A step toward reducing foreclosures

Our view: Gov. O'Malley's mandatory mediation bill wouldn't solve Maryland's foreclosure crisis, but it would help

February 21, 2010

In many respects, Maryland is weathering the recession better than most other states, but not when it comes to foreclosures. The number of foreclosure events -- either final dispositions of foreclosures or court filings -- increased in the final three months of 2009 to nearly 17,000. That's 13.4 percent higher than the previous quarter and nearly 70 percent higher than the previous year. Hardest hit by far is Prince George's County, followed by Baltimore City. The foreclosures have crippled the state's housing market and driven down real estate values, compounding economic woes that could last for years.

During his term, Gov. Martin O'Malley has made foreclosure prevention one of the key focuses of his administration, pushing through legislation that lengthened what was previously one of the quickest foreclosure processes in the nation. Now he's back with legislation to require mediation between lenders or mortgage servicers and borrowers. It has the general support of both consumer advocates and the state's banking industry, and it deserves to be enacted by the General Assembly. In many cases, it would do a lot of good. But lawmakers and homeowners should understand that it will not solve the foreclosure crisis and that given the way things have deteriorated, it's possible that nothing the government can do will solve it completely.

Although Governor O'Malley's legislation is being called a mandatory mediation bill, mediation is not the most important element of it. The key is that it will force lenders or loan servicers to make an affidavit before they file for foreclosure indicating that they have tried all other options first. Various federal and state programs can help homeowners to modify their loans, and other outcomes besides foreclosure can help bring both sides to a softer landing. But many homeowners don't know about them, and lenders or mortgage servicers don't necessarily offer the information. Mediation would come into play if the two sides dispute the conclusion about whether the homeowner is eligible for any of the assistance programs, but as it is, too many troubled borrowers don't even get to that point.

In the romanticized notion of mortgages, such rules wouldn't be necessary. The story we often hear is that foreclosures are no better for the lender than they are for the borrower and that both sides have an incentive to find an alternative. It conjures the "It's a Wonderful Life" idea of a homeowner heading down to the building and loan to talk over his problems with kindly George Bailey, who is just as invested in the community as he is.

That's still true for some borrowers, but the profusion of mortgage-backed securities and other Wall Street innovations that bundled loans and sold them to investors means that the borrower often has no real relationship with the company that services his loan, and that company, in turn, has no more than a contractual relationship with the entity that actually owns the debt. Talking to the miserly Mr. Potter would be better than many homeowners can manage these days; at least he had a financial stake in the situation and the power to negotiate.

The representatives of the banking industry who participated in the task force that helped design this legislation have expressed concerns about the timing of the process. They argue that they should be able to file for foreclosure in court before seeking alternatives with the borrower. In some cases, they say, borrowers don't take foreclosure seriously until they get notice of a court filing, and just because a lender files court papers doesn't mean the foreclosure actually has to be completed.

They do have reason to worry about lengthy delays in the process; as long as a loan is delinquent, they are forced to hold larger reserves and thus have less money to loan in the community. And the longer a homeowner is delinquent in his or her loan, the more difficult it is to catch back up.

But the legislation does allow lenders to certify that a borrower has not responded to efforts to determine eligibility for assistance. That should be sufficient protection for lenders. Borrowers are at enough of a disadvantage that they deserve to be granted a pause to seek alternatives.

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