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I Think We Need to Talk This Out: Congress Needs to Mandate PreForeclosure Mediation

JACLYN LATESSA∗

ABSTRACT
The United States is currently in the midst of an economic crisis fueled by a high rate of foreclosures. One third of U.S. homeowners are in foreclosure or under water on their mortgage. This is significant because home equity is the primary asset of the majority of American households. Approximately seven to ten million more homes will foreclose before the end of the current crisis. Federal loan modifications and the National Mortgage Settlement have not done enough to alleviate the problem. Establishing federal mandatory mediation standards and coercing states to implement them via the Spending Clause is the most effective and efficient solution. Nineteen states thus far have implemented mediation programs, with mandatory participation programs demonstrating a success rate of over 75%. State programs have taken a variety of shapes and forms but all have resulted in fewer foreclosures and greater savings for taxpayers. The federal government must use its power under the Spending Clause to withhold neighborhood stabilization funds in order to entice the states to establish mandatory mediation programs. These funds are currently being used toward repairing neighborhood blight, such as fixing up abandoned homes, rather than preventing it. Mandatory mediation in every state will improve the nation’s economy and stabilize neighborhoods by conserving judicial resources and decreasing the reliance on social services, which often develop when families are forced to leave their homes.

Candidate for Juris Doctor, New England Law | Boston (2013), Bachelor of Science. TV/Radio Kent State University (2005). I would like to thank my grandfather, Tony Baxter, for instilling an "anything is possible" mentality in me at an early age and always encouraging and believing in me. I would also like to thank Attorney Lauren Song of Greater Boston Legal Services for mentoring and inspiring me both in and outside of the legal context and patiently introducing me into the world of housing law.

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INTRODUCTION

oing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest.”1 By making the decision to foreclose a lender declares that the entire initial amount of the loan, as well as all of the interest secured by a mortgage, is due immediately.2 Typically, if a homeowner is unable to pay the debt the lender will redeem their right to the property, resulting in the homeowner losing all rights to the property.3 To understand the significance of a homeowner losing all of the money invested in their home (or “equity”), it is important to understand that in the United States home equity is the primary asset of a majority of households.4 Approximately one and a half million U.S. homes are currently in foreclosure.5 In addition to the homes that are already in foreclosure, one third of U.S. homeowners owe more to banks than their homes are currently worth—predictions estimate over seven million more homes will enter foreclosure before the end of the current crisis.6 New federal loan guidelines, imposed in 2009, have not had enough of an impact.7 The National Mortgage Settlement of 2012 provides hope to some homeowners but not all, and not to the extent needed.8 Something more needs to be

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1 Sue Kirchhoff, Bernanke: Let’s Fight Foreclosures, USA TODAY (May 6, 2008, 3:40 AM) http://usatoday30.usatoday.com/news/washington/2008-05-05-bernanke-congress_N.htm (quoting Federal Reserve Chairman Ben Bernanke).

THE FLORIDA BAR, Mortgage Foreclosure and Alternatives§ I (7th ed. 2012). Foreclosure, STATE OF MAINE DEP’T OF PROF’L. & FIN. REGULATION: CONSUMER CREDIT PROTECTION, http://www.maine.gov/pfr/consumercredit/foreclosure_resources/whatis foreclosure.html (last visited May 20, 2013).
3 4 Kasey Curtis, The Burst Bubble: Revisiting Foreclosure Law in Light of the Collapse of the Housing Industry, 36 W. ST. U. L. REV. 119, 121 (2008). In fact, this asset is “the most significant source of wealth households have in this country.” Id. 5 National Real Estate Trends: Foreclosure Status Distribution-U.S., REALTYTRAC, http://www.realtytrac.com/trendcenter/market.html (last visited May 20, 2013). 6 See GEOFF WALSH, THE NATIONAL CONSUMER LAW CENTER, REBUILDING AMERICA: HOW STATES CAN SAVE MILLIONS OF HOMES THROUGH FORECLOSURE MEDIATION 4 (2012) [hereinafter REBUILDING], available at http://www.nclc.org/images/pdf/foreclosure_mortgage/ mediation/report-foreclosure-mediation.pdf; Peter S. Goodman, Foreclosure Settlement Fails to Force Mortgage Companies to Improve, HUFFINGTON POST (Aug. 7, 2012), http://www.huffingtonpost.com/2012/08/08/foreclosure-settlement-failsmortgage_n_1754018.html; Despite Home Value Gains, Underwater Homeowners Owe $1.2 Trillion More than Homes’ Worth, ZILLOW.COM (May 24, 2012), http://zillow.mediaroom.com/index. php?s=159&item=278. 7 See REBUILDING, supra note 6, at 5-6. 8 See generally Ben Hallman, Few Homeowners See Benefit From National Mortgage Settlement, Three Months Later, HUFFINGTON POST, http://www.huffingtonpost.com/2012/06/12/national-

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done, and mediation is that something. So far, nineteen states agree that mediation, with its staggering ability to save approximately 75% of homes from foreclosure, is worth a try.9 State mediation programs have taken a variety of shapes and forms but all have resulted in fewer foreclosures and greater savings for taxpayers.10 This Note will argue that the Federal Government must use its power under the Spending Clause to withhold funding in order to entice the states to establish transparent mandatory mediation programs. Mandatory mediation in every state will improve the nation’s economy and stabilize neighborhoods by conserving judicial resources and decreasing reliance on social services. Part I of this Note discusses foreclosures and the root of the crisis. Part II will discuss mediation and the state mediation programs that are already in place. Part III argues that transparent mandatory mediation is necessary on a national scale, and Part IV explains why the Spending Clause is the best way to implement it.

BACKGROUND
I. Foreclosures and Their Effect on Neighborhoods and the Nation’s Economy A. Foreclosure Defined Foreclosure is when a lender “seeks to take an owner’s property to satisfy a debt.”11 When a homeowner borrows money from a lender and uses their house as security for the debt, the type of loan they receive is a mortgage.12 The lender that holds the mortgage on a house can initiate a foreclosure when a homeowner does not pay his or her mortgage on time.13 States use two types of foreclosures: judicial and non-judicial.14 Lenders initiate a judicial foreclosure when they file a complaint and announce to potential buyers that the property with the past due mortgage
mortgage-settlement-_n_1589499.html. (June 12, 2012). Fannie Mae and Freddie Mac, the two largest mortgage holders in the United States, refuse to participate in a key element of the settlement; additionally, it is not clear whether private investors are required to participate in certain provisions either. Id. See REBUILDING, supra note 6, at 22, 41. See infra Part I.C. 11 See STATE OF MAINE, supra note 3. 12 See id. 13 Id. 14 ANDREW JAKABOVICS & ALON COHEN, THE CTR. FOR AM. PROGRESS, IT’S TIME WE TALKED: MANDATORY MEDIATION IN THE FORECLOSURE PROCESS 35 (2009) [hereinafter IT’S TIME WE TALKED], available at http://mortgagegroup.wikispaces.com/file/view/foreclosure_ mediation.pdf.
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is available for purchase.15 Lenders accomplish this by recording a notice in public land records.16 The complaint requests the court’s permission to foreclose and take possession of the property.17 Homeowners may dispute the facts alleged by the lender, as well as present defenses and counterclaims.18 If the court authorizes the lender to foreclose, the lender then holds a public auction of the property.19 States with non-judicial foreclosure enact statutes that establish foreclosure requirements.20 Homeowners receive a default notification through the mail, which provides a fixed time to “cure” the debt, or pay what they owe in full.21 If they do not cure, the lender posts a notice of sale, records the notice with the county, publishes it in local newspapers, and mails the notice to the homeowner.22 After a statutorily prescribed period, the lender sells the property at a public auction.23 If a homeowner disputes the facts of the case, he or she can file a lawsuit to challenge the foreclosure.24 B. The Recent Prevalence of Foreclosures Between the years 2000 and 2005, the residential property values of developed countries rose by over $30 trillion.25 Not only was this larger than any prior “house-price boom,” it was greater than the “stockmarket bubble” of the 1920s and the late 1990s—thus appearing to be the “biggest bubble in history.”26 During this period, a type of mortgage called an interest-only mortgage was very popular.27 With an interest-only mortgage, a buyer could pay less than the interest due on their loan and add all of the unpaid
15 See MORTGAGE BANKERS ASS’N, JUDICIAL VERSUS NON-JUDICIAL FORECLOSURE [hereinafter MORTGAGE BANKERS], available at http://www.mbaa.org/files/ResourceCenter/ ForeclosureProcess/JudicialVersusNon-JudicialForeclosure.pdf (last visited May 20, 2013).

Id. Id. 18 Id. 19 Judicial and Non-Judicial Foreclosures, ALL FORECLOSURE, http://www.all-foreclosure. com/help/judicial.htm (last visited April 13, 2013).
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Id. See MORTGAGE BANKERS, supra note 15. 22 Id. 23 Id. 24 Id. 25 The Global Housing Boom: In Come the Waves, THE ECONOMIST (June 16, 2005), http://www.economist.com/node/4079027?story_id=4079027 [hereinafter The Global Housing Boom].
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interest to the initial amount of the loan (the “principal”).28 Principal payment began after an initial period, at which point payments increased.29 Buyers obtained these types of loans with the belief that home prices would continue to rise quickly, thinking that they would be able to either refinance or sell their home for a profit before payment was required on their principal.30 Rising property values delayed the consequences of giving bad loans to people who could not afford them.31 “When[] people experienced difficulties making their mortgage payments, they could easily take another loan against the value of their house, simply because now it was worth more. Basically, they went into more debt in order to pay off their debts.”32 Unfortunately, while home prices rose, average household income levels remained the same.33 When property values stopped rising, the availability of home equity loans and home equity lines of credit decreased, thus, many people began to default on their mortgage payments.34 This initiated a chain reaction: as the number of people defaulting on their mortgage increased, the number of houses on the market increased.35 The increasing supply of houses and shortage of buyers caused housing prices to plummet in late 2006 and early 2007.36 While everyday Americans were blissfully ignorant of the housing bubble and purchased homes well beyond their means, investors worldwide thought they had found a great low-risk investment with a decent return in mortgage backed securities.37 Individuals obtained mortgage loans from brokers who then sold those mortgages to investment firms.38 Firms would then sell shares of the mortgage income to willing investors.39 Eventually, the demand for these securities became so great that mortgage providers began to relax their mortgage qualification
Id. Id. 30 The Global Housing Boom, supra note 25. 31 The Subprime Mortgage Crisis Explained, STOCK MARKET INVESTORS, http://www.stockmarket-investors.com/stock-investment-risk/the-subprime-mortgage-crisis-explained.html (last visited April 10, 2013) [hereinafter Crisis]. 32 Id. 33 Id. 34 See id. 35 Id. 36 Id. 37 Crisis, supra note 31; see Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 TEX. L. REV. 1255, 1274 (2002).
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Engel & McCoy, supra note 37, at 1274. Crisis, supra note 31.

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guidelines.40 When the housing bubble burst, people no longer wanted to buy these risky mortgages and mortgage companies began to go out of business.41 Most mortgage-backed securities are now worth less than half of their initial value, and have caused investors to lose a lot of money.42 Historically, when financial institutions like banks held mortgages, the lender had a greater interest in working with homeowners to help them pay back their loans.43 Today, that is no longer the case since “mortgages have been sold and resold and pooled together into securities and sold to investors in the financial market.”44 So far, the federal government has spent over $2 trillion on various initiatives aimed at alleviating the crisis and stabilizing the market.45 The Home Affordable Modification Program (“HAMP”), implemented in early 2009, is one such initiative.46 HAMP requires participating lenders “to evaluate all homeowners facing foreclosure to see whether they qualif[y] for an affordable loan modification.”47 HAMP defines affordable as a housing payment that is less than thirty-one percent of the household income.48 Unfortunately, many of the largest lenders have not made a good faith effort “to make sustainable modifications.”49 Only about one-third of applicants received a permanent modification.50 Issues cited include lenders’ own ineffective review of the modification application, foreclosing while a modification was still under review, and failing to notify homeowners of the reasons for their denial.51 On April 5, 2012, the D.C. Circuit affirmed a settlement between the federal government, the attorneys general of forty-nine states and the District of Columbia, and five mortgage servicers to create new servicing standards and provide at least $25 billion in consumer relief.52 Part of the
Id. Id. 42 Id. 43 Id. 44 Id. 45 Stan Liebowitz, New Evidence on the Foreclosure Crisis: Zero Money Down, Not Subprime Loans, Led to the Mortgage Meltdown, WALL ST. J. (July 3, 2009) http://online.wsj.com/article/ SB124657539489189043.html#articleTabs%3Darticle. 46 REBUILDING, supra note 6, at 11. 47 Id. 48 Id. 49 Id. at 12-13. 50 Id. at 13. 51 Id. at 5. 52 About the Mortgage Settlement, OFFICE OF MORTGAGE SETTLEMENT OVERSIGHT, https://www.mortgageoversight.com/about-the-mortgage-settlement/ (last visited May 20,
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settlement addressed the HAMP program by providing penalties for the mortgage servicers’ failure to make the good faith effort required under the program.53 Unfortunately, forty percent of servicers did not participate in the settlement, and months later, those who participated have been slow to implement changes.54 Of the $2.5 billion allocated to the states intended to “help prevent foreclosures, stabilize communities and prevent or prosecute financial fraud,” nearly $1 billion was diverted to states’ general funds or for non-housing related use.55 Additionally, federal banking regulators established a separate program, the Independent Foreclosure Review (“IFR”), to provide restitution to homeowners who suffered financial harm due to errors in the foreclosure process that occurred between January 1, 2009 and December 31, 2010.56 The IFR “was one of the most ambitious and costly auditing projects in U.S. history.”57 The goal of the IFR was for a third party to review each foreclosure individually and provide substantial cash payouts to those harmed as a result of their mortgage provider’s behavior.58 “The predictable consequences included a windfall for the bank consultants hired for the job—they made a combined $2 billion off the reviews.”59 Rather than complete the 500,000 reviews60 requested by individual borrowers, in a move described as “highly unusual” and “a tacit acknowledgement of the program’s failure,” federal bank regulators agreed to a settlement that halts the IFR and provide $3.2 billion in payouts.61 The settlement provides payouts to all 4.2 million borrowers
2013).
53 See National Mortgage Settlement Summary, NAT’L CONFERENCE OF STATE LEGISLATURES, http://www.ncsl.org/issues-research/banking/national-mortgage-settlement-summary.aspx (last visited May 20, 2013).

See id.; Hallman, supra note 8. See Andrew Jakabovics & Andrew McHale, States Fall Short for Help on Housing, ENTERPRISE, (last visited May 20, 2013), http://www.enterprisecommunity.com/servlet/ servlet.FileDownload?file=00Pa000000Gb8pnEAB. 56 See INDEPENDENT FORECLOSURE REVIEW, https://independentforeclosurereview.com/ (last visited April 21, 2012).
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Ben Hallman & Eleazar David Melendez, Foreclosure Review Insiders Portray Massive Failure, Doomed From the Start, HUFFINGTON POST (Jan. 14, 2013, 9:23 AM), http://www.huffingtonpost.com/2013/01/14/foreclosure-review-failure-start_n_2468988.html. 58 See Marilyn Lewis, Is Your Foreclosure Eligible for Review?, MSN MONEY (Nov. 28, 2011, 9:18AM), http://money.msn.com/saving-money-tips/post.aspx?post=14c55390-cfa5-4ca9-8ee5b2e9501b9315. David Dayden, The Fed Messed with the Wrong Senator, SALON (Apr. 15, 2013, 12:43 PM), http://www.salon.com/ 2013/04/15/fed_messed_with_the_wrong_senator/. 60 Id. 61 Ben Hallman, Banks Foreclosure Settlement: $8.5 Bill Deal Reached Over Foreclosure Abuse Claims, HUFFINGTON POST (Jan. 1, 2013, 11:05 AM), http://www.huffingtonpost.com/2013/
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undergoing foreclosure during the January 2009 to December 2010 timeframe, regardless of whether they are victims of foreclosure fraud or not.62 A majority of borrowers, 3.4 million, will receive $1000 or less.63 C. Effects of Foreclosure on Neighborhoods Foreclosures “[e]ndanger[] decades of public and private investment in urban infrastructure and neighborhood quality.”64 Since foreclosed homes tend to sell at a discount, the city collects less revenue in property tax than they would from a similarly situated home that had not been foreclosed.65 Foreclosure not only impacts the value of the property being foreclosed, but also the value of those surrounding it.66 There is a 0.9 percent decline in property value for each foreclosure within one eighth of a mile around a property.67 In low-income neighborhoods that number jumps to 1.4% due to the higher foreclosure risk.68 Vacant properties result in lower tax revenues for cities, while the need for social services, like homeless shelters, increases.69 Remaining taxpayers must absorb these increased costs.70 One study commissioned by the Massachusetts Alliance Against Predatory Lending found that vacant buildings act as refuges for criminals and significantly increase crime.71 Increased numbers of vacant buildings in a community reduces “the number of ‘eyes on the street,’” therefore
01/07/banks-foreclosure-settlement_n_2424887.html. See Dayden, supra note 4. Id. 64 Suffolk University Law School, Foreclosure Fiasco: Documentation Challenges and Policy Solutions 24 (Oct. 14, 2011) (unpublished handout from panel discussion at Suffolk University) [hereinafter Foreclosure Fiasco]. 65 See SAMUEL M. SIMON, MASS. ALLIANCE AGAINST PREDATORY LENDING, VACANT SPACES: THE EXTERNAL COSTS OF FORECLOSURE RELATED VACANCIES IN BOSTON 21 (2011), available at http://maapl.info/uploads/VacantSpaces_Final.pdf.
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See id. at 16. IT’S TIME WE TALKED, supra note 14, at 12. 68 Id. 69 Foreclosure Fiasco, supra note 64, at 8. 70 See SIMON, supra note 65, at 3. In Boston, for example, when the city learns of a vacant lot, it automatically becomes the property of the community sanitation division of the Inspectional Services Department (ISD). Id. ISD will first attempt to contact the owner of the lot to request they secure the property—for example, by boarding up windows, changing locks, and blocking all means of entering the property. Id. If ISD is unable to contact the owner or get them to secure the lot, ISD secures it for them. Id. The city must then pay for this process, costing on average $2,007 per property. Id.at 4. The city has attempted to pass the cost on to owners by placing liens on the properties, but has fallen behind, filing only one lien since June 2009. Id.
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SIMON, supra note 65, at 6-7.

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increasing opportunities for criminals.72 The more time a building is vacant, the more it contributes to increases in neighborhood crime.73 Crimes not only impose a cost on their victims, but also impose a significant cost on local police departments.74 If the police catch a suspect, the city must then bear the cost of prosecution and possible incarceration.75 However, one of the most disheartening effects of foreclosure on neighborhoods is that it leaves vulnerable community members, such as the poor and the elderly, susceptible to financial scams that promise to rescue them from foreclosure.76 These scams often demand payment upfront for “rescue” from foreclosure that they are unable to provide.77 Some scammers even get people to sign papers under false pretenses, resulting in susceptible homeowners signing over the deeds to their home.78 D. Effects of Foreclosure on the Economy The decline in home values resulting from foreclosure “have strong negative effects on both consumer spending and investment in new construction.”79 Declines in construction and consumer spending in turn drive unemployment and job loss.80 Increased job loss and unemployment then results in more foreclosures, creating a “multiplier effect.”81 The decline in investment in new construction may be because building a new home is unwise since foreclosures drove down the cost of homes previously lived in, making them “a comparative bargain.”82 New homes in the United States now cost on average 30% more than homes being resold, which is more than twice the difference during “a healthy housing market.”83 The lack of new home sales results in less business for
Id. at 6. Id. 74 Id.at 8-9. 75 Id. at 9-10. 76 See CHRISTINE VIDMAR, SEVEN WAYS FORECLOSURES IMPACT COMMUNITIES 3 (2008), available at http://www.nw.org/network/neighborworksprogs/foreclosuresolutions/reports/ documents/7ForeclosureImpacts.pdf.
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Id. Id. 79 AMS. FOR FIN. REFORM, WE ALL PAY A PRICE FOR THE FORECLOSURE CRISIS 1, available at http://ourfinancialsecurity.org/blogs/wp-content/ourfinancialsecurity.org/uploads/2011/02/ AFR-The-Price-of-Foreclosures-2-28-112.pdf. 80 Id. 81 Id. 82 Falling New Home Sales Hurt Economy, USA TODAY, Mar. 24, 2011, at B2 [hereinafter Falling].
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the construction industry and their affiliated contractor services.84 Since the housing bubble burst, 2.2 million construction jobs have been lost, which is approximately one third of all the construction jobs that were available in January 2007.85 Furthermore, the economy is negatively impacted by a psychological factor that is common among consumers living in previously occupied homes.86 During healthy financial times, property values rise.87 The value of new homes has historically risen faster than the value of previously occupied homes.88 “When homes appreciate in value, people feel they have more money. So they spend more.”89 Therefore, the decline in new home building and purchasing is contributing to the decline in consumer spending.90 II. The Impact of Pre-foreclosure Mediation A. What is Mediation? Mediation is a non-binding process of negotiation with the assistance of an impartial third party.91 The third party, or mediator, cannot impose decisions on the parties,92 and the conflicted principles are free to walk away from the process at any time.93 Mediators use a number of techniques in order to facilitate voluntary decision making between the parties, including helping the parties understand the comparative weaknesses and strengths of their cases, educating each side on the consequences of a refusal to settle, and offering proposals.94 These techniques reframe each party’s perceptions and positions and assist the parties in drafting and

Id. Id.; Construction: Summary Series: General Summary: Detailed Statistics for Establishments: 2007, U.S. CENSUS BUREAU, http://factfinder2.census.gov/faces/tableservices/ jsf/pages/productview.xhtml?pid=ECN_2007_US_23SG01&prodType=table (last visited May 30, 2013). 86 Id. 87 Id. 88 Falling, supra note 82. 89 Iid. 90 Id. 91 DWIGHT GOLANN & JAY FOLBERG, MEDIATION: THE ROLES OF ADVOCATE AND NEUTRAL 95 (2006).
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Campbell C. Hutchinson, The Case for Mandatory Mediation, 42 LOY. L. REV. 85, 86 (1996). Timothy Hedeen, Coercion and Self-Determination in Court-Connected Mediation: All Mediations Are Voluntary, but Some Are More Voluntary Than Others, 26 JUST. SYS. J. 273, 273 (2005). 94 Leonard L. Riskin, Understanding Mediators’ Orientations, Strategies, and Techniques: A Grid for the Perplexed, 1 HARV. NEGOT. L. REV. 7, 26-28 (1996).
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implementing their agreement.95 “[M]ediation empowers the disputant by permitting him or her to be an integral part of the problem-solving process and to retain control of the outcome of the controversy.”96 B. Benefits of Mediation There are no guarantees of success because parties can walk away from mediation at any time.97 In spite of this, mediation may shorten the lifespan of a dispute and do away with the need for adjudication thereby conserving judicial resources while saving parties money and time.98 Additionally, mediation may help parties to perceive each other differently, providing each party with a greater understanding of the other’s position, and “a perception that will redirect their attitudes and dispositions toward one another.”99 Mediation allows parties to consider creative solutions outside of traditional judicial remedies.100 Additionally, even if the parties do not come to an agreement, mediation can be beneficial by functioning as an “eye opener,” and it can reinforce advice parties may have previously received from counsel.101 Mediation can help “parties understand what they can gain from a negotiated settlement and what they stand to lose if they proceed without resolving their conflict.”102 It also helps parties to overcome any lack of trust parties may have toward one another, facilitating communication and a quicker resolution of the dispute.103 C. Mediation in the Context of Foreclosures Pre-foreclosure mediation can result in a variety of positive outcomes, including a lower interest rate on the loan (resulting in a lower monthly payment), the development of a repayment plan, forbearance on the loan, or what is called a “graceful exit.” 104 A graceful exit includes solutions

GOLANN & FOLBERG, supra note 91, at 96. Hutchinson, supra note 92, at 87. 97 Thomas J. Stipanowich, The Quiet Revolution Comes to Kentucky: A Case Study in Community Mediation, 81 KY. L.J. 855, 870 (1992) (quoting Lon L. Fuller, Mediation—Its Forms and Functions, 44 S. CALIF. L. REV. 305, 325 (1971)).
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Id. Id. at 871; Riskin, supra note 94, at 45. 100 GOLANN & FOLBERG, supra note 91, at 98. 101 Stipanowich, supra note 97, at 871. 102 Jamie Duitz, Battling Discriminatory Lending: Taking a Multidimensional Approach Through Litigation, Mediation, and Legislation, 20 J. AFFORDABLE HOUS. & CMTY. DEV. L. 101, 135 (2010). 103 Stipanowich, supra note 97, at 871-72. 104 How Mediation Can Help Save Your Home, VERMONT LAW HELP, http://www.vtlawhelp.org/node/837 (last visited Nov. 11, 2012).
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such as a short sale, deed in lieu of foreclosure, or “cash for keys”—where the lender pays the homeowner a sum to help pay for moving expenses, in exchange for the homeowner leaving their home.105 If the parties do not reach an agreement, then the lender may be required to obtain the court’s permission before moving forward with the foreclosure.106 Foreclosure mediation programs take a variety of approaches to covering costs and encouraging participation.107 Many states do not charge homeowners to participate in mediation, while a few others, like Nevada, require lenders and homeowners to evenly split a fee.108 Nevada further subsidizes its program by adding surcharges to the fees for filing a foreclosure complaint or notice of default.109As of 2012, only nineteen states have foreclosure conference or mediation programs.110 These programs are classified either as mandatory or voluntary.111 1. Mandatory Mediation

Mandatory mediation programs typically require lenders to participate in mediation at the election of the borrower, but in some programs, the borrower is required to participate as well.112 At the state level, mandatory mediation may require lenders, before initiating a foreclosure, to notify

105 Robert A. Merring, The Mortgage Foreclosure Crisis: Can We Talk?, 52 ORANGE COUNTY LAW. MAG. 9, 13 (2010), available at http://mediate.com/articles/MerringB1.cfm. 106 See, e.g., MASS. ALLIANCE AGAINST PREDATORY LENDING, AN ACT TO ESTABLISH MANDATORY FORECLOSURE MEDIATION WITH JUDICIAL REVIEW: FACT SHEET (last visited May 20, 2013) [herein after JUDICIAL REVIEW),http://www.maapl.info/uploads/Mandatory _Mediation_with_judicial_oversight_factsheet_11.pdf. 107 Grace B. Pazdan, How Foreclosure Mediation Legislation Can Keep Vermonters in Their Homes (And Money in the Pockets of Mortgage Holders), 36 VT. B.J. 24, 26 (2010). For a complete breakdown of state-by-state pre-foreclosure mediation programs, see Heather Scheiwe Kulp, Foreclosure Mediation and Mitigation Program Models, AMERICANBAR.ORG (updated May 17, 2011), http://www.americanbar.org/content/dam/aba/administrative/dispute_resolution/ Foreclosuremed6-29.authcheckdam.pdf. 108 See REBUILDING, supra note 6, at 28. 109 Id. 110 REBUILDING, supra note 6, at 41. Foreclosure mediation programs are currently available in California, Connecticut, Delaware, Florida, Illinois, Indiana, Kentucky, Maine, Maryland, Nevada, New Jersey, New York, New Mexico, Ohio, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin. Foreclosure Mediation Programs by State, NAT’L CONSUMER LAW CTR., http://www.nclc.org/issues/foreclosure-mediation-programs-by-state.html (last visited May 20, 2013).

Pazdan, supra note 107, at 26. See Shana Khader, Mediating Mediations: Protecting the Homeowner’s Right to SelfDetermination in Foreclosure Mediation Programs, 44 COLUM. J. L. & SOC. PROBS. 109, 131-32 (2010).
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homeowners of their right to participate in mediation.113 Other programs simply give homeowners the right to mediation upon their request.114 If the homeowner elects to participate in mediation, he or she will then have the chance, with the assistance of a neutral third-party, to negotiate with the lender to determine a reasonable alternative to foreclosure.115 Many states have implemented mandatory pre-foreclosure mediation programs, with positive results.116 In Philadelphia, data demonstrates that almost three-quarters of the cases that participated in pre-foreclosure mediation were resolved without foreclosure proceedings.117 Homeowners were able to keep their homes in 80% of those cases, and in the other 20%, the homeowner exited upon agreement, without the need for eviction proceedings.118 Foreclosure filings in Nevada declined by 33% just one year after they implemented a mediation program.119 The mandatory mediation program in Cleveland boasts a 61% success rate among mediation participants.120 There is some concern, however, that a lack of choice undermines “the value of self-determination,” which is crucial to successful mediation.121 This concern has resulted in some states establishing their mediation programs as strictly voluntary.122 2. Voluntary Mediation Programs

Voluntary mediation programs, which do not require either party to participate, have not demonstrated as much success as mandatory programs.123 In the first year and a half of New Hampshire’s voluntary mediation program, only fourteen settlements were reached out of more

See, e.g., JUDICIAL REVIEW, supra note 106. See, e.g., Mortgage Issues and Foreclosure, UNIV. OF VERMONT, http://www.uvm.edu/ consumer/?Page=foreclosure.html (last visited April 13, 2013). 115 See, e.g., JUDICIAL REVIEW, supra note 106. 116 Pazdan, supra note 107, at 25. It is worth noting that not all states have implemented mediation by statute. See IT’S TIME WE TALKED, supra note 14, at 35. Some states, such as Pennsylvania and New York, have implemented mandatory mediation as a result of a rulings of the state’s highest court. Id. at 36. 117 See Duitz, supra note 102, at 136. 118 Id. 119 Pazdan, supra note 107, at 26. 120 Jon Prior, Forced Foreclosure Mediation More Successful than Voluntary: Boston Fed, HOUSING WIRE (Sept. 29, 2011, 4:19 PM), http://www.housingwire.com/news/boston-fedforced-foreclosure-mediation-more-successful.
114

113

Khader, supra note 104, at 130, 133. For mediation to be successful, parties must come together on grounds that encourage them to cooperate—being forced to participate in a program does not necessarily facilitate that cooperation. Id. at 130.
122 123

121

Id. at 131. Prior, supra note 112.

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than one hundred cases that opted for mediation.124 Maryland’s voluntary mediation boasts of just a 10% participation rate, and in Maine, only 21% of participants in their voluntary mediation program came to an agreement that was an alternative to foreclosure.125 Voluntary mediation has, however, been commended for enhancing the communication between parties.126 Parties view the mediator as a facilitator of communication rather than an agent of the power who is forcing them to be there.127 Parties are not as open to communication “if it results from power and not from agreement.”128 D. Constitutional Implications of Mandatory Mediation 1. The Commerce Clause

The Commerce Clause129 grants Congress the power to regulate state activities that affect the national economy.130 The Constitution does not define the term “commerce,” giving the Supreme Court much flexibility in their decisions implicating the Clause, and “enormous power to influence the balance of state versus federal power.”131 Wickard v. Filburn is one of the most famous Commerce Clause cases.132 In Wickard, a farmer grew wheat in excess of the federal limitations, imposed by the government to drive up prices during the Great Depression.133 Although the excess wheat was for the farmer’s own use, he was ordered to pay a fine.134 The Court decided that because the farmer’s excess wheat would affect the amount of wheat he would buy on the open market, and because the wheat market was a national market, production of wheat affected interstate commerce and subject to the regulation of the federal government.135

Id. Id. 126 Gary Smith, Unwilling Actors: Why Voluntary Mediation Works, Why Mandatory Mediation Might Not, 36 OSGOODE HALL L.J. 847, 874 (1998).
125

124

Id. Id. 129 “The Congress shall have Power . . . to regulate Commerce with Foreign Nations, and among the several States, and with the Indian Tribes.” U.S. CONST. art. I, § 8, cl. 3.
128

127

See Commerce Clause – The Commerce Power of Congress, LAWNIX, http://www.lawnix.com/cases/commerce-clause.html (last visited Nov. 9, 2012). 131 Id. 132 317 U.S. 111, 113-14 (1942); see also Ilya Somin, Gonzales v. Raich: Federalism As A Casualty of the War on Drugs, 15 CORNELL J.L. & PUB. POL’Y 507, 510 (2006).
133 134 135

130

Id. at 114-15. Id. at 117. Id. at 127-28.

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The Spending Clause

The Spending Clause grants Congress the power to spend tax revenues in order to meet governmental goals.136 The Supreme Court has held that Congress can also use this power to withhold funds in order to encourage desired state legislation.137 In 1987, the Supreme Court upheld a federal law that withheld highway funding from states, which did not have a legal drinking age of twenty-one.138 As a result, by the end of 1988, every state had adopted a legal drinking age of twenty-one.139

ANALYSIS
III. Congress Should Implement Mandatory Mediation Through the Spending Clause Congress has the option of imposing a federal pre-foreclosure mandatory mediation program through either the Commerce Clause or the Spending Clause.140 Foreclosures can be subjected to federal legislation based on two theories: (1) homeowners often obtain loans from national banks, and since many of these banks sell the loans to government controlled financial entities such as Fannie Mae or Freddie Mac,141 these transactions qualify as interstate commerce;142 and (2) the devastation the

136 See U.S. CONST. ART. 1, § 8, CL. 1 (“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States[.]”); see also United States v. Butler, 297 U.S. 1, 66 (1936) (“[T]he power of Congress to authorize the expenditure of public moneys for public purposes is not limited by the direct grants of legislative power found in the Constitution.”). 137 See, e.g., Fullilove v. Klutznick, 448 U.S. 448, 449-50 (1980) (upholding the conditioning of federal public works funds upon states’ administration of a race-based affirmative action program to obtain contractors to complete the construction supported by the funds).

South Dakota v. Dole, 483 U.S. 203, 211-12 (1987). Jeffrey A. Miron & Elina Tetelbaum, Does the Minimum Legal Drinking Age Save Lives? 4 (Nat’l Bureau of Econ.. Research, Working Paper No. 13257, 2007), available at http://www.nber.org/papers/w13257.pdf. 140 See infra notes 133-37 and accompanying text. 141 R. Wilson Freyermuth, Why Mortgagors Can’t Get No Satisfaction, 72 MO. L. REV. 1159, 1207 (2007) (citing Grant S. Nelson & Robert J. Pushaw, Rething the Commerce Clause: Applying First Princples to Uphold Federal Commercial Regulations but Preserve State Control over Social Issues, 85 IOWA L. REV. 1, 164 (1999) (explaining Congress’ power under the Commerce Clause to regulate the mortgage industry)).
139 142 Bob Ivry & Bradley Keoun, Citigroup 46% Gain Masks Flawed Loans Sold to Freddie, BLOOMBERG, Jan. 18, 2011, http://www.bloomberg.com/news/2011-01-18/citigroup-46-gainmasks-flawed-mortgages-freddie-mac-calls-not-acceptable.html. (“Fifteen percent of the performing loans Citigroup sold to the government-owned mortgage-finance company

138

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foreclosure crisis has had on the national economy impedes interstate commerce by decreasing the overall number of economic transactions occurring in the United States.143 This encompasses, for example, both travel and Internet sales, which frequently involve individuals in one state spending money in another.144 Either of these criteria would allow Congress to impose mandatory pre-foreclosure mediation under the Commerce Clause.145 To impose mandatory pre-foreclosure mediation under the Spending Clause, Congress could condition the receipt of federal neighborhood stabilization funds on each state’s establishment of a transparent mandatory pre-foreclosure mediation program.146 These funds, aimed at stabilizing neighborhoods experiencing foreclosure, are part of the Housing and Economic Recovery Act (“the Act”) of 2008.147 The government allocates funds based on a formula factoring the number of foreclosures, percentage of homes financed by a subprime loan, and percentage of homes in default in a given state.148 The Federal Government should modify the Act to include funding to establish a mandatory mediation program, and any withholding must be limited strictly to the

[Freddie Mac] . . . had flaws such as missing appraisals or insurance documents or income miscalculations.”); see also J.N. Sbranti, Region Mortgage Deal Excludes Loans Back by Fannie, Freddie, THE MODESTO BEE (Feb. 23, 2012), http://www.modbee.com/2012/02/23/2083480/ region-mortgage-deal-excludes.html. The loans sold to the government are often the riskiest. Ivry & Keoun, supra. See infra Part I.D. See also Haya El Nasser, Foreclosure Crisis Has Ripple Effect, USA TODAY, Mar. 11, 2008, http://www.usatoday.com/news/nation/2008-03-11-foreclosures_N.htm (stating that a decline in the housing industry does not just impact the sale of new homes, but purchasing other commodities, like cars).
144 See, e.g., Heart of Atlanta Motel, Inc. v. U.S., 379 United States 241, 251 (1964) (finding practices that inhibit travel impact interstate commerce); ACLU v. Reno, 929 F. Supp. 824, 831 (E.D. Pa. 1996) (“The resulting whole [of the internet] is a decentralized, global medium of communications—or ‘cyberspce’—that links people, institutions, corporations, and governments around the world.”). 145 See infra Part II.D. 146 Cf. South Dakota v. Dole, 483 United States 203, 218 (1987) (upholding a federal regulation that withheld highway funds from states that did not have a legal drinking age of twenty-one); Madison v. Virginia, 474 F.3d 118, 128, 131 (4th Cir. 2006) (upholding a federal statute conditioning receipt of prison funding on states’ waiver of sovereign immunity and consent to suit for violating prisoner’s religious liberty); West Virginia v. U.S. Dept. of Health and Human Servs., 289 F.3d 281, 297 (4th Cir. 2002) (holding Congress’ requirement that states implement an estate recovery plan prior to receiving federal Medicaid funding was constitutional under the Spending Clause). 147 148 143

See Housing and Economic Recovery Act of 2008, 42 U.S.C. 5301 § 2301(a). See § 2301(b).

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funding needed to develop the program.149 State representatives are more likely to support mandatory-mediation legislation if there is no concern the legislation will impact the funding they receive to develop a refinancing programs for low-income buyers, or demolish abandoned properties.150 The states that most need mandatory preforeclosure mediation are the states receiving a greater portion of neighborhood stabilization funds.151 Tying a portion of these funds to a requirement to develop a mandatory mediation program will ensure that the states needing these programs most have the greatest incentive to create them.152 Congress has already acknowledged that the foreclosure crisis has national implications through their creation of HAMP modifications.153 If Congress did not create HAMP modifications to regulate a facet of interstate commerce, the modifications would violate the Commerce Clause, and the companies forced to implement the modifications would likely challenge the requirement to do so.154 Further, mandatory mediation would not encroach on any independent constitutional right.155 The Contracts, Due Process, and Takings Clauses of the Constitution raise additional constitutional issues about mediation.156 The Supreme Court has

See Reeve T. Bull, The Virtue of Vagueness: A Defense of South Dakota v. Dole, 56 DUKE L.J. 279, 304-05 (2006) (explaining the negative ramifications of federal funding being strictly conditioned—to the dollar—on the state’s compliance with regulaton). With reference to their influence on elections and members of Congress, “states typically possess sufficient political capital to oppose imposition of conditions that they consider objectionable.” Id. at 304. It follows that conditions on funding should be established in a manner that is unlikely to tread on other issues, thereby creating opposition. Id. at 304-05.
150 See id. at 304; Housing and Economic Recovery Act § 2301(c)(2)(3) (imposing reasonable requirements to regulate the areas of greatest need of redevelopment as a condition for the states to receive federal funding under the statute).. 151 See id. § 2301(a) (noting that $4,000,000,000 is available for assistance to the states for the redevelopment of abandoned and foreclosed homes).

149

See id. § 2301(a), (c)(2)(3). See supra Part I.B. 154 See supra Part II.C-D. (noting that variances in state approaches to mortgage mediation—although focused to aid the local market—do effect the national market and impact interstate commerce). Only lenders owned or guaranteed by Fannie Mae and Freddie Mac are required to participate in the HAMP program. Mortgage Modifications Under HAMP: Hope for the Struggling Homeowner, FINDLAW, Mar. 31, 2010, http://knowledgebase.findlaw. com/kb/2010/Mar/111642.html. Other lenders may participate voluntarily. Id. 155 See IT’S TIME WE TALKED, supra note 14, at 31-32. For a discussion of cases discussing the validity of pretrial requirements, see generally Kristine C. Karnezis, Annotation, Validity and Construction of State Statutory Provisions Relating to Limitations in Amount of Recovery in Medical Malpractice Claim and Submission of Such Claim to Pretrial Panel, 80 A.L.R.3d 583, 594600 (1977).
153 156

152

See IT’S TIME WE TALKED, supra note 14, at 31. There has also been erroneous

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held that parties entering contracts are aware at all times that laws regarding available remedies may change at anytime, thus, changing available remedies to impose mediation would not “impair” a contract in violation of the Contracts Clause.157 Because “foreclosure mediation programs are ‘addressed to a legitimate end’ and are ‘reasonable and appropriate to that end’” they satisfy the Due Process Clause.158 Further, altering lenders’ contractual rights does not constitute a taking.159 State and local governments are the most appropriate entities to establish pre-foreclosure mandatory mediation programs because local governments have a greater understanding of the needs in their own jurisdictions.160 Local laws have always governed property with respect to zoning, taxation, and building codes—pre-foreclosure mediation is merely an extension of that.161 Incorporating a mandatory mediation program into existing local programs would be easier and less costly than developing an entirely new system.162 Since Congress cannot force state actors to implement federal legislation, Congress would need to devise an entirely new system to impose mandatory pre-foreclosure mediation.163 Thus far, states have made funded and unfunded mandatory mediation programs

implications that the right to a trial by jury is impeded by mediation. Stipanowich, supra note 97, at 882-83. Mediation preserves the right to a trial by jury and merely imposes conditions on it, which is not prohibited by the Constitution. Id.
157 IT’S TIME WE TALKED, supra note 14, at 32; see also Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398, 447-48 (1934) (holding that allowing a homeowner to temporarily stay a foreclosure was an acceptable use of the State’s police power). 158 IT’S TIME WE TALKED, supra note 14, at 33. 159 Id. The article also provides a complete discussion on why mediation does not violate the Contracts Clause, Due Process Clause, or Takings Clause. See id. at 31-34. 160 Id. at 16. See generally JEFFREY W. SEIFERT & GLENN MCLOUGHLIN, CONG. RESEARCH SERV., RL34104, STATE E-GOVERNMENT STRATEGIES: IDENTIFYING BEST PRACTICES AND APPLICATIONS (2007), available at http://www.fas.org/sgp/crs/secrecy/RL34104.pdf (finding state governments are in the best position to determine their needs for online services).

IT’S TIME WE TALKED, supra note 14, at 16. See id. at 40. 163 Congress could not mandate state and city government judicial officers create and facilitate mediation programs in addition to their state and local duties. See generally Printz v. United States, 521 U.S. 898, 904-05, 935 (1997) (holding federal acts cannot force states to fund federal objectives). FDR’s New Deal created a number of programs under the auspice of the Commerce Clause, all of which were federally funded. See Ben Conery, Commerce Clause at Center of Battle Over Health Reform, THE WASHINGTON TIMES, http://www.washingtontimes. com/news/2010/dec/29/health-reform-battle-hinges-on-historic-clause/?page=all (last visited April 10, 2013). For examples of federally-funded New Deal programs, see New Deal Achievements, FRANKLIN D. ROOSEVELT AMERICAN HERITAGE CENTER MUSEUM, http://www.fdrheritage.org/new_deal.htm (last visited April 10, 2013).
162

161

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work within the context of their individual needs.164 Therefore, there is no need to spend federal money establishing uniform mediation programs in each state.165 Conditioning the receipt of federal funding on the development of a transparent, mandatory pre-foreclosure mediation program through the power of the Spending Clause is an ideal solution.166 IV. Mandatory Mediation Regulations in All Fifty States Will Stabilize Neighborhoods and the Economy A. Mediation Needs to be Mandatory Parties in a dispute are often disinclined to initiate mediation—often because they are afraid they will appear weak and other times simply because they do not understand the process or know their rights.167 Where mediation is mandatory, “neither party is seen as the initiator.”168 Since some form of foreclosure mediation exists in only twenty-five states, with the longest running program having started in 2008, foreclosure mediation is in its infancy.169 Legal processes in their infancy are unfamiliar and regularly misunderstood by lawyers.170 “This misunderstanding leads to mistrust, which leads to avoidance.”171 Legal professionals must regularly use pre-foreclosure mediation before they will accept it.172 Participation is below twenty-five percent in states with voluntary preforeclosure mediation programs, as opposed to the seventy-five percent participation rate in states with mandatory mediation.173 Increasing the
See supra notes 102-04 and accompanying text. See supra notes 102-04 and accompanying text. 166 See supra Part II.D.2 (noting that withholding federal funds under the Spending Clause can have the desired affect of encouraging necessary state legislation). 167 See Hutchinson, supra note 92, at 86, 89. 168 Id. at 90. 169 IT’S TIME WE TALKED, supra note 14, at 7 (showing mandatory foreclosure mediation programs as early as 2008); Foreclosure Mediation Programs by State, NATIONAL CONSUMER LAW CENTER, http://www.nclc.org/issues/foreclosure-mediation-programs-by-state.html (last visited April 10, 2013) (noting that in 2012 fifteen states and the District of Columbia have some type of foreclosure mediation program).
165 164

See Hutchinson, supra note 92, at 90. Id. 172 Id. See also Bethany Verhoef Brands et al., The Iowa Mediation Service: An Empirical Study of Iowa Attorneys’ Views on Mandatory Farm Mediation, 79 IOWA L. REV 653, 717 (1994) (discussing how the 75% of surveyed Iowa lawyers who indicated a change in their attitude toward mediation thought of it positively after being subjected to mandatory mediation in farmer orcreditor disputes).
171

170

ALON COHEN & ANDREW JAKABOVICS, THE CENTER FOR AMERICAN PROGRESS, NOW WE’RE TALKING: A LOOK AT CURRENT STATE-BASED FORECLOSURE MEDIATION PROGRAMS AND HOW TO BRING THEM TO SCALE 4 (2010), available at http://www.americanprogress.org/

173

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participation in mediation will increase the number of beneficiaries.174 Mandatory mediation will also create a pool of skilled individuals with a specialization in pre-foreclosure mediation, which will improve the process.175 A skilled mediator can show parties the advantages of mediating.176 Understanding the advantages will help to prevent parties from just “going through the motions,” and approach mediation in good faith.177 Uniform pre-foreclosure mandatory mediation programs will also reinforce the effectiveness of the HAMP loan modification program by ensuring homeowners eligible for modifications receive them.178 Often, when homeowners are denied a modification, they do not know how or have the opportunity to appeal the decision.179 Mandatory mediation provides homeowners the opportunity to work with knowledgeable third parties, taking them out of the “sphere of isolation” surrounding their interactions with their lender, and ultimately faring better results.180 Homeowners who are not eligible for a modification can then “identify alternatives that benefit each side more than foreclosure.”181 “Outcome satisfaction and settlement rates [of mandatory mediation] both appear comparable to those found with voluntary mediation programs.”182 Criticisms that mandatory mediation coerces parties to reach an agreement is misguided in light of the fact that parties in litigation receive the same pressure to reach an agreement from lawyers and judges.183 For example, Federal Rule of Civil Procedure 16(a)(5) allows the court to mandate a pretrial settlement conference which the judge may preside over.184 Attorneys may pressure litigants to settle to dispose of

issues/2010/06/pdf/foreclosure_mediation.pdf. See id. at 4. See Hutchinson, supra note 92, at 90. A mediator’s experience with many of the same types of mediation sessions allows them to steer mediation sessions in particular directions “without revealing their agenda.” See Smith, supra note 126, at 869-70.
175 174

See Hutchinson, supra note 92, at 89-90. See id. at 90. 178 IT’S TIME WE TALKED, supra note 14, at 8. 179 See, e.g., Anna Cuevas, Hope for Homeowners: Now I Know My NPV’s – HAMP, HUFFPOST BUSINESS (Feb. 3, 2001, 1:30 PM), http://www.huffingtonpost.com/annacuevas/hope-for-homeowners-know-_b_810150.html. 180 REBUILDING, supra note 6, at 22. 181 IT’S TIME WE TALKED, supra note 14, at 8. 182 Alexandria Zylstra, The Road from Voluntary Mediation to Mandatory Good Faith Requirements: A Road Best Left Untraveled, 17 J. AM. ACAD. MATRIM. L. 69, 79 (2001).
177 183 184

176

Id. at 77. FED. R. CIV. P. 16(a)(5).

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time-consuming lawsuits more quickly.185 Mandatory mediation does not eliminate parties’ rights, but merely delays the foreclosure process beyond the legal restrictions in place at the time of the original transaction.186 The foreclosure laws in many states already contain considerable delay in order to give borrowers the opportunity to cure their default.187 Further, many programs do not delay the foreclosure process at all, and work within existing legal timeframes.188 Whether a state foreclosure program is judicial or non-judicial does not affect the validity of a foreclosure mediation program.189 Mandatory mediation provides cost conservation in both judicial and non-judicial foreclosure states “by minimizing the time the court spends determining whether a case qualifies for mediation.”190 State legislatures are free to eliminate or amend their foreclosure statutes at anytime.191 Therefore, there are no legal barriers to amending foreclosure statutes in a non-judicial foreclosure state to require mediation before a foreclosure is initiated.192 Non-judicial foreclosures are often viewed as the enforcement of a contract between private parties.193 However, many public actors are ultimately involved in the process.194 For example, although Colorado, North Carolina, Georgia, and Maryland are all non-judicial foreclosure states, lenders must still seek permission from the court before moving forward with the sale.195 In Massachusetts, lenders must first confirm with the Land Court whether or not the homeowner is on active military duty before moving forward with a foreclosure.196 In many states, lenders must

185 See Debt Collection Basics: How Do I Negotiate a Settlement in a Debt Case?, MY LEGAL SERVS. INC. (2007), available at http://www.mfy.org/wp-content/uploads/facts/ HowDoINegotiate.pdf.

Geoff Walsh, The Finger in the Dike: State and Local Laws Combat the Foreclosure Tide, 44 SUFFOLK U. L. REV. 139, 161 (2011). Id. at 161-62. REBUILDING, supra note 6, at 7. Data on Philadelphia’s mediation program demonstrates that the typical case lasts fifty-three days, whereas the average time for an uncontested foreclosure is ten months. Id.
188 187

186

Walsh, supra note 186, at 167. IT’S TIME WE TALKED, supra note 14, at 40. 191 Id. at 35. 192 Id. 193 See Janet Zink, Rick Scott, GOP Look at Taking Courts Out of Florida Foreclosure Process, TAMPA BAY TIMES (Sept. 20, 2011 7:42PM), http://www.tampabay.com/news/business /realestate/rick-scott-gop-look-at-taking-courts-out-of-florida-foreclosure-process/1192603 (stating that nonjudicial foreclosures remove courts from the foreclosure process).
190 194 195 196

189

Walsh, supra note 186, at 189. Id. Nicholas Ortiz, Massachusetts Mortgage Foreclosures Severely Backlogged, BANKR. L.

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also record the notice of sale with public officials, and in other states, the auction of the property must take place on public land to ensure transparency of the auction process.197 Although judicial foreclosures are on average more costly than their non-judicial counterparts, there is no doubt that the involvement of state actors in non-judicial foreclosures imposes a cost on the state.198 Beyond federal neighborhood stabilization funds and requiring lenders and homeowners to pay, it is possible for a pre-foreclosure mandatory mediation program to be self-sustaining, funded via an additional surcharge to court filing fees.199 The costs associated with mediation do not offset the overall savings mediation provides to the courts and taxpayers.200 After all, the positive impact of pre-foreclosure mediation has had on courts and taxpayers is what has led twenty state governments to adopt a pre-foreclosure mediation program already.201 One study, commissioned by the Oregon Department of Justice compared legal processes across a wide range of disputes.202 The study found that the total costs of mediating a dispute cost an average of eighty-five percent less than litigating it.203 Further, this study did not take into consideration the societal costs of forcing an individual to abandon their home.204 B. Pre-foreclosure Mandatory Mediation in Every State Would Positively Impact the National Economy Given the demonstrated success rates of an average of 75% in presently implemented pre-foreclosure mediation programs, the thirty one states without pre-foreclosure mediation programs stand to benefit by implementing similar programs.205 Reducing the number of foreclosures will reduce the costs associated with each foreclosure, thereby positively
NETWORK, http://www.bankruptcylawnetwork.com/massachusetts-mortgage-foreclosuresseverely-backlogged/ (last visited May 20, 2013). Walsh, supra note 186, at 189. See Merring, supra note 97, at 12. 199 WALSH, supra note 6, at 7. In Delaware, Washington, and Nevada, surcharges range from $40 to $400. Id. These states also use these funds to “support housing counseling and legal services for homeowners in mediation.” Id.
198 197

See Pazdan, supra note 107, at 26. IT’S TIME WE TALKED, supra note 14, at 39. 202 STATE OF OREGON DEP’T OF JUSTICE, COLLABORATIVE DISPUTE RESOLUTION PILOT PROJECT, REPORT (January 30, 2001) [hereinafter STATE OF OREGON], avalible at http://www.doj.state.or.us/adr/pdf/gen74031.pdf. 203 Id. at 6 (showing that receiving a trial verdict on average costs $60,557 whereas mediation costs $9,537—a difference of 84.25%).
201 204 205

200

See id. at 2, 4. See supra note 9 and accompanying text.

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impacting state budgets.206 As of 2012, “29 states have projected or have addressed [budget] shortfalls totaling $44 billion for the fiscal year 2013.”207 Deficits in state budgets drag down the overall national economy.208 The federal government provided aid to the states in 2009 to fill the gaps in their budgets, but much of that aid has expired.209 It is estimated that the federal government plans to continue with spending cuts in the future, further reducing federal funding of state and local government programs, and eliminating jobs in the process.210 High unemployment leads to less taxable income and a deflated economy.211 Deflation may then result in “a downward spiral in output, employment, and demand.”212 Reducing gaps in the budget by reducing the number of foreclosures will avert these negative impacts.213 Furthermore, assuming a mediation session is successful, the mediation process eliminates trial, appeals, and discovery costs saving each party potentially thousands of dollars.214 The fact that almost three quarters of mediations in Philadelphia and Connecticut settle without a foreclosure proves that mediation is more financially beneficial to lenders than foreclosing.215 The less money parties spend on litigation, the more money they have to reinvest in other areas of the economy.216 A homeowner, who has negotiated the opportunity to stay in their home or

See STATE OF OREGON, supra note 202 at 2, 4-7. Phil Oliff et al., States Continue to Feel Recession’s Impact, CTR. ON BUDGET AND POL’Y PRIORITIES, 2 (June 27, 2012), available at http://www.cbpp.org/files/9-8-08sfp.pdf.
207

206

See id. at 1-2. Id. at 2; ETHAN POLLOCK, ECON. POLICY INST., DIRE STATES: STATE AND LOCAL BUDGET RELIEF NEEDED TO PREVENT JOB LOSSES AND ENSURE A ROBUST RECOVERY, BRIEFING PAPER NO. 252, at 2 (2009), available at http://www.epi.org/page/-/bp252/bp252.pdf. For a detailed overview of how this aid has been utilized, see Tracking the Money, RECOVERY.GOV, http://www.recovery.gov/Pages/default.aspx (last visited April 10, 2013).
209

208

See Oliff et al., supra not 197, at 3-4. DOUGLAS H. BROOKS & PILIPINAS F. QUISING, DANGERS OF DEFLATION, ERD POLICY BRIEF SERIES NO. 12, 1-2(2002), available at http://www.adb.org/Documents/EDRC/Policy_Briefs/ PB012.pdf.
211

210

Id. at 8. See Oliff et al., supra note 199, at 2, 6. 214 See Hutchinson, supra note 84, at 88. Cf. Brands, supra note 172, at 685 (discussing how mandatory mediation in disputes between farmers and their creditors provides “a significant cost savings . . . to participants themselves”); see also STATE OF OREGON, supra note 202. 215 See IT’S TIME WE TALKED, supra note 14, at 7. 216 See BEN FRANKLIN, POOR RICHARD’S ALMANACK 6 (2007) (“A penny saved is two pence clear.”).
213

212

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make a peaceful exit with a program like “cash for keys,”217 is less likely to rely on social services that drain government resources.218 C. A Transparent Mandatory Mediation Program Will Provide Maximum Impact Not all foreclosure mediation programs are created equally. Specific characteristics make some programs more effective than others, which is why the federal government should hold each state’s program to a standard that will ensure the maximum impact. The benefits of mediation do not extend merely to the parties involved in a particular transaction, but benefit society as a whole.219 Therefore, mediation should not be merely optional for the borrower but mandatory for the lender—it should be mandatory for both parties in order to maximize the benefits to the judicial system and taxpayers.220 Procedures that automatically enroll homeowners in mediation at the commencement of a foreclosure program are the most efficient way to ensure homeowner participation.221 To optimize efficiency, in the event the homeowner does not participate in a mediation session, the lender should be able to file for summary judgment.222In light of the inefficiencies of the HAMP modification program, it is apparent that all servicers must be held accountable to ensure their fairness to borrowers.223 The National Mortgage Settlement recognizes this, but only provides accountability for the participating servicers—leaving out the forty percent

See supra Part II.C. See supra Part I.D. 219 See IT’S TIME WE TALKED, supra note 14, at 39. 220 Id. at 40. 221 Pazdan, supra note 107, at 26. 222 See IT’S TIME WE TALKED, supra note 14, at 41. The twelfth judicial circuit of Florida, for example, requires lenders to file a notice of the borrower’s nonparticipation before requesting summary judgment. Residential Mortgage Foreclosure Mediation Program of the Twelfth Judicial Circuit, 12CIRCUIT 4, http://12circuit.state.fl.us/Portals/0/PDF/ Foreclosure/AO%2010-111%20Exhibits/Residential%20Mortgage%20Foreclosure %20Mediation%20Program%20Summary.pdf (last visited May 20, 2013).
218 223 See IT’S TIME WE TALKED, supra note 14, at 40. The National Consumer Law Center has also found that a number of existing pre-foreclosure mediation programs do not hold lenders accountable, “sometimes resulting in homeowners being offered unaffordable, unsustainable workout agreements.” Id. At least one former Bank of America employee has blown the whistle, stating he saw Bank of America and one of its subsidiaries “implement business practices designed to intentionally prevent scores of eligible homeowners from becoming eligible or staying eligible for permanent HAMP modification.” Jessica Dye, Whistleblower Says BofA Defrauded HAMP, REUTERS (March 7, 2012), http://www.reuters.com/article/2012/03/08/bank-of-america-whistlebloweridUSL2E8E804820120308.

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of lenders that did not participate in the settlement.224 Lenders should be required to document the types of repayment plans discussed with the homeowners and approach mediation in good faith.225 Lenders should be subject to sanctions by the court for non-compliance.226 Without sanctions, lenders do not have much incentive to change unfair or deceptive practices.227

CONCLUSION
There is no need for another seven to ten million Americans to lose their homes to foreclosure. Mandatory mediation is an effective preventative measure that can be implemented under any state’s budget. Homeowners in thirty-one states are currently going through the process of foreclosure without knowledge of their rights or a voice in the process. The other nineteen states have set an example that is not being followed, and until the other states follow suit, foreclosures will continue to be a drag on the national economy. In the absence of a mediation program, federal neighborhood stabilization funds are pilfered away and essentially wasted. Congress must condition their receipt on the development of a transparent mandatory mediation program.

See Hallman, supra note 8; National Mortgage Settlement Summary, supra note 53. See IT’S TIME WE TALKED, supra note 14, at 46, 53. The American Bar Association has determined three factors that must be considered to ensure parties approach mediation in good faith: “(1) what conduct should be sanctionable; (2) what conduct or other information may mediators be required to report to court administrators or judges; and (3) what actions court-mandated mediation programs should take to promote productive behavior in mediation.” Resolution on Good Faith Requirements for Mediators and Mediation Advocates in Court-Mandated Mediation Programs, ABA SECTION OF DISPUTE RESOLUTION, 1 (Aug. 7, 2004), available at www.americanbar.org/content/dam/aba/migrated/.../draftres2.doc.
225

224

See IT’S TIME WE TALKED, supra note 14, at 46.. Mediators in Nevada have reported being removed from the state’s preforeclosure mediation program after recommending sanctions for lenders that violated program guidelines. Gretchen Morgenson, When Mortgage Mediation is a Gamble, N.Y. TIMES (Sept. 18, 2010), http://www.nytimes.com/2010/09/19/business/19gret.html? pagewanted=all. This implies a need for independent evaluations to be conducted regarding lenders’ participation and performance. See id.
227

226

See IT’S TIME WE TALKED, supra note 14, at 40, 46.