food stamps) Gross up by 125% (benefit amount x 1.25) Provide benefit letter plus 2 recent bank statements

Rent: canceled checks, lease, Schedule E 75% of monthly rent for in-house renters 75% of rent less PITIA for other rental property

Passive Income E.g., rental, part-time employment, bonuses/tips, benefit income If less than 20% of total income, does not need to be documented

Income – Optional Sources 9

Optional Income Sources: Child Support

Alimony / Separation Maintenance

Non-borrower household income

Spouses – letter indicating that 100% of their income goes towards household expenses

All income will go towards gross income

Children, Parents, Non-borrower household members – contribution letter stating % of contribution

Only contribution is treated as gross income

Credit Authorization may be required for all non-borrowers

Consider how optional income will affect borrower’s eligibility; NPV result; 31% payment amount

Timeline – Income Documents 10

Initial Packet = HAMP Request for Mortgage Assistance (RMA); IRS form 4506T; proof of income; Dodd-Frank Certification (now included in RMA) Fannie & Freddie loans – substitute UBAF (form 710) for RMA

Servicers must acknowledge receipt of initial packet in writing within 10 business days

HAMP only requires that documents be current w/in 90 days of submission

Within 30 calendar days, servicers must provide: 1. Notification that packet is incomplete, and allow at least 30

calendar days for borrower to submit missing docs; 2. HAMP Trial Period Plan (TPP); OR 3. Non-Approval Notice with list of NPV Inputs & Values

Eligibility – Income Example 11

What’s the gross monthly income?

$600/week in gross wages 600 x 52 / 12 = $2600/month

$1000/month in rent for attached apartment 1000 x 75% = $750/month

$200/week in child support (optional income) 200 x 52/12 = 866 x 1.25 = $1,082.50/month

$4432.50 or $3350 = gross monthly income

$1374.08 or $1038.50 = 31%

*Do Not assume that servicers get this right! June 18, 2012 SIGTARP report found servicer errors in calculating

borrower gross monthly income, leading to improper HAMP denials

Income – Is There Enough? 12

Ex: UPB = $400K. House is worth $300K. Income is $4000/month. Prop taxes + ins. = $700/month

__________________________________________

Best possible modification: 2%, 40 years, $120K forbearance ($280K int. bearing principal). What’s the payment?

Using amortization calculator at: http://www.bretwhissel.net/amortization/amortize.html

Monthly payment = $847.91

If you add that to escrow, does it reach 31%?

$847.91 + $700 escrow = $1,547.91

31% of $4,000 = $1,240

CONCLUSION = Negative NPV Test (i.e., not enough income for HAMP)

http://www.bretwhissel.net/amortization/amortize.html

NPV – Too Little Income 13

Not valid reasons for denial “Too little income”

“Deficit”

“Expenses are too high”

Valid reasons Negative NPV test”

“Excessive forbearance”

Make sure this is calculated correctly; some servicers use “lesser” of (1) 30% of UPB or (2) amount needed to reach 100% LTV

Considerations Is “excessive forbearance” due to servicer delay?

Can you include income that had been excluded?

Is there any way to reduce the UPB (e.g., contributing client savings)?

NPV Test – Enough Income v. Too Much Equity

14

Net Present Value of modification at 31% v. Net Present Value of foreclosure If NPV of modification exceeds NPV of foreclosure, servicers must start a TPP

Unless there’s an investor restriction that can be documented by production of the Pooling & Servicing Agreement

Servicers are required to make reasonable efforts to get investors to waive restrictions

Includes variables like: Likelihood of re-default (credit score + other debt) Months until property is liquidated REO discount Fair market value of property

NPV inputs should be made available Review carefully, especially income Recent SIGTARP report shows servicers get NPV inputs wrong

In sample of 149 denied HAMP apps, in 19% of cases inputs were entered incorrectly or servicer could not provide documentation to support the inputs

NPV Test – Challenging Fair Market Value 15

Homeowners are entitled to learn the home value used in the NPV test

FMV can be challenged by presenting estimate and a reasonable basis for that estimate w/in 30 days Tax assessment

Recent appraisal

Comparables

If the new value results in a positive NPV, servicer must offer opportunity for an appraisal Borrower must pay $200 towards appraisal cost

If appraisal leads to positive NPV = HAMP TPP offer

NPV Calculator 16

Borrower NPV calculator available at: www.checkmynpv.com

Requesting NPV inputs from servicer prior to mediation allows mediator to use online NPV to determine whether defendant qualifies for HAMP TPP

Also allows mediators to change inputs challenged by borrowers at mediation (or change discretionary income) and determine whether the change results in a modification

http://www.checkmynpv.com/

Trial Period Plan (TPP) 17

Three-month TPP

Permanent modifications must be modified as of the Effective Date (1st day of 1st month after three-month TPP), with interim payments rolled into a non-interest bearing balloon

No longer an agreement; Borrower just receives letter & pays

Payments are timely if made within the month in which they are due (e.g., March 1 payment is timely if made by March 31)

Borrower can decline TPP w/out prejudice to future HAMP application

Borrower cannot fail to make timely payments under TPP w/0ut prejudice

Borrower’s credit will take a hit during the TPP

For “delayed conversions,” borrower must be put in same position as if conversion were timely

HAMP Tier 2 – Effective 6/1/12 18

New loan modification program available to borrowers who are not eligible for HAMP Tier 1

Idea is to expand the number of borrowers who qualify for a loan modification

Certain servicers have reported a delay in full implementation to Treasury:

Bank of America 10/15/2012 J. P. Morgan Chase 8/31/2012 GMAC 7/10/2012 Green Tree Servicing 7/22/2012

HAMP Tier 2 Does not apply to Fannie Mae or Freddie Mac loans b/c GSE’s already have similar “standard” modifications

HAMP Tier 2 Eligibility 19

Borrower must meet basic eligibility criteria, plus: Borrower does not qualify for HAMP Tier 1 modification b/c

Debt-t0-income ratio is already under 31%, or Excessive forbearance, or NPV failed

OR Borrower defaulted on HAMP Tier 1 TPP

OR Borrower defaulted on HAMP Tier 1 permanent mod and

Change of circumstances, or At least 12 months since HAMP Tier 1 mod effective date

OR Property does not qualify for HAMP Tier 1 b/c not owner-occupied

But, remember these properties don’t qualify for mediation by statute

HAMP Tier 2 – What Kind of Modification? 20

Tier 2 Waterfall Capitalize accrued interest, escrow, and fees

Fix interest rate at Freddie Mac Rate (rounded to nearest .125%) + .5%

Available on Freddie Mac’s website

Currently, Freddie Mac rate + .5% = 4.125%

Extend term by 480 months and reamortize

If Loan-to-Value (LTV) is > 115% forbear the lesser of:

30% of the modified unpaid principal balance, OR

Amount needed to bring LTV to 115%

Post-modification DTI must be between 25% and 42% (not the standard 31% for HAMP Tier 1)

Post modification Principal & Interest payment must be reduced by at least 10%

HAMP Tier 2 – What Kind of Modification? 21

Principal Reduction Alternative

Servicer must run the alternative NPV test, substituting principal forgiveness for principal forbearance

Incentives are available for principal reduction down to 105% of LTV

But, principal forgiveness is not required under Tier 2

Incentive payments are not available to borrowers in HAMP Tier 2

HAMP Tier 2 NPV & Denial Notices 22

If borrower passes Tier 2 NPV, servicer must offer borrower a Tier 2 TPP

If borrower is NPV negative for Tier 2, servicer may: deny for HAMP Tier 2, OR

offer HAMP Tier 2 TPP subject to investor approval

If servicer denies for HAMP Tier 2 must send notice

Tier 2 denial reasons: Insufficient Monthly Payment Reduction

Post-Modification DTI Outside of Acceptable Range (25%-42%)

Failed NPV (NPV inputs must be provided)

Interplay between HAMP Tier 1 & HAMP Tier 2

23

If borrower is denied for Tier 1 TPP, servicer may:

Automatically solicit and review for HAMP Tier 2; OR

Send a Tier 1 denial notice and offer to review for Tier 2 at borrower request

A loan may only be modified once under Tier 1 and once under Tier 2

A borrower who rejects either Tier 1 or Tier 2 HAMP mod cannot be considered for another HAMP mod of that loan unless there is change of circumstances

Common HAMP Violations 24

Steering borrowers to non-HAMP loan modifications or forbearance plans

Late Fees, Modification Fees, Continued Accrual of High Rates of Interest

Higher monthly payments

No $5K of incentive payments

Waiver of defenses/claims

Higher re-default rates

Data for 2d quarter of 2011 showed HAMP re-default rate of 17.3% v. in-house re-default rate of 31.4% (NCLC Report)

Miscalculating income so that the TPP payment is inaccurate

Erroneously denying on the basis that “Investor is not participating” in HAMP

Claiming homeowner failed to provide documents

Failure to complete review within 30 days of receiving complete packet

Failure to convert TPP to permanent HAMP loan mod or breach of TPP or permanent HAMP modification agreements

Escalations 25

Fannie Mae 1-800-7FANNIE [email protected]

Freddie Mac 1-800-FREDDIE [email protected]

HAMP Solution Center 1-866-939-4469 [email protected]

Supply the following information: Homeowner Name Property Address Servicer Name & Loan Number Foreclosure Sale Date (if applicable) Nature of problem or inquiry Advocate Name/Relationship to Homeowner

Expect 2-3 week turnaround

mailto:[email protected]?Subject=Counselor Escalation

mailto:[email protected]?Subject=Counselor Escalation

mailto:[email protected]

Resources – HAMP (non-GSE) 26

MHA Handbook v. 3.4

Supplemental Directive 12-02 MHA Expansion (effective June 1, 2012)

Index – sorted by topic

Borrower Package: 4506-T + RMA + Income docs

Trial Period Plan Letter

Permanent Agreement

www.hmpadmin.com

http://www.hmpadmin.com/

Authority – GSE Loans 27

Fannie Mae and Freddie Mac have separate requirements which they enforce as investors

GSE loans are subject to HAMP, regardless of the servicer E.g., no Vermont banks or credit unions participate in HAMP, but

some retain servicing rights to loans they sell to Fannie Mae or Freddie Mac

Check Fannie/Freddie loan look up tools online to determine whether loan is GSE

Note that Fannie/Freddie now require the Uniform Borrower Assistance Form (UBAF) in lieu of the HAMP Request for Mortgage Assistance (RMA) form

Fannie Mae / Freddie Mac Rules 28

Similar but not the same as the non-GSE rules

More specific than the non-GSE rules and more likely to use servicer “must/shall” than “may/should”

Some of the larger policy issues – e.g., how to handle borrowers in bankruptcy, borrowers on unemployment – are where the GSEs diverge from Treasury guidance

Fannie/Freddie “Standard” Modifications 29

Similar to HAMP Tier 2

Fixed rate near current market rate

Term extended 480 months

Principal forbearance if LTV > 115%

Mod must result in principal & interest payment decrease of at least 10%

Different than HAMP Tier 2 b/c post-mod DTI can be anywhere between 10% and 55%

Servicers of Fannie/Freddie loans must consider for HAMP Tier 1 first, then standard modification

Fannie / Freddie Resources 30

Fannie Mae https://www.efanniemae.com/sf/guides/ssg/

Single Family Servicing Guide

Freddie Mac

http://www.freddiemac.com/singlefamily/

Single-Family Seller/Servicer Guide

Bulletins that provide updated guidance

Use Internet Explorer

https://www.efanniemae.com/sf/guides/ssg/

http://www.freddiemac.com/singlefamily/

Second Mortgages – HAMP 2MP 31

If the first mortgage is modified under HAMP Tier 1 or 2 and servicer of second mortgage participates in 2MP http://www.makinghomeaffordable.gov/contact_servicer.html

second mortgage should be automatically modified or extinguished if client is current

If second mortgage is delinquent, it should be modified subject to a TPP or extinguished


National Foreclosure Settlement 32

Consent order entered April 4, 2012 between 49 State AGs & DOJ and the “Big 5” Bank of America

Citimortgage

GMAC

JP Morgan Chase

Wells Fargo

Total settlement amount was $25 billion Direct assistance to borrowers

Payments to States

Non-monetary relief in form of loan servicing standards


Direct Assistance to Borrowers:

$17 billion in loan modifications (including principal reductions)

$3 billion in refinancing for borrowers who are current but under water

$1.5 billion in direct payments to borrowers whose homes have been foreclosed


$17 billion in loan mods

60% must include principal reduction

Must be completed within three years; 75% must be completed within 2 years

Incentives for mods offered in the first year of settlement

Does not apply to Fannie/Freddie loans

Only required for loans held by the “Big 5” not investor owned

But, some servicers, such as Bank of America, are extending the mods to investor owned loans


Servicing Standards Prohibits robo-signing/requires proof of standing & accounting

Restricts “dual-tracking”

Better oversight of 3rd parties involved in servicing/loss mitigation

Specific loss mitigation protocols

Customer outreach

Timelines for review

Public in-house mod criteria

Apply regardless of who owns the loan, as long as serviced by the “Big 5”

Standards to be implemented within 30/60/90/180 days of settlement


Resources

www.nationalforeclosuresettlement.com

Contact information for each of the “Big 5” servicers

Copies of all pleadings in the action, including consent orders

Information for borrowers about settlement relief

www.mortgageoversight.com

Website of settlement monitor - enforcement

Information about the monitor’s role

Process for making a complaint against a “Big 5” servicer

http://www.nationalforeclosuresettlement.com/

http://www.mortgageoversight.com/

Other Foreclosure Prevention Tools 37

Options for Keeping Home “In-house” or “Traditional” Loan Modification

Forbearance Agreement

Repayment Agreement

Reinstatement

Chapter 13 Bankruptcy

Graceful Exit Options (w/deficiency waiver) Private Sale

Short Sale

Deed-in-Lieu/Foreclosure Agreement

Cash for Keys Agreement

04-30-2012 08:28 am

NPV Evaluation Results

Based on the information you provided your mortgage may pass a HAMP NPV evaluation and you may be eligible for a HAMP modification. Be sure to save a copy of the information below and share it with your mortgage servicer to discuss options available to you.

Please note, CheckMyNPV.com provides only an estimate of a servicer's NPV evaluation. While the NPV formula used is required to be the same as your mortgage servicer's, differences in input data and other industry-related data may result in different outputs.

Your session has ended and you will not be able to run an NPV evaluation without completing this process again.

Information Calculated For You

For more information about the proposed modification, visit the Frequently Asked Questions.

NPV Date 04-30-2012

Unpaid Principal Balance of the Proposed Modification $130888.00

Principal Forbearance Amount of the Proposed Modification $0.00

Interest Rate of the Proposed Modification 2.0000%

Principal and Interest Payment of the Proposed Modification $492.86

Amortization Term of the Proposed Modification 351 months

Information That You ProvidedWhich Best Describes You? Other

Servicer & Investor Information

Your Investor Fannie Mae

Homeowner & Property Information

Data Collection Date 04-30-2012

Borrower Credit Score 550

https://checkmynpv.com/sites/all/themes/npvtool/pdf/CheckMyNPV-FAQ.pdf

Co-Borrower Credit Score not provided

Monthly Gross Income $2,722.00

Property State VT

Property ZIP Code 05465

Property Value $150,000.00

Property Valuation Type Exterior BPO/Appraisal

Mortgage Information

Original Loan Amount $110,000.00

First Payment Date 12-01-2006

Do you have a fixed rate mortgage? Yes

Unpaid Principal Balance of Your Mortgage $105,846.38

Total First Mortgage Debt $130,888.00

Interest Rate of Your Mortgage 6.375%

Remaining Term (Months Remaining) on Your Mortgage 294

Mortgage Insurance Coverage Percent 0%

Modification Fees Paid by Investor $0.00

Monthly Payment Information

Principal and Interest $686.26

Real Estate Taxes $36.00

Hazard and Flood Insurance $110.00

Homeowner Association Fees and Escrow Shortage $205.00

Months Past Due 27

Imminent Default No

Important information regarding NPV Evaluation results obtained from this site.The net present value ("NPV") of your mortgage is one of many factors that need to be considered in determining whether you are eligible for participation in the Home Affordable Modification Program ("HAMP"). For this reason:

The NPV evaluation results generated through use of this Site ("NPV Results") are not evidence of, nor are they determinative of, your or any other person's or entity's eligibility for

participation in any federal, state, local, Fannie Mae, Freddie Mac or other mortgage foreclosure prevention or assistance type plan.

This calculator uses the same underlying formula for calculating NPV as that used by each participating mortgage servicer, these results may vary from that of this calculator due to differences in data inputs.

The NPV Results for a mortgage that are the same as or similar to NPV evaluation results obtained or reported by any other person or entity ("Other NPV Evaluation Results") in connection with that mortgage do not constitute in any way any endorsement, statement, confirmation, verification or certification of accuracy or reasonableness by Treasury, its financial agents or any person or entity of such Other NPV Evaluation Results.

The NPV Results for a mortgage that differ from Other NPV Evaluation Results in connection with that mortgage do not constitute in any way any suggestion, inference, statement, confirmation, verification or certification by Treasury, its financial agents or any person or entity of any error, omission or illegal activity by any person or entity.

Helpful Resources

Frequently Asked Questions | Glossary of Terms | CheckMyNPV.com Quick Start Guide

This information is provided subject to, and may only be used in compliance with, the Terms of Use and other requirements, policies and disclaimers contained on CheckMyNPV.com.

www.Treasury.gov | www.WhiteHouse.gov | www.HUD.gov | www.FinancialStability.gov

https://checkmynpv.com/sites/all/themes/npvtool/pdf/CheckMyNPV-FAQ.pdf

https://checkmynpv.com/sites/all/themes/npvtool/pdf/CheckMyNPV-Glossary.pdf

https://checkmynpv.com/sites/all/themes/npvtool/pdf/CheckMyNPV-Quick-Start-Guide.pdf

http://www.treasury.gov

http://www.whitehouse.gov

http://www.hud.gov

http://www.financialstability.gov

13

2121

10

15

20

25

Comparison of In‐Person Attendance by Lender’s Attorney with Final Outcome

Lender Attorney appearance in person ‐ yes

Lender Attorney appearance in person ‐ No

Lender Attorney appearance in person ‐ N/A

These charts comprise 80 mediation sessions completed by Jennifer Emens‐Butler, with 95 more pending/to be scheduled at the present time. This is not an official record of mediation results in State Court but rather a demonstration of one mediator's perceived results from completed sessions.

8

0

3

7

34

0

5

10

Full Settlement Partial/TPP Settlement No Settlement


Lender Attorney appearance in person ‐ N/A (No Session Held)

Total Mediations ‐ 80

June 14, 2012

7

0

8

1

4

13

1

13

3

0

5

10

15


Comparison of In‐Person Attendance by Lender’s Attorney and With Legal or Housing Advocate Representation for Borrower

with Final Outcome





Comparison of In‐Person Attendance by Lender’s Attorney and

10

5

23

8

2

8

1

02468

10


Comparison of In‐Person Attendance by Lender’s Attorney andWithout Legal or Housing Advocate Representation for Borrower

with Final Outcome





June 14, 2012

Bad Faith6%

Borrower did not Participate7%

Insufficent Documents4%

Insufficient Income19%

Full Settlement18%

Mediation Totals

Bad Faith

Borrower did not Participate

Insufficent Documents

Insufficient Income

Lender Restrictions19%

Lender Restrictions10%

TPP Offered, Not Accepted1%

TPP/Partial35%

TPP Offered, Not Accepted

TPP/Partial

Full Settlement

June 14, 2012

donna

Text Box

This chart comprises 88 mediation sessions completed by Jennifer Emens-Butler, with 95 more pending/to be scheduled at the present time. This is not an official record of mediation results in State Court but rather a demonstration of one mediator's perceived results from completed sessions.

Form No.

2/22/12 1

STATE OF VERMONT SUPERIOR COURT CIVIL DIVISION RUTLAND UNIT DOCKET NO.

__________________________________________ Plaintiff vs. __________________________________________ Defendant

ORDER OF REFERRAL TO FORECLOSURE MEDIATION The Court refers this case to Mediator,

Esq., for foreclosure

Name of Mediator

mediation as provided for in 12 V.S.A. § 4632 (a). The Mediator shall contact Plaintiff's lawyer and Defendants or Defendants’ lawyer within 10 days to schedule mediation. Contact information:

Plaintiff Plaintiff’s Attorney

Contac t Info -

Defendant

Defendant’s Name

Contact Info

Defendant’s Attorney

Contact Info

Mediator

Mediator Name

Contact Info

If Defendant's address changes, Defendant shall notify the court and Mediator immediately. If either party fails to respond to the Mediator's attempts to schedule mediation, the Mediator shall notify the Court and the other party, who may file a motion with the Court and may request costs incurred as a result of the delay caused by that party’s failure to respond. Any motion to strike this Order of Referral on the grounds that the loan is not subject to foreclosure mediation under 12 V.S.A. §4631 or §4632 shall be filed within 15 days of this Order. If not filed by that date, any claim to strike the Order on the grounds that statutory foreclosure mediation is not warranted will be waived. In addition, any claim that Plaintiff is

Form No.

2/22/12 2

not obligated for the cost of mediation will be waived, and the costs of the mediation will, pursuant to statute, be paid by the Plaintiff. If either party can show that these parties completed mediation of the subject mortgage debt in the Bankruptcy Court or some other forum, the Court will waive the mediation requirement. No later than 30 days from this Order, the Mediator shall inform the Court of the date of the scheduled mediation by written or email notice with a copy to each party; the Mediator shall also inform the Court of any postponements or continuation sessions. Mediation shall be complete no later than 90 days from this Order except as extended by the Court upon motion. The Mediator’s obligations are to:

1. Schedule and hold a mediation session, if the Defendant provides the documents required by HAMP; and

2. Require that the Net Present Value (NPV) test be done at the session according to statute, as long as the minimum required HAMP documents have been produced.

The Mediator shall have full authority over all decisions related to the conduct of

mediation, such decisions to be consistent with 12 V.S.A. § 4633 and its statutory purpose. This includes (but is not limited to) authority to:

1. Require personal attendance of participants, including Plaintiff's attorney; 2. Determine whether each party has provided the required documents for the session

to take place, despite objection or additional requests of a party; and 3. Decide to convene, continue, or cancel a particular session, despite objection of a

party. The Mediator may not require the parties to execute a separate mediation agreement. All terms of mediation are governed by 12 V.S.A. §§4631-4637 and this Order. The Mediator is directed to submit to the Court a Mediation Report as required by statute within seven (7) days of completion of mediation, with copies to the parties. The Court may schedule a status conference at any time to review whether timely progress is being made, either on its own or on request of a party to the action. Any issues concerning the Mediator's fee may be addressed to the court by motion.

Date Hon. Mary Miles Teachout

Superior Court Judge cc: Plaintiff’s attorney Defendant’s attorney or Defendant Mediator