Nevada Foreclosure Mediation: Sanction the Bank or Modify the Loan

Last Friday, the LV Sun reported that the foreclosure mediation program is getting a much needed boost, after its start in July 2009. Nevada enacted laws in the spring that forced all foreclosures into mandatory mediation at the cost of $200 (per side), utilizing judges, attorneys, etc. as mediators with reduced fees. The intent was to slow the foreclosures and drive the banks into loan modification negotiations with homeowners. Why?

There is not an incentive for banks to keep homeowners in their homes. You may not understand this, but here is why. When a homeowner is having trouble making their mortgage payments, in this economy, they will attempt to modify their loan terms by reducing principle, reducing interest rate, getting a fixed interest rate (which in 75% of the problem), etc. Many of the banks will work with the homeowners. Many will not. Instead of working out a deal with the homeowner (e.g. lowering the principle of the loan from $500,000 to $300,000), the bank, many times, will prefer foreclosure and sale.

The bank will first put the home up for auction, then at auction list the initial bid as the current loan amount, which in this example would be $500,000 when the value is only $300,000. Obviously, no one will bid on the home, except the bank itself. The bank then buys the house from itself. This clears off any other 2nd mortgages or potential liens. It clears title. Anyone that has gone to an auction know this: 80-90% of the auctions are buy-backs by the bank at the higher loan amount, not the value.

This also allows the bank to get the homeowner out of the house. Removal is easy after they buy the house from themselves, a legal technicality. Then, instead of auctioning the house off, like all common sense would dictate, the bank simply lists the house for sale with a Realtor and it sits empty on the market until sold. That is why the houses in your neighborhood are for sale and don't quickly get auctioned off for market value.

What is accomplished here and why is it bad for homeowners? The banks are in a position, right now, to increase their loses. The stronger banks want to push out the weak banks, buy their assets and force the market down. They do this by issuing fewer loans and by not modifying currentl upside-down loans. Killing the loan through a foreclosure will allow the bank to take huge losses, which are only on paper at this point. The money is already gone (having been paid at the time the loan was issued) & the payments have not been coming in for well over two years, now. So, the loss is not a literal loss, it is paper. If the banks were to keep homeowners in their homes, they would not be able to claim the loss this way. Instead they would have to deal with the second mortgages & they would have to still maintain the loan on the home, which shows up on their overall paper and costs them less profit because the loan terms would be modified. It is a bit like buying a company, selling all the assets (the factory and the tools) and keeping the money from the sale. It makes you a lot of money, but everyone loses their job. Is it good for the economy, overall? Is it good for you, personally? Obvious answer, right?

The Nevada Foreclosure Mediation Program halts that process. The banks can't just run to foreclosure and sell to themselves, without first mediating. The immediate problem that we are facing, & that we knew would occur, is that the banks would 'thumb their noses' at Nevada. They have, and they will, unless the mediator & subsequently the judge has the power to impose sanctions on the banks. The sanctions must be hefty enough to warrant a loan modification that would keep the homeowners with a roof over their head and keep the paper on the banks' books. In anticipation of this need (given the 1,171 requests for mediation already in the program), the Nevada Supreme Court is seeking to stiffen the penalty if the banks do not participate. A recent hearing was held by the Nevada Supreme Court to assess the need for imposing hardcore sanctioning power via the mediation.

"Assembly Speaker Barbara Buckley called on the Supreme Court to require mediators to make a finding about whether lenders are acting in good faith or bad faith and the ability to recommend sanctions.

Supreme Court spokesman Bill Gang said the state law already requires mediators to make a finding. As for sanctions, mediators have the ability to halt foreclosure proceedings if lenders aren’t bargaining in good faith, Gang said. Lenders require a certificate from the program administration to continue on with the foreclosure process, he said.

In addition, homeowners can filed a motion in District Court to cases reviewed, and judges have the ability to impose sanctions, Gang said." (LVSun)

If the mediators have the power to make a finding that the banks are not mediating in "good faith", the homeowner can then go to the Court and have the bank sanctioned. If this threat is real and if the harm is large enough, we will likely get some movement on forcing banks to keep homeowners housed. Judge Mosley was just recently placed as the judge overseeing this activity in Clark County. He is a long-time Clark County criminal judge known for issuing harsh sentences. So, we don't expect him to be scared of any banks. Hopefully this is not just Clark County flexing their muscle, without any punch.

The intent of the Forclosure Mediation is to get the banks out of the 'liquidate all assets' approach to this economic recession and into the 'loan modification' approach, thereby keeping people in their homes. However, we all know that the road to hell 'can be' paved with good intentions.

.