St. Louis County MO Foreclosure Mediation Angers Bankers but Pleases Housing Advocates

The St. Louis Post-Dispatch discusses opposition by the Missouri Bankers Association to a mediation ordinance introduced by Councilwoman Hazel Erby (St. Louis County, MO).

The County Council for St. Louis County, MO passed Bill 174 on August 28, 2012 and was signed the following day by the County Executive; it will go into effect 30 days thereafter.

Foreclosure mediation angers bankers, pleases housing advocates

The mortgage industry is in an uproar over a proposal that would require banks to participate in professional mediation before foreclosing on St. Louis County homeowners.

Bankers predict big problems if the St. Louis County Council approves the measure, which they say would burden lenders, discourage mortgage lending and drive up interest rates.

“You would have to do something entirely different when servicing properties in St. Louis County. If every municipality tried to impose their own guidelines, imagine the havoc,” said Keith Thornburg, general counsel of the Missouri Bankers Association.“It's very chilling for home buyers trying to get a loan.”

Baloney, say mediation advocates.

“I don't see any data anywhere in the country that supports that,” said Karen Tokarz, a law professor who studies mediation at Washington University.

Indeed, such mediation is required with foreclosures in parts of more than 20 states, including Illinois, without reports of problems. And a local mediation program, right across the river in Madison County, has been running without major issue since June of last year, supporters say.

Mediation seeks to offer a last chance for a homeowner to stave off foreclosure, which advocates say benefits both borrower and lender.

Still, it remains unclear how many of St. Louis County's homeowners facing foreclosure might participate or benefit from the proposal. Under the proposed plan, homeowners facing foreclosure could opt for a mediator – with the bank paying the bill. A professional would try to work out a compromise – most often a payment reduction – to keep the borrower at home.

Banks wouldn't have to agree to a deal. They could still foreclose. But they'd face a $1,000 fine if they refuse to mediate or if the mediator felt they acted in bad faith.

In Madison County, the program has put a small dent in foreclosures. Linda Jun, who ran the program until last week, said only 10 to 20 percent of borrowers opt for mediation, although it's offered to everyone in foreclosure.

Of the 291 who signed up, 61 homeowners reached a deal with their creditors so far, according to court figures. Of those, all but two kept their homes. About 100 cases are still working through the system, so the number of averted foreclosures could increase.

Madison County's experience seems on par with other mediation programs around the country.

The St. Louis County Council passed its own mediation plan by 5-to-2 on a preliminary test vote on Aug. 14; a final vote is expected on Tuesday. But bankers are mobilizing and threatening lawsuits if it wins final approval.

The bill was introduced by Councilwoman Hazel Erby, a Democrat who represents some inner-ring suburbs where foreclosure rates are high. As of July, 805 homes in St. Louis County were in some phase of foreclosure, according to figures from RealtyTrac.

CUTTING THROUGH THE CHAOS

The mediation proposal stems from the hand-wringing, hair-pulling frustration that afflicts many homeowners who fall behind on their mortgages and ask for a loan modification, or just some mercy, from banks and mortgage servicers.

They face a system in chaos. Documents are routinely lost. Deals seemingly made over the phone are contradicted by letters in the mail. Callers say they rarely talk to the same person twice.

“They get a letter every week saying a different person is in charge of their case,” says Lindy Tarrant, a counselor for Beyond Housing, which gives free help to Metro East homeowners under a government program. “When you call that person, you never get to talk to them. They don't call you back. It's almost laughable.”

Rules proposed by federal consumer regulators, and a legal settlement with major banks earlier this year, may solve some of those problems over time. For instance, the reforms promise a single person for a homeowner to contact.

As of now, the frustration continues for families facing the loss of a house.

Mediation forces the parties to the negotiating table with a neutral mediator before the bank can take a home.

It puts a “fresh set of eyes” on the problem, said William Asa, a lawyer who represents banks in Madison County foreclosures. "I think it's beneficial to all parties.”

The bank moves a mediation case up the priority ladder, he says, which makes it easier to solve.

But it's not clear that the system will work the same way in Missouri. In Illinois, banks must get court permission to foreclose. Madison County's judges set up the mediation program and back it.

Court permission isn't required in Missouri foreclosures. Instead, the county ordinance will rely on $1,000 fines for banks that don't cooperate.

"It's not binding arbitration,” said Chris Krehmeyer, president of the Beyond Housing. “It is simply bringing the two parties together one time, face to face, before the foreclosure actually happens.”

GIVING UP

Most homeowners who reject mediation may have a good reason: They know they can't be saved. A homeowner with no job is going to lose the house.

The close calls involve homeowners with paychecks big enough to make a house payment – just not the payment set in their mortgage.

The bank then decides if it would lose less money by foreclosing then by taking what the homeowner can pay.

The St. Louis program would be financed by a $150 fee charged to banks for each home they foreclose. If the homeowner chooses mediation, the banks pay another $350.

The mediation would be done by United States Arbitration & Mediation, a St. Louis firm that helps with the Madison County program.

Banks say proposed mediation program will create extra costs, delays and hassles.

The big mortgage packagers, such as Fannie Mae and Freddie Mac, might shun St. Louis County loans because of this program, said Thornburg of the Missouri Bankers Association. The Federal Housing Finance Agency, which governs Fannie and Freddie, declined comment.

However, across the Mississippi in Madison County, realors see no problems due to mediation.

There, mortgage mediation made no noticeable difference in the ability of homebuyers to get new mortgages, said Al Suguitan, chief operating officer at the Greater Gateway Association of Realtors in Madison County.

Any effect is “so small that it's not even a blip on the radar,” he said.

In Illinois, court-ordered mediation also is in place in the Chicago area and Peoria.

Until now, the Madison program was free and the mediators were volunteers. The Madison courts recently imposed a $150 fee on every foreclosure filing, and judges are considering paying the mediators. There is no cost to homeowners.

The bank's foreclosure lawyer comes to the mediation, and that lawyer usually has the power to strike a deal. The St. Louis County plan would let out-of-town banks call in by phone, but their representative would have to have power to cut a deal.

Bankers see a problem with that. Often the banks don't own the loan. Mortgages are generally packaged into securities by the thousands and sold to investors. The securities also restrict the deals that can be cut.

So it's hard to package mortgages that have odd foreclosure rules in marketable securities, which are crucial to financing mortgages, say the bankers.

Krehmeyer, of Beyond Housing, isn't upset that mediation has so far saved only a small percentage of homeowners facing foreclosure. Those successes are worth the effort, he argues.

After seizing a house, banks have to maintain them, and usually end up selling them cheap for big losses. So, mediation is good for the banks as well, he said.

“All you have to have is one save through mediation," he said. "If you save a bank $30,000 to $40,000 in foreclosure costs, and keep one family in a home, that far outweighs the cost of this program."

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