RGJ.Com -Critics say loan modification law isn't working

By Frank X. Mullen Jr. • July 11, 2010

A year ago, Nevada's new foreclosure-mediation law was touted as a savior that would keep an estimated 17,700 Silver State families in their homes and prevent communities from becoming ghost towns in a state that led the nation in home foreclosures.

Under the law, borrowers who believe they can avoid foreclosure if the terms of their mortgages are modified can ask for mediation, and lenders must attend the mediation meeting. The mediation mandate kicks in once foreclosure proceedings begin. Borrowers have 30 days to request the mediation meeting.

Lawmakers who pushed for the measure say the law is working but needs to be more consistent. Banking representatives say they are pleased with the mediation procedure and that just showing up or calling in at a mediation meeting is enough "good faith" to satisfy the requirements of the statute.

But critics argue the mediation law is a toothless sham because the program isn't following the law. Homeowners and their advocates argue that although lenders' representatives are taking part in meetings, they aren't negotiating. They charge that many lenders would rather throw homeowners out than consider loan modifications.

They argue that loan servicing firms and lenders often make more money from a foreclosed home than from a modified loan agreement and, therefore, go through the motions of a meeting without putting any offers on the table.

"Last July, we were happy because there was a new law in town, and banks were going to have to face consequences for their actions," said Kristy Sinsara, a Las Vegas-based consumer advocate. "But the sheriff, or in this case the courts, isn't enforcing the law, isn't utilizing it."

She said lenders have been standing fast on "even the worst predatory loans" and claim that just because they have a representative at the mediation, often via telephone, they have satisfied the law and don't have to put anything on the table.

"District courts are not imposing sanctions on loan modifications even though they have that power," Sinsara said. "These aren't kinks to be worked out. It's a fundamental flaw.

A year ago, Nevada's new foreclosure-mediation law was touted as a savior that would keep an estimated 17,700 Silver State families in their homes and prevent communities from becoming ghost towns in a state that led the nation in home foreclosures.

Under the law, borrowers who believe they can avoid foreclosure if the terms of their mortgages are modified can ask for mediation, and lenders must attend the mediation meeting. The mediation mandate kicks in once foreclosure proceedings begin. Borrowers have 30 days to request the mediation meeting.

Lawmakers who pushed for the measure say the law is working but needs to be more consistent. Banking representatives say they are pleased with the mediation procedure and that just showing up or calling in at a mediation meeting is enough "good faith" to satisfy the requirements of the statute.

But critics argue the mediation law is a toothless sham because the program isn't following the law. Homeowners and their advocates argue that although lenders' representatives are taking part in meetings, they aren't negotiating. They charge that many lenders would rather throw homeowners out than consider loan modifications.

They argue that loan servicing firms and lenders often make more money from a foreclosed home than from a modified loan agreement and, therefore, go through the motions of a meeting without putting any offers on the table.

"Last July, we were happy because there was a new law in town, and banks were going to have to face consequences for their actions," said Kristy Sinsara, a Las Vegas-based consumer advocate. "But the sheriff, or in this case the courts, isn't enforcing the law, isn't utilizing it."

She said lenders have been standing fast on "even the worst predatory loans" and claim that just because they have a representative at the mediation, often via telephone, they have satisfied the law and don't have to put anything on the table.

"District courts are not imposing sanctions on loan modifications even though they have that power," Sinsara said. "These aren't kinks to be worked out. It's a fundamental flaw.

"There's no point to the mediation when good faith isn't defined and judges won't do what the law says they should do. It's a waste of time, effort and money."

One state mediator said a Nevada Supreme Court administrator cut him off from mediations for recommending sanctions against lenders in loan modification cases. The law says sanctions, which include thousands of dollars levied against lenders, "may" be imposed by courts.

Homeowners, consumer advocates and lawyers say the law is useless because judges refuse to accept the responsibility granted them by the law, many lenders refuse to negotiate and no one agrees on what the "good faith mediation" mandated by the law actually means.

The law

In the 2009 legislative session, lawmakers passed Assembly Bill 149, the Foreclosure Mediation Law. Assembly Speaker Barbara Buckley, D-Las Vegas, said the law was designed to "keep Nevadans in their homes" by making foreclosure "the remedy of last resort."

The law allows borrowers to ask for loan modifications and sets up a mediation process. It also empowered courts to modify loans in "appropriate cases" when parties were not negotiating in good faith.

Philip A. Olsen, a mediator who has recommended judicial reviews of loan mediation cases, said he was removed from his job by a Supreme Court administrator for making those recommendations. He said administrators and judges want to steer clear of the loan-modification process.

Supreme Court rules say that mediators aren't allowed to recommend sanctions, although Buckley said that was the intent of the law. Instead, court officials said mediators are allowed to determine if either side in the mediation was acting in "good faith."

Olsen said forms developed by the court "mislead borrowers into forfeiting their right to judicial review." Olsen said mediators often ignore the option for sanctions even when lenders don't show up for hearings, fail to bring the required documents, send a person to the hearing who has no authority to negotiate for the lender or fail to follow through on agreements made at a mediation.

He said that even when a mediator refuses to approve a foreclosure because a lender has violated the law or not acted in good faith, the lender usually begins new foreclosure proceedings, and the borrower than has to re-file for a new mediation and pay another $200 fee. Asking a judge to review a case costs another $350.

Olsen said the way the court has interpreted the law negates its effectiveness.

"Until mediators are permitted to prepare and submit recommendations for sanctions, and until the district courts are prepared to modify loans in appropriate case, the law will not achieve its objective of keeping Nevadans in their homes," he said.

Case by case

Of the 79,553 notices of foreclosure issued in Nevada between July 2009 and May 31, mediation was completed in 3,513 cases, according to the Nevada Supreme Court. But the court has no data on how many of those cases involved loan modifications.

Nevada Supreme Court officials said administrators are in the process of gathering statistics. He said mediation has helped some homeowners hang on to their properties but said there's no way to quantify that until statistics are available.

Some cases now before Washoe District Court challenge the Supreme Court administrator's interpretation of the mediation law.

One review petition filed by Reno resident David Murray alleges that his loan-service company, which collects mortgage payments but doesn't own the loan, has a conflict of interest during mediation because the company can make more money with a foreclosure.

The petition says that in Murray's case and many others, the mortgages are owned by mortgage pools and the true beneficiaries of the loans aren't involved in mediations. Instead, the loan servicing companies pretend they can speak for the lender, the petition alleges.

It states that the modification process has devolved into "a thinly veiled attempt to obstruct the statutory process of mediation under the guise of compliance." Murray is asking the court to either send the case back to a mediator "and this time do it right" or modify the loan itself "under such terms that are just."

Reno lawyer Terry J. Thomas, who is fighting several mortgage foreclosure cases and appeals on behalf of Nevada homeowners, said courts often ignore banks who violate the law.

Some judges think "there's no such thing as an honest homeowner," he said, adding that several banks have a policy that loans are not to be modified.

"(Lenders would) rather throw people out on the street and have a house they can't sell," he said. "(The lenders), for the most part, don't live here. They don't care if our area turns into a dust bowl."

In some cases, he said, lenders agree to "modify" a loan for nine months or a year or will ask the borrower to make three payments in a row before the lender will make a decision about modifying loan conditions.

"That's not loan modification, that's a collection scam," he said.

Usually, he said, the lenders he deals with say, "We ain't doing nothing, no how. Drop dead."

Advocates say until the courts take an interest in loan-modification cases, the law will be ineffectual.

"No attorney I know considers the mediation program successful because the courts won't enforce it as written," Thomas said. "Imagine the outrage if a convicted murderer is released because the judge doesn't believe in jail sentences so won't impose any.

"This is our current situation; our judges don't believe in the law, so they will not enforce it."