Give Pre-Suit Foreclosure Mediation a Try
The perspective of a private lender turned mediator
Several years ago, my partners and I had a viable and profitable private lending business. Like so many of you, we had a huge book of business with a steady stream of both of prospects and properties that supported our operations. Our market was principally in South Florida and our typical loan size was between $50,000 and $125,000. At 15% plus 3% in origination fees, turning the line two times per year, we, and our investors, were happy. There were not enough hours in a day to do all of the business that was available.
Then, the music stopped. For a year or so preceding the end of the dance, we were extremely cognizant of the increasing risk associated with private lending. But, like many, we were knee deep with our loan portfolio and there was no quick and loss-free way to extricate ourselves from our then performing portfolio. I recall conversation after conversation with my partners about tightening of underwriting standards, limiting the geographic areas that we serviced and increasing reserves to insure that we were properly bolstered. In hindsight, it was all wasted breath because none of us really understood what it meant to take back hundreds of properties, virtually overnight. One of the few ways we might have profited from the downturn would have been to get out of the business in early 2006; it is so easy to see the past.
As Florida-based lenders, we kept a close eye on how our State’s choked court-system was dealing with the foreclosure crisis that ensued as we and other lenders began foreclosing to recover our assets. While we successfully negotiated deeds-in-lieu of foreclosure for many of our defaulted loans, we were forced into the court system for those borrowers that, for whatever reason, did not want to cooperate with our voluntary deed-in-lieu program. Six, eight, ten months oftentimes passed between the initial default and our recovery of title. Borrower bankruptcy and mandated foreclosure moratoriums sometimes made the wait a year or more. In the interim, our investors were losing both the time value of their money and principal. There had to be a better solution.
A relative of mine, a practicing attorney and experienced mediator, learned about a recently enacted Florida Supreme Court initiative to help reduce the bottleneck of foreclosure cases in the court system. Florida’s courts have a long-established history of encouraging and oftentimes requiring mediations as an alternative to all types of judicial proceedings. Mediation is the last opportunity that both a plaintiff and defendant have for self-determination. Mediations are successful only when the litigants understand that in a dispute, a bad or otherwise imperfect settlement is always better than a good lawsuit. Mediation is the opportunity to turn opposing parties into cooperative partners as settlements are achieved. In December of 2009, the Florida Supreme Court formally adopted an administrative order requiring that no Final Judgment be ordered by any judge in a residential, homesteaded foreclosure action until after mediation had occurred, or until a sincere effort was made by the lender to hold mediation. Each of the 20 circuits in the Florida court system was then given an indefinite period to formalize its local procedures and implement mediation as part of the foreclosure process. Non-profit third party mediators like the American Arbitration Association and the Collins Center were then installed as the court-appointed mediators and they systematized foreclosure mediations.
While well and good, mediations within the foreclosure process occur too late to have much benefit to all of the parties involved. Think about it, upon the initial default by the borrower, the concerned borrower may have made attempts to bring the loan current. The lender’s servicer replied to the borrower, or tried to initiate an outreach program, hoping to mitigate the loss with a finite tool box of options. While many of the borrowers had legitimate reasons for defaulting and wanting to keep their residences, a great number were figuring out that delaying was in their best interests and sought any excuse or fabricated any story to delay an inevitable foreclosure proceeding. It became impossible for loss mitigation specialists to separate the proverbial wheat from the chaff. Time passed, late charges accrued on files that might otherwise have settled, borrowers who legitimately wanted to figure out how to save their homes became frustrated, time dragged on and lender/borrower relationships soured. Foreclosure became the only resolution, which, once realized, led to abandonment of the houses, pillaging of the structures, liens being placed by municipalities, and force-placed insurance accruals. The future-advance clauses of the notes and mortgages led to swelling loan balances and the hole became too deep for the struggling borrower to dig out of. And did I mention that while the loss mitigation folks were working, property values halved as a result of the Great Recession that engulfed the nation? Mediation, after months and months of these expensive accruals, ends up being just another step in an expensive and lengthy foreclosure process.
In an effort to recreate ourselves during this recession, in the wake of the destruction of our once viable private lending business, we created a pre-suit foreclosure mediation group. Having been educated by authorized Florida Supreme Court trainers, four of us grouped together to offer a service that we feel holds tremendous value to borrowers, lenders and their attorneys. Pre-suit mediation, when conducted as close to the default date as possible, has proven to be an extremely effective tool to avoid a foreclosure action. Since it is a requirement in Florida of a homesteaded, residential foreclosure action anyway, conducting a pre-filing mediation only streamlines the ultimate collection process. A successful mediation might restore the lender/borrower relationship through a change in terms or an alteration of payment schedule. This keeps the borrower in his home, delaying or sidestepping his abandonment of it, avoiding the tremendous waste that occurs with vacant property. Sometimes, borrowers have been yearning to deed the property back to the lender because they realize that there simply is no escape, but have been unable to negotiate a deed-in-lieu because that option was fraught with too many hoops at the loss mitigation level. A confidential, face-to-face meeting between all of the parties on the note and a decision-maker from the lender has yielded constructive results, time after time.
Pre-suit mediation adds, at most, thirty days to a foreclosure cycle. We take great pains to locate borrowers by sending several letters in various languages while simultaneously attempting to make telephone contact. We have found that almost 50% of all files referred to our group are borrowers who are not only desirous but oftentimes anxious to mediate. We have successful results on 98% of all files that we have mediated; only 2% have resulted in an impasse, i.e. there was no agreement reached. A foreclosure filing with court fees, service of process fees, mandated mediation costs, and attorney’s fees on the most basic of mortgages in Florida costs in excess of $2,500 to commence. Mediation costs only $750 and fees are assessed only on files that are actually mediated. Add the time value of money lost during the six to twelve month process, the prospects of a vacant, wasting asset being vandalized as title is being pursued by the lender, and a 98% settlement rate on 50% of the loan files, and it is easy to calculate the enormous savings to any lender and, most importantly, the opportunity for borrowers to save their most important asset, their home.
While it is too early to determine the default-rate on mediated settlements, even if 100% of the files later default, neither time nor money has been wasted. The procedures that we follow in our pre-suit mediation process substantially mirror those required by the Administrative Order of the Florida Supreme Court. Therefore, if a suit has to be filed, lenders can provide affidavits to the Court attesting to their compliance with the mediation requirement of the Administrative Order and avoid additional fees and time delays associated with the court-ordered process.
Pre-suit mediation serves many good purposes. When a pre-suit program is used, better and faster results are often achieved by attorneys for their clients. While representation and title charges are typically incurred by the client, these are less onerous than the preparation of a filing with its incidental costs. Lenders benefit through more timely settlements, reduction of in-house loss-mitigation costs, and the reduction of legal costs to collect on defaulted loans. Borrowers can avoid a foreclosure ding on their credit and have the opportunity to explore, face-to-face, various options to save their home before the repayment options become impractical.
About the author:
Bernard Danzansky is a civil circuit trained, county certified mediator, and is a managing member of the Foreclosure Mediation Group. Mr. Danzansky has been active in commercial and residential real estate development, lending, construction and brokerage in Florida since 1995. Mr. Danzansky can be reached at 561–212–7563 or at barney@danzansky.com. View the website at www.foreclosuremediationgroupfl.com
