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TO KILL A MOCKINGBIRD MEDIATOR?:ASSESSING THE NEED FOR THIRD-PARTY

NEUTRALS IN FEDERAL BANKRUPTCYCOURTS’ HOME FORECLOSURE

AVOIDANCE PROGRAMS

Lancelot L. Esteibar*

INTRODUCTION

“Toto, I’ve a feeling we’re not in Kansas anymore.”1 LikeDorothy in The Wizard of Oz, finding a dead witch surrounded bymunchkins instead of breakfast with Uncle Henry and Aunty Em,many American realtors specializing in residential foreclosures en-counter bizarre scenes far different from their daily routine of pick-ing up house keys. Instead, realtors report finding homes withferret feces splattered along baseboards,2 entire plumbing systemsclogged with concrete, landscaping defaced by homeowners whohave uprooted trees and shrubbery,3 and even set booby trapsrigged to explode.4 The media coined this destructive behavior as“buyer’s revenge.”5

These stories evidence the disturbing effects created by thegrowing American home foreclosure crisis. Since the recession be-gan in 2007, over five million mortgages in the United States con-fronted foreclosure proceedings, and an estimated eight to thirteen

* Senior Articles Editor, Cardozo Journal of Conflict Resolution, J.D. Candidate (June2012), Benjamin N. Cardozo School of Law. B.A. Public Health Studies, The Johns HopkinsUniversity 2006. Lancelot participates in the Benjamin N. Cardozo School of Law MediationClinic and mediates Manhattan Civil Court and EEOC disputes. I thank my parents, RosemarieL. Esteibar and Gawaine T. Esteibar, for their love and support; Professor Lela P. Love, for herwisdom and guidance; and my family, friends, and members of the Cardozo Journal of ConflictResolution.

1 THE WIZARD OF OZ (Metro-Goldwyn-Mayer 1939).2 Michael M. Phillips, Buyers’ Revenge: Trash the House After Foreclosure, WALL ST. J.

(Mar. 28, 2008), http://online.wsj.com/article/SB120665586676569881.html.3 Id.4 Mary Parks, Cop Allegedly Trashes Million-Dollar Home, NBC SAN DIEGO (Oct. 10,

2010), http://www.nbcsandiego.com/news/local-beat/Cop-Trashes-His-Million-Dollar-Home-104353638.html.

5 Phillips, supra note 2. R

527


528 CARDOZO J. OF CONFLICT RESOLUTION [Vol. 13:527

million more could follow in the next five years.6 During the firstsix months of 2010 alone, RealtyTrac, the leading online marketplace for foreclosed properties, reported that 1.65 million proper-ties received foreclosure filings.7 Moreover, the number of home-owners from 2009 who were seriously delinquent on theirmortgage, but not yet facing foreclosure, doubled to 3.04%, whichin monetary terms represents $227 billion in loans.8 As a result, itcomes as no surprise that many Americans falling prey to the fore-closure process frequently lashed out, and in turn, landed front-page headlines with stories similar to those previously mentioned.One sympathetic broker with Century 21 Advantage Gold stated,“When you’re losing your dream, and you’re paying all this moneyto it . . . and it doesn’t happen—you know, people get upset.”9

In addition to the national statistics, the effects and magnitudeof the home foreclosure crisis can also be observed on the statelevel. For example, in New York, the New York State Banking De-partment reported 13,664 new foreclosure filings in the secondquarter of 2009 alone—a 24% increase from the first quarter of theyear.10 Furthermore, over 234,000 homeowners in New York, or11.7% of all mortgage holders, fell behind on mortgage paymentsfor the second quarter of 2009—compared to a delinquency rate of10.5% from the previous quarter.11 In New York City and otherlarge urban areas, with a high concentration of rental occupiedhousing, there is an additional concern that tenants will be dis-placed as their landlords default.12

6 Chris Adams, Feds Make Slow Progress on Stalling Foreclosures, NEWS & OBSERVER (Ra-leigh, N.C.), Jan. 3, 2010, at 3A.

7 Press Release, RealtyTrac, 1.65 Million Properties Receive Foreclosure Filings in FirstHalf of 2010 (July 15, 2010), http://www.realtytrac.com/content/foreclosure-market-report/165-million-properties-receive-foreclosure-filings-in-first-half-of-2010-5877.

8 Renae Merle, Not Paying the Mortgage, Yet Stuck With the Keys, THE WASHINGTON POST

(June 20, 2009), http://www.washingtonpost.com/wp-dyn/content/article/2009/06/23/AR2009062303500.html.

9 Phillips, supra note 2. R10 Foreclosure Filings By County: 2nd Quarter 2009, N.Y. STATE BANKING DEP’T, http://

www.banking.state.ny.us/pr090727b.pdf.11 Daniel Massey, NY’s Mortgage Woes Worsen, CRAIN’S N.Y. BUS. (Aug. 20, 2009), http://

www.crainsnewyork.com/article/20090820/FREE/908209980.12 See, e.g., Sharon Parrott, Recession Could Cause Large Increases in Poverty and Push Mil-

lions into Deep Poverty, CTR. FOR BUDGET & POL’Y PRIORITIES, Nov. 24, 2008, at 12, availableat http://www.cga.ct.gov/coc/PDFs/poverty/taskforce/handouts/Ctr_on_Budget_102408.pdf (“Thecurrent turmoil in the housing sector is exacerbating risks of housing instability and homeless-ness. Former homeowners and low-income renters both are being displaced by foreclosures . . . .Data indicates that at least 20% of foreclosed properties nationally in late 2007 were rental


2012] TO KILL A MOCKINGBIRD MEDIATOR? 529

As the national foreclosure crisis unfolded with effects seen inboth urban and rural areas, solutions aimed at assisting individualsfrom losing their homes arose from the federal government, statelegislatures, and more recently, programs initiated by federal bank-ruptcy courts.13 Specifically, the bankruptcy court initiatives, re-ferred to as “loss mitigation” programs, claim to loosely mirroralternative dispute resolution (“ADR”) processes already presentin these jurisdictions’ court-annexed mediation programs.14 Todate, the bankruptcy courts of the Southern District of New York(“S.D.N.Y.”), Eastern District of New York (“E.D.N.Y.”), andDistrict of Rhode Island (“D.R.I.”) each offer programs aimed toassist qualified homeowners avoid foreclosure during bankruptcy.15

However, a significant difference between these loss mitigation ini-tiatives and the traditional court-annexed mediation programs isthat mediators are not required to participate during debtor-credi-tor negotiations.16

According to Judge Morris, one of the bankruptcy courtjudges heralded for establishing the S.D.N.Y.’s loss mitigation pro-gram, the idea to create the program began with a simple discus-sion with a national attorney for the servicers.17 Shortly thereafter,Judge Morris and other S.D.N.Y bankruptcy judges met with sev-eral big name northeast creditors between September and October2008 in order to understand the lenders’ perspective about possible

properties, and in some parts of the country—including New England, New York City, and Min-neapolis—at least half of households living in properties that faced foreclosure were renters.”).

13 For a comprehensive report detailing the various foreclosure mediation programs found inthe United States, see Geoffrey Walsh, State and Local Foreclosure Mediation Programs: CanThey Save Homes?, NATIONAL CONSUMER LAW CENTER REPORT, at 8-9 (2009), available athttp://www.nclc.org/images/pdf/foreclosure_mortgage/mediation/report-state-mediation-pro-grams.pdf.

14 See Adoption of Loss Mitigation Program Procedures, General Order M-364, Bankr.S.D.N.Y. (2008), available at http://www.nysb.uscourts.gov/orders/m364.pdf; see also, Adoptionof Loss Mitigation Program Procedures, General Order M-543, Bankr. E.D.N.Y. (2009), availa-ble at http://www.katznerlawgroup.com/Loss_Mitigation_-_EDNY.pdf; see also, Adoption ofLoss Mitigation Program Procedures, General Order 09-003, Bankr. D.R.I. (2009), available athttp://www.psh.com/stuff/contentmgr/files/0/2a38c26cb20bace3010e709e6aee8693/formimages/ri_loss_mitigation_program.pdf [hereinafter The General Orders when referring to all three bank-ruptcy court orders].

15 The General Orders, supra note 14.16 The Hon. Mary G. Diehl et al., The Consumer Bankruptcy Panel: Views from the Bench—

Five Years of BAPCA, 26 EMORY BANKR. DEV. J. 225, 243 (2010).17 Id. The FTC defines the role of a mortgage servicer as someone who “is responsible for

the day-to-day management of [a] mortgage loan account, including collecting and crediting . . .monthly loan payments, and handling . . . escrow account[s] . . . . The servicer is who you contactif you have questions about your mortgage loan account.” Facts for Consumers, FTC, http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.shtm (last visited Feb. 27, 2011).



solutions to the foreclosure crisis.18 Judge Morris stated that afterseveral months of planning with both debtors and creditors, “Wesimply went to [our] mediation program and said, ‘This is ourmodel. We’re going to conceive of it as mediation without a medi-ator.’”19 Although Judge Morris stated that the program would beconducted without mediators, the final court order establishing theprogram provides parties with the option to request a court-ap-pointed mediator. This Note maintains the position that theS.D.N.Y. and E.D.N.Y.’s loss mitigation programs should generallybe classified as “direct negotiations,” rather than mediations, be-cause participants in these jurisdictions routinely decline the pro-grams’ option to choose the assistance of a mediator.20 Moreover,the D.R.I.’s loss mitigation program comes even closer to resem-bling a direct negotiation because unlike the S.D.N.Y. andE.D.N.Y. programs, it fails to provide parties with the opportunityto request a court-appointed mediator.21 Although debates con-tinue at both the federal and state level regarding how to best pre-vent residential foreclosure, these federal bankruptcy initiativesattempt to achieve loss mitigation, without a mediator, throughstructured direct negotiation sessions between debtors and theircreditors.22 This Note will explore and compare the current stateand success of these various loss mitigation programs. The Noteconcludes that the bankruptcy court initiatives may benefit frommaking a mediator’s presence mandatory during loss mitigationsessions because of the unique power imbalance between debtorsand their creditors, the technical complexities inherent in the lossmitigation process, and the emotional mental states of debtors fac-ing foreclosure.

This Note proceeds in four parts. First, Part I provides back-ground information on the mortgage crisis, the loss mitigationprocesses, and current federal, state, and bankruptcy court pro-grams aimed towards preventing foreclosure. Second, Part II de-scribes the role of a mediator and the process of mediation. Third,Part III examines barriers to effective negotiation and whymediators can assist in overcoming those obstacles in the bank-

18 Diehl, supra note 16, at 243.19 Id.20 Written Testimony of Hon. Martin Glenn, Mandatory Mediation Programs: Can Bank-

ruptcy Courts Help End the Foreclosure Crisis?, Hearing of the Senate Judiciary Committee’sSubcommittee on Administrative Oversight and the Courts, Oct. 28, 2010, http://judiciary.senate.gov/pdf/10-10-28GlennTestimony.pdf.

21 See General Order 09-003, supra note 14. R22 See generally The General Orders, supra note 14. R



ruptcy courts’ loss mitigation programs. Finally, Part IV offers analternative to the direct negotiation model prescribed by theS.D.N.Y., E.D.N.Y., and D.R.I. loss mitigation programs.

I. BACKGROUND

A. There and Back Again: A Brief History of the U.S.Subprime Mortgage Crisis

Similar to the Hobbits of Middle-earth, fearing the loss oftheir homes to the rising darkness, American homeowners stood inhorror “as the world’s largest economy shed jobs and real estateprices tumbled”; in fact, one in ten of them found themselves fac-ing mortgage default and foreclosure at the end of 2008.23 Accord-ing to the CEO of RealtyTrac, “The midyear numbers put us onpace to exceed 3 million properties with foreclosure filings by theend of the year, and more than 1 million bank repossessions.”24

How did today’s reality develop? In 2004 and 2005, the thriv-ing American economy, which allowed the national housing mar-ket to flourish, caused home prices to increase at double-digitrates.25 In turn, this growth allowed lenders to offer financing toprospective borrowers in abundance.26 However, the nationalhousing boom began demonstrating signs of distress in 2006.27

Soon, home values declined and many homeowners paid mort-gages that far exceeded the fair market value of their properties.28

According to the Case-Shiller Composite Home Price Index, a tool

23 Kathleen M. Howley, Mortgage Delinquencies, Foreclosures Rise to Record (Update3),BLOOMBERG (Dec. 5, 2008), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=A37uyBrX6dvY.

24 Press Release, RealtyTrac, Foreclosure Activity Increase 81 Percent in 2008 (Jan. 15,2009), http://www.realtytrac.com/content/press-releases/foreclosure-activity-increases-81-per-cent-in-2008-4551.

25 Strengthening the Economy: Foreclosure Prevention and Neighborhood Preservation:Hearings Before the Comm. on Banking, Housing & Urban Affairs, 110th Cong. 3 (2008) (state-ment of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation), available at http://banking.senate.gov/public/_files/Bairtestimony13108.pdf.

26 Strengthening the Economy, supra note 25. R27 Interest Only Mortgage Payments and Payment-Option ARMs—Are they for you?, BD. OF

GOVERNORS OF THE FED. RESERVE SYS. 2 (2006), available at http://www.federalreserve.gov/pubs/mortgage_interestonly/mortgage_interestonly.pdf.

28 Sheila C. Bair, Forward: The Case for Loan Modification, FDIC QUARTERLY BANKING

PROFILE, Vol. 1(3), 23 (2007), available at http://www.fdic.gov/bank/analytical/quarterly/2007_vol1_3/FeatureArticle_1_V1N3_Full.pdf.



that measures changes in prices for single-family homes across thecountry, record level double-digit declines in home values beganappearing across the country during the second quarter of 2006through the second quarter of 2008.29

The culprits of today’s mortgage meltdown include “nontradi-tional” and “subprime” mortgage loans provided during the hous-ing boom.30 In the early 1990s, nontraditional mortgages marketedby lenders to borrowers began appearing.31 One of the first exam-ples included “interest only mortgages,” where the borrower paidno principal for the first few years of the loan.32 However,problems occurred when the “interest only” period expired and theborrower was required to pay principal, interest, and monthlymortgage payments.33 Another example of nontraditional mort-gages include “exploding” adjustable rate mortgages (“ARM”),where interest rates reset upwards, often more than once, after aninitial period of lower “teaser” rates expired.34 In that instance,distressed properties arose when a borrower’s monthly paymentsincreased beyond the ability to pay.

In addition to these nontraditional mortgages, lenders also ex-tended financing to large numbers of subprime borrowers.35 Asubprime borrower is perceived to have high credit risk “because

29 Press Release, Standard & Poor’s, National Trend of Home Price Declines Continues intothe Second Half of 2008 (Oct. 28, 2008), http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_102831.pdf (reflecting annual declines in 2008 of 17.7% and 16.6%respectively).

30 Alexandra Sickler, Mitigating the Foreclosure Crisis with Bankruptcy Mortgage Modifica-tions, 9 U.C. DAVIS BUS. L.J. 85, 88 (2001).

31 Strengthening the Economy, supra note 25. R32 BD. OF GOVERNORS, supra note 27. R33 Id.34 CHARLES E. SCHUMER, SENATE JOINT ECONOMIC COMMITTEE, SHELTERING NEIGHBOR-

HOODS FROM THE SUPREME FORECLOSURE STORM 1 (2007) [hereinafter JOINT ECONOMIC COM-

MITTEE REPORT], available at http://jec.senate.gov/public/?a=Files.Serve&File_id=8c3884e5-2641-4228-af85-b61f8a677c28. Exploding ARMs are “hybrid adjustable rate mortgages that offer a30-year loan with an initial fixed rate that is set below market rates (often called a “teaser” rate).Id. When the rate resets after an initial fixed rate period, it often resets to a more onerous ratethat leads to a significantly higher mortgage payment. Id.

35 The FDIC’s “subprime borrower” definition:Subprime borrowers typically have weakened credit histories that include paymentdelinquencies, and possibly more severe problems such as charge-offs, judgments,and bankruptcies. They may also display reduced repayment capacity as measured bycredit scores, debt-to-income ratios, or other criteria that may encompass borrowerswith incomplete credit histories. Subprime loans are loans to borrowers displayingone or more of these characteristics at the time of origination or purchase.

ComE-IN Background Definitions, FDIC.GOV, http://www.fdic.gov/about/comein/background.html (last visited Feb. 27, 2011).



the borrower lacks a strong or lengthy credit history or has othercharacteristics associated with high probabilities of default.”36 Inturn, these borrowers, obligated on nontraditional mortgages,faced extreme vulnerability to any increase to their monthlyexpenses.37

The “roller coaster pattern of foreclosure activity . . . demon-strates that while the foreclosure problem is being managed on thesurface, a massive number of distressed properties and underwaterloans continues to sit just below the surface, threatening the fragilestability of the housing market.”38 As the economy began itsdownward spiral and homeowners became delinquent with mort-gage payments, many borrowers began seeking modification oftheir existing loans through loss mitigation processes.

B. You Can Go Home Again: Types of Debtor-CreditorAgreements Preventing Foreclosure

Unlike Thomas Wolfe’s ominous title, You Can’t Go HomeAgain, homeowners facing foreclosure hoped that they could re-turn to affording their mortgages by negotiating loan modificationswith mortgage servicers. However, as foreclosures drastically in-creased in 2007 and 2008, the mortgage industry faced a new di-lemma—increased loss mitigation service requests from delinquentborrowers.39 Loss mitigation is a “time-consuming, manual, hands-on process.”40 It requires that a servicer41 analyze a homeowner’sfinancial and personal information in order to develop possible so-

36 Ben S. Bernanke, Federal Reserve Board Chairman, The Subprime Mortgage Market,Address at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structureand Competition (May 17, 2007), available at http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm. Subprime mortgages are typically extended to high-risk borrowerswith credit scores under 620 and typically have higher interest rates, prepayment penalties and/or balloon payments, as contrasted with prime loans. Id. The Federal Reserve Board has esti-mated that 7.5 million families held subprime mortgages as of May 2007. Id.

37 Id.; JOINT ECONOMIC COMMITTEE REPORT, supra note 34, at 2 (“When the loan resets Rafter the initial teaser rate period, the overall increase in monthly payment can be quite disrup-tive - particularly for subprime borrowers.”).

38 Foreclosure Activity Increase 81 Percent in 2008, supra note 24. R39 Robin S. Golden & Sameera Fazili, The Worst of Times: Perspectives on and Solutions for

the Subprime Mortgage Crisis, 2 ALB. GOV’T L. REV. 29, 40 (2009).40 See Neil J. Morse, Between a Rock and a Hard Place, 68 MORTGAGE BANKING 28, 31

(2008).41 See Facts for Consumers, supra note 17. R



lutions to avoid foreclosure.42 Historically, mortgage servicersmanage these requests; their responsibility to the lender is to man-age loans by processing monthly mortgage payments and develop-ing relationships with the borrowers.43 However, servicers faceduncharted territory as to how to manage the high demand for theserequests.44 Consequently, borrowers complained that when theycalled servicers, in order to negotiate a loan modification, theywere often directed to the wrong department or kept on hold foran excessively long period of time.45 For borrowers lucky enoughto reach a loss mitigation department, impending foreclosure pro-ceedings still loomed over their heads because loss mitigation de-partments often failed to communicate with correspondingcollection departments.46

Generally, a servicer can enter five types of agreements whichcan prevent the loss of a debtor’s property to foreclosure; they in-clude: (1) loan modification; (2) loan refinance; (3) forbearance;(4) short sale; or (5) surrender of the property in full satisfaction.47

First, a loan modification provides a “permanent change in one ormore of the terms of a Mortgagor’s loan, [which] allows the loan tobe reinstated, and results in a payment the Mortgagor can af-ford.”48 Loan modifications can include: interest rate reduction,capitalization of arrears, extension of the terms, freeze of interestrates, principal balance reduction, and step interest ratereduction.49

42 CHARLES A. CAPONE, JR., U.S. DEP’T OF HOUS. & URBAN DEV., PROVIDING ALTERNA-

TIVES TO MORTGAGE FORECLOSURE: A REPORT TO CONGRESS 38 (1996), available at http://huduser.org/Publications/pdf/alt.pdf.

43 See, Mortgage Servicing: Making Sure Your Payments Count, DIV. OF CONSUMER & BUS.EDUC., FED. TRADE COMM’N 1-4 (2008), available at http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.pdf (listing the duties of a mortgage servicer).

44 See Foreclosure Prevention and Intervention: The Importance of Loss Mitigation Strategiesin Keeping Families in Their Homes: Hearing before the H. Subcomm. on Housing and Commu-nity Opportunity, 110th Cong. 166-172 (2007) (statement of Tara Twomey, Of Counsel at Nat’lConsumer Law Center) (discussing problems in the mortgage industry).

45 Id. at 167.46 Id. at 168.47 The General Orders, supra note 14.48 Loan Modification Frequently Asked Question, U.S. Dep’t of Hous. & Urban Dev., http://

www.hud.gov/offices/hsg/sfh/nsc/faqlm.cfm (last visited Feb. 27, 2011).49 P. Enric, Types of Loan Modification, EZINEARTICLES, http://ezinearticles.com/?Types-of-

Loan-Modification&id=2333569 (last visited Feb. 27, 2011).



Second, a refinancing scheme may be provided which allows aborrower to repay a loan by taking out another loan with monthlypayments that are affordable.50

Third, principal forbearance51 is an option where a lender cangrant temporary relief by giving a borrower extra time to come upwith an overdue payment in return for the borrower’s promise tomake regular payments in the future.52

Fourth, if the borrower cannot make the necessary mortgagepayments, the lender can decide, with the borrowers approval, tosell the real estate at a moderate loss.53 However, in this option,the borrower is still liable to the lender for the deficiency, which isan obligation to pay the remaining balance of the loan after thesale.54

Finally, a lender may choose to accept title to the property infull satisfaction of the outstanding loan.55

C. The Federal Government’s Leviathan Response

On March 4, 2009, the Obama administration, attempting totake a Thomas Hobbes approach to fixing the mortgage crisis, an-

50 Definition of “Refinance,” available at http://financial-dictionary.thefreedictionary.com/Mortgageefinance. For example, “one can replace a loan at an 8.5% rate with one at 5.5%.”Id.

51 Principal forbearance is often confused with the term principal reduction, however:In the first case, the borrower’s unpaid principal balance remains unchanged but isrestructured to reduce monthly payments. In the latter case, a certain amount of theprincipal is forgiven by the lender. Principal forbearance means that the loan’s un-paid principal balance is not fully amortized over the remaining life of the loan. Thebalance, less the amount subject to forbearance, is then amortized or “spread out”over the remaining period of the loan, lowering the amount due each month. Theamount by which the principal was reduced is then due as a balloon payment at theend of the loan, or when the property is sold. In the case of principal reduction, acertain amount of the principal is forgiven and is no longer owed by the borrower.

CONGRESSIONAL OVERSIGHT PANEL, DECEMBER 14, 2010: A REVIEW OF TREASURY’S FORE-

CLOSURE PREVENTION PROGRAMS, at n.24, available at http://cop.senate.gov/documents/cop-121410-report.pdf.

52 Definition of “Forbearance,” available at http://www.businessdictionary.com/definition/forbearance.html; see also Making Home Affordable: Borrower Frequently Asked Questions,http://www.makinghomeaffordable.gov/faqs/homeowner-faqs/Pages/default.aspx (last visitedMay 20, 2012).

53 Definition of “Short sale,” available at http://www.nolo.com/dictionary/short-sale-term.html;jsessionid=221FFE543112BCEC44A8F8DC9B195260.jvm1 (last visited May 20, 2012).

54 Les Christie, You lost your house - but you still have to pay (Feb. 3, 2010), http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/.

55 See The General Orders, supra note 14. R



nounced the creation of a program called the Home AffordableModification Program (“HAMP”), in order to encourage loanmodification and prevent residential foreclosure.56 The federalgovernment created HAMP in order to offer an alternative to fore-closure, vı́s-a-vı́s loan modification, in instances where modificationwould be economically preferable to foreclosure from the lender’sperspective.57 During the same period, the U.S. Department ofTreasury also released guidelines for implementation of the newprogram.58

This response was novel because the program mandates cer-tain actions by participating mortgage servicers, which in theorywould remove a servicer’s discretion in the loan modification pro-cess.59 The program actually “pay[s] servicers a few thousand dol-lars per loan they modify, depending on when they make the offerand how successful it is,”60 and generally encourages lenders topursue modifications.61 However, a loan servicer’s participation iscompletely voluntary until the servicer elects to participate.62

Upon participation, adherence to the program’s standards ismandatory for all the servicer’s loans.63

A borrower must meet certain requirements in order to be eli-gible for the federal program.64 If the borrower meets the pro-

56 See Tami Luhby, Obama Housing Fix Open for Business (Mar. 5, 2009), http://money.cnn.com/2009/03/04/news/economy/guidelines/index.htm.

57 CONGRESSIONAL OVERSIGHT PANEL, supra note 51, at 13. R58 See Press Release, U.S. Dep’t of Treasury, Home Affordable Modification Guidelines

(Mar. 4, 2009), available at http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf.

59 Geoff Walsh, Foreclosure Mediations: Can They Make a Difference?, 40 CLEARINGHOUSE

REV. J. POVERTY L. & POL’Y 322, 356 (2009).60 Stephen Gandel, Foreclosure Prevention: New Program Shows Big Jump, TIME (June 22,

2009), http://www.time.com/time/business/article/0,8599,1906167,00.html.61 Manuel Adelino et al., Why Don’t Lenders Renegotiate More Home Mortgages?

Redefaults, Self-Cures, and Securitization 2 (2009), FED. RESERVE BANK OF BOSTON, http://www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf (“Every major policy action to date has involvedencouraging lenders, in one way or another, to renegotiate loan terms.”); see About MakingHome Affordable, http://www.makinghomeaffordable.gov/about.html (last visited Feb. 27,2011).

62 CONGRESSIONAL OVERSIGHT PANEL, supra note 51, at 14. R63 Id.64 Frequently Asked Questions for Bankruptcy Filers, Making Home Affordable Program

and Home Affordable Modification Program, http://www.makinghomeaffordable.gov/get-assis-tance/explore-eligibility/Documents/HAMP%20for%20Homeowners%20in%20Bankruptcy%20FAQs%20(English).pdf (last visited May 10, 2010). The federal program sets the followingrequirements from homeowners requesting participation:

1. Be the owner-occupant of a one- to four-unit home.2. Have an unpaid principal mortgage balance that is equal to or less than:



gram’s criteria, the program requires that the servicer determinewhether a modification would make economic sense by using theTreasury’s Net Present Value (“NPV”)65 model.66 The NPV calcu-lation is essential to HAMP’s success because the program seeks toencourage only modifications in cases where the modificationvalue is greater than the value of a foreclosure.67 Thus, where themodification value exceeds the foreclosure value, the servicer isprohibited from foreclosing and must offer the homeowner a three-month modification trial period.68 Accordingly, the program man-dates that the participating servicer modify the loan to a monthlypayment of no more than 31% of the homeowner’s gross monthlyincome.69 Should the trial period be successful, the servicer is obli-gated to provide the homeowner with a permanent loanmodification.70

The program’s ultimate goal is that loan modifications occurwhere qualifying borrowers receive any of the following: a reduc-tion in interest rate, extensions of when the loan will be paid, de-ferring a portion of the principal payment to a balloon payment atthe end of the loan term, or forgiving a portion of the principal.71

One unit: $729,750Two units: $934,200Three units: $1,129,250Four units: $1,403,400

3. Have a first lien mortgage that was originated on or before January 1, 2009.4. Have a monthly mortgage payment (including taxes, insurance, and homeowners’

association dues) greater than 31 percent of your monthly gross (pre-tax) income.5. Have a mortgage payment that is not affordable due to a financial hardship that

can be documented.Id.

65 “NPV model” defined:The NPV model calculates net present values for the expected income from themortgage under a HAMP modification, and the expected income with no modifica-tion (generally a foreclosure and home sale scenario). The two figures are then com-pared. If the mortgage has a greater value under the HAMP modification, it is saidto be “NPV positive,” in which case a participating servicer must offer the borrowera HAMP modification.

CONGRESSIONAL OVERSIGHT PANEL, supra note 51, at 15. R66 CONGRESSIONAL OVERSIGHT PANEL, supra note 51, at 15. R67 See id. at 16.68 See GEOFFREY WALSH, STATE AND LOCAL FORECLOSURE MEDIATION PROGRAMS: CAN

THEY SAVE HOMES?, NATIONAL CONSUMER LAW CENTER REPORT 8-9 (2009), available at http://www.nclc.org/images/pdf/foreclosure_mortgage/mediation/report-state-mediation-programs.pdf.

69 Grace B. Pazdam, How Foreclosure Mediation Legislation Can Keep Vermonters in TheirHomes, 36 VT. B.J. 24, 25 (2010).

70 See Home Affordable Modification Guidelines, supra note 58. R71 Frequently Asked Questions for Bankruptcy Filers, supra note 64. R



Thus, HAMP has the “promise of keeping many homeowners fac-ing financial hardship in their homes with new affordable pay-ments, while protecting lenders and investors from the huge lossesthat result from foreclosure.”72

D. Sense and Sensibility: State ResponsesThe Maryland HOPE Initiative

On July 1, 2010, Maryland’s new foreclosure mediation lawtook effect under House Bill 472.73 Under the new law, the lenderis required to send the borrower an application for a loan modifica-tion or loss mitigation analysis.74 The Bill provides that a notice ofintent to foreclose must be sent to a mortgagor of residential prop-erty.75 In addition, a servicer is required to provide the notice ofintent forty-five days prior to initiating foreclosure.76 The form forsuch a notice must include several new requirements,77 which pro-vide a homeowner with information regarding foreclosure optionsand rights.78 According to Maryland Gov. Martin O’Malley, thenew law “gives borrowers the information they need at an earlystage, and gives every Maryland family the right to have access totheir lenders when they feel they are unfairly denied a loan modifi-

72 Pazdam, supra note 69, at 25. R73 Maryland Foreclosure Mediation – Advisory Notice, MD. DEP’T OF LABOR, FIN. & REG.,

http://www.dllr.maryland.gov/finance/advisories/advisorynoi.shtml (last visited Feb. 27, 2011).74 Ovetta Wiggins, Maryland Bill Provides Foreclosure Mediation for Homeowners, THE

WASHINGTON POST (Apr. 15, 2010), http://www.washingtonpost.com/wp-dyn/content/article/2010/04/14/AR2010041404602.html.

75 Maryland Foreclosure Mediation, supra note 73. R76 Kerry Curry, Maryland’s Foreclosure Mediation Law Takes Effect, HOUSINGWIRE (July 1,

2010), http://www.housingwire.com/2010/07/01/maryland%E2%80%99s-foreclosure-mediation-law-takes-effect.

77 Pursuant to H.B. 472, the notice of intent to foreclose must include and also be accompa-nied with the following:

A statement recommending housing counseling; information on governmental fore-closure assistance . . . an explanation of the Maryland foreclosure process and timeline . . . a loss mitigation application; instructions for completing the loss mitigationapplication and a telephone number to call to confirm receipt of the application; adescription of the eligibility requirements for the loss mitigation programs offered bythe secured party that may be applicable to the loan secured by the mortgage or deedof trust that is the subject of the foreclosure action; and an envelope preprinted withthe address of the person responsible for conducting loss mitigation analysis on be-half of the secured party for the loan secured by the mortgage or deed of trust that isthe subject of the action.

Maryland Foreclosure Mediation, supra note 73. R78 Maryland Foreclosure Mediation, supra note 73. R



cation or other mitigation option.”79 In addition, the bill states thatbefore a foreclosure can occur, the lender must also file an affidavitattesting to and providing support of the homeowner’s ineligibilityfor loss mitigation programs.80

If the homeowner’s application for loss mitigation is denied bythe creditor and the homeowner disagrees with the denial, the stat-ute allows the borrower the opportunity to participate in media-tion.81 To take part in mediation, the homeowner must pay a $50fee, while the lender pays a $300 fee.82 The mediator is an adminis-trative law judge with the Maryland Office of Administrative Hear-ings who is trained in mediation.83 Once the mediation request isproperly filed, the Office of Administrative Hearings (“OAH”)conducts mediation within sixty days after it receives the request.84

The OAH then schedules mediations around the state dependingon where the foreclosure action has been filed.85 The programstresses that a mediator is a neutral party, without the authority tobe a “decision-maker.”86 Moreover, the program reiterates that amediator will only facilitate the parties in “finding common groundand helping them reach a solution that is satisfactory to bothparties.”87

The New Jersey Judiciary Foreclosure Mediation Program

On January 9, 2009, a foreclosure mediation program was cre-ated “as a joint effort of the NJ Judiciary, the Office of the Attor-ney General, the Housing Mortgage Finance Agency in theDepartment of Community Affairs, the Public Advocate, the De-partment of Banking and Insurance, and the Legal Services of New

79 Curry, supra note 76. R80 Julie Bykowicz, New State Laws Take Effect July 1, THE BALTIMORE SUN (June 30, 2010),

http://articles.baltimoresun.com/2010-06-30/news/bs-md-maryland-new-laws-20100630_1_fore-closure-mediation-civil-court-filing-fees-homeowner.

81 Wiggins, supra note 74. R82 Bykowicz, supra note 80. R83 Who Conducts the Mediation and Where does it Take Place?, The Maryland Hope Initia-

tive, http://www.mdhope.org/Foreclosure%20Mediation%20FAQ.aspx#3 (last visited Feb. 27,2011).

84 Maryland’s Foreclosure Mediation Law, Md. Dep’t of Hous. & Cmty. Dev., http://www.dhcd.state.md.us/website/documents/guidlines_Rosa_only.pdf (last visited Feb. 27, 2011).

85 Who Conducts the Mediation and Where does it Take Place?, supra note 83. R86 Id.87 Id.



Jersey.”88 To support the program, New Jersey Governor Corzinesigned legislation allocating $12.5 million in state funds for its suc-cess.89 In addition, the New Jersey judiciary also agreed to assistthe program by providing free mediation90 to any qualified home-owner whose primary residence is the subject of a foreclosure ac-tion, whether or not they filed an answer disputing theforeclosure.91 At the time of the release, the Judiciary signed upmore than 700 mediators to participate.92 Mediator training wasconducted by Judiciary staff in conjunction with the Office of Dis-pute Settlement in the Public Advocate’s Office and Legal Servicesof New Jersey.93 According to the N.J. Administrative Office ofthe Courts, mediators are required to complete eighteen hours ofmediation training and one-day of foreclosure training offered atno cost by the N.J. Office of Dispute Resolution.94

The new statute sets certain requirements for creditors whofile foreclosures against high risk mortgage loans.95 One of thoserequirements states:

[A] creditor that files and serves . . . a summons and complaintof foreclosure on a high risk mortgage loan, shall grant the bor-rower a six month period of forbearance, upon written requestof the borrower to pursue a loan workout, loan modification,refinancing, or other alternative through the Judiciary’s Foreclo-sure Mediation Program, where eligible, or another form of me-diation or settlement discussion.96

88 Press Release, Statewide Mortgage Foreclosure Mediation Program Launched, NewJersey Office of the Attorney General (Jan. 9, 2009), http://www.nj.gov/oag/newsreleases09/pr20090109a.html.

89 Id.90 The New Jersey Foreclosure Mediation Program’s definition of mediation: “Mediation is a

dispute resolution process in which an impartial person, a mediator, helps parties negotiate amutually acceptable settlement. Mediation is non-binding, guided negotiations. Mediators donot decide matters; rather they rely on the ability of the parties to reach a voluntary agreementwithout coercion.” Foreclosure Mediation FAQ, N.J. STATE JUDICIARY, http://www.judiciary.state.nj.us/civil/foreclosure/11289_foreclosure_mediation_faq.pdf (last visited Feb. 27, 2011).

91 Statewide Mortgage Foreclosure Mediation Program Launched, supra note 88. R92 Id.93 Id.94 New Jersey Foreclosure Mediation, New Jersey Courts, October 2009, http://www.judici-

ary.state.nj.us/civil/foreclosure/11290_foreclosure_med_info.pdf.95 New Jersey Foreclosure Fairness Act, 2009 N.J. Sess. Law Serv. Ch. 296 (West). This act

amends the Mortgage Stabilization and Relief Act, N.J. STAT. ANN. §§ 55:14K-82 to 55:14K-93(West Supp. 2009).

96 Id. at ¶ 16.



The statute also requires that, during this six month period of for-bearance, creditors must not pursue foreclosure on the property orincrease the homeowner’s interest rate.97

Under the New Jersey program, foreclosure mediation pro-vides an opportunity for qualified homeowners, facing foreclosure,to receive help from housing counselors, attorneys, and a neutralmediator to resolve a loan delinquency.98 Before entering media-tion, however, the program requires an initial counseling phasewhere homeowners are connected with certified housing counsel-ors.99 These counselors can recommend various workout optionsto assist the borrower.100 If no resolution occurs during the initialphase, the homeowner can then enter mediation.101 In mediation,homeowners are eligible, based on income, for free legal represen-tation.102 According to the N.J. Judiciary, mediators are ready toencourage every participant and mortgage lender to reach an ami-cable result.103 The New Jersey program lists a number of possiblesolutions104 that can be reached in order to avoid foreclosure, butalso reiterates to the homeowner that solutions are unique to eachborrower’s financial situation.105

The program aims to assist homeowners in order to avoidforeclosure by proposing workout and payment arrangements thatbalance the interests of the borrower and lender.106 According toNJ Public advocate Ronald Chen, “One of the beauties of media-tion is that it can produce creative, positive outcomes, the “win-win” situations traditional litigation cannot always achieve.”107

Within the first six months of the program, a report concluded that

97 Id.98 New Jersey Foreclosure Mediation Program, http://www.nj.gov/foreclosuremediation/

what-is-it.html (last visited Feb. 27, 2011).99 MaryAnn Spoto, New Program Aids N.J. Homeowners Facing Foreclosure, THE STAR-

LEDGER (Jan. 10, 2009), http://www.nj.com/news/index.ssf/2009/01/new_program_aids_nj_homeowners.html.

100 Id.101 Id.102 Id.103 New Jersey Foreclosure Mediation Program, supra note 98. R104 Some solutions illustrated in the New Jersey program include: reinstatement, a repayment

plan, a forbearance agreement, extension agreement, loan modification, loan guarantee partialclaim or time to refinance. See Foreclosure Mediation FAQ, New Jersey State Judiciary, availa-ble at http://www.judiciary.state.nj.us/civil/foreclosure/11289_foreclosure_mediation_faq.pdf.

105 Foreclosure Mediation FAQ, supra note 90. R106 New Jersey Foreclosure Mediation Program, supra note 98. R107 Spoto, supra note 99. R



over half of the participating homeowners were able to keep theirhomes.108

The Connecticut Foreclosure Mediation Program

In 2008, the Connecticut legislature enacted Public Act No.08-176 (the “Act”), which required that the chief court administra-tor establish a foreclosure mediation program in each of Connecti-cut’s judicial districts.109 Section 17 of the Act governs theestablishment of the foreclosure mediation program.110 Accordingto Roberta Palmer, the individual responsible for running the C.T.program, “We hear every day about people getting rejected forloan modification programs when they shouldn’t be.”111 Thus, inaccordance with the Act, the chief court administrator for Con-necticut “established the Foreclosure Mediation Program to assistlenders and homeowners achieve a mutually agreeable resolutionof a mortgage foreclosure action through the mediation pro-cess.”112 In 2009, the foreclosure mediation program becamemandatory by the CT legislature after the passage of Public Act(“P.A.”) 09-209.113

As a result of the new legislation, a lender must serve threedocuments to a homeowner when commencing a foreclosure ac-tion: a notice of foreclosure, a foreclosure mediation certificate,and an appearance form.114 If a homeowner qualifies for the pro-gram and files an appearance, the homeowner and lender mustmeet with a mediator employed by the C.T. Judicial Branch to tryto reach an agreement. To qualify, the real property must be a 1, 2,

108 Lisa Fleischer, Report: Mortgage Mediation Helps Homeowners Avoid Foreclosure, THE

STAR-LEDGER (June 22, 2009), http://www.nj.com/business/nj-real-estate/index.ssf/2009/06/re-port_mortgage_mediation_help.html.

109 OLR Bill Analysis, H.B. 5577, http://www.cga.ct.gov/2008/BA/2008HB-05577-R01-BA.htm (last visited Feb. 27, 2011).

110 An Act Concerning Responsible Lending and Economic Security, 2008 Conn. Pub. Act 8-176.

111 Chris Arnold, Housing Advocates Seek Foreclosure Options, NPR (Oct. 23, 2010), http://www.npr.org/templates/story/story.php?storyID=130761339.

112 What is the Foreclosure Mediation Program?, State of Connecticut Judicial Branch, http://www.jud.ct.gov/foreclosure/attorney_qs.htm#1 (last visited Feb. 27, 2011).

113 Press Release, State of Connecticut Judicial Branch, Notice Regarding the ForeclosureMediation Program P.A. 09-209, An Act Concerning Implementation of the S.A.F.E. MortgageLicensing Act (Sections 34 and 35), http://www.jud.ct.gov/external/news/press270.htm (last vis-ited Feb. 27, 2011).

114 Id.



3, or 4 family owner-occupied principal residential property withthe homeowner being the borrower.115 In addition, the propertymust be located in the state of C.T. and the mortgage foreclosureaction must have a return date on or after July 1, 2008.116 Duringthe mediation process, the program articulates that mediation willaddress “all issues of foreclosure, including, but not limited to, re-instatement of the mortgage, assignment of law days, assignment ofsale date, restructuring of the mortgage debt and foreclosure bydecree of sale.”117

In addition, the program also requires certain qualifications ofits mediators. First, the mediator should be an employee of theConnecticut Judicial Branch. Second, the mediators are requiredto be “trained in mediation and all relevant aspects of the law, asdetermined by the Chief Court Administrator . . . have knowledgeof the community-based resources that are available in the judicialdistrict in which they serve, and . . . of the mortgage assistanceprograms.”118 As of December 31, 2009, the Connecticut Foreclo-sure Mediation Program “reported that of the 5,014 cases that hadcompleted statutory mediation, 3,045, or 61% resulted in settle-ments that allowed homeowners to stay in their home.”119

E. The Alchemist: The Federal Bankruptcy Courts’ Responses

Historically, bankruptcy represents “one of the major mecha-nisms for resolving financing distress.”120 As the foreclosure crisisgrew, bankruptcy courts across the country faced a substantial in-crease in consumer bankruptcy filings.121 Typically, bankruptcycases filed by consumers under Chapter 13 of the Bankruptcy Codeare done so on the “eve of an impending foreclosure, after the bor-

115 Foreclosure Mediation Program, Homeowner Frequently Asked Questions, State of Con-necticut Judicial Branch, http://www.jud.ct.gov/foreclosure/homeowner_qs.htm#1 (last visitedFeb. 27, 2011).

116 Id.117 According to the program a mediator “will be trained in all relevant aspects of the law,

have knowledge of community-based resources and mortgage assistance programs and referhomeowners to these programs when appropriate.” Id.

118 An Act Concerning Responsible Lending and Economic Security, supra note 110, at § 17. R119 Foreclosure Mediation Program (FMP) Results: Cases Terminated as of December 31,

2009, State of Connecticut Judicial Branch (on file with Roberta Palmer, Foreclosure MediationProgram Manager).

120 Adam J. Levitin, Resolving the Foreclosure Crisis: Modification of Mortgages in Bank-ruptcy, 2009 WIS. L. REV. 565, 570 (2009).

121 Glenn, supra note 20, at 1. R



rower exhausts all consensual and state court efforts to avoid fore-closure.”122 For many individuals facing foreclosure, bankruptcyprovides a legal process where parties can resolve unmanageabledebt burdens.123 Even though bankruptcy can be a painful processfor debtors, bankruptcy is an orderly forum where creditors canrecuperate losses while returning a debtor to productivity.124

Therefore, the bankruptcy system presents a baseline against whichconsensual debt restructurings can occur.125 Indeed, for over a cen-tury, bankruptcy has been the “social safety net for the middleclass.”126 However, bankruptcy “is incapable of handling the cur-rent home-foreclosure crisis because of the special protection itgives to most residential-mortgage claims.”127 Under the Bank-ruptcy Code, a judge is prevented from rewriting a residentialmortgage in order to prevent foreclosure.128

By contrast, a Judge can request that the parties speak to eachother in order to avoid foreclosure under the Bankruptcy Code.129

On December 18, 2008, the Bankruptcy Court for the S.D.N.Y.created a loss mitigation program that would “facilitate consensualresolutions for individual debtors whose residential real property isat risk of loss to foreclosure.”130 The adoption of the Loss Mitiga-tion Program coincided with the U.S. Treasury’s creation of theHAMP program, which provides incentives for lenders and loanservicers to negotiate loan modifications with borrowers.131 TheS.D.N.Y. endeavored to create a program that would amelioratethe effects of the foreclosure crisis on borrowers and lenders alike,consistent with existing provisions of the Bankruptcy Code.132

Under the S.D.N.Y.’s program, both lenders and borrowers aregiven the opportunity to negotiate a loan workout whenpossible.133

122 Id. at 1-2.123 Levitin, supra note 120, at 571. R124 Id.125 Id.126 Id.127 Id.128 Bankruptcy Court Offers “Loss Mitigation” Program, THE THIRD BRANCH (Newsletter of

the Federal Courts, Washington, D.C.), June 2009, at 4, available at http://www.uscourts.gov/News/TheThirdBranch/09-06-01/The_Third_Branch_-_June_2009_pdf.aspx.

129 Id.130 General Order M-364, supra note 14. R131 Id.132 Glenn, supra note 20, at 2. R133 General Order M-364, supra note 14. R



The idea for the program grew after lawyers representing bothdebtors and creditors met with S.D.N.Y. bankruptcy judges.134 Ac-cording to one of the judges, there was no “significant divide be-tween debtors’ and creditors’ lawyers,” and everyone wanted todevelop a program that would allow foreclosure avoidance or an-other consensual solution.135 Accordingly, S.D.N.Y. BankruptcyJudge Morris modeled the program loosely after the district’s ownmediation program.136 Judge Morris’ career clerk stated, “What Ithink the two programs have in common is the concept that al-though the parties cannot be forced to reach an agreement, a judgecan require those parties to confer with each other in a good-faitheffort to resolve, or narrow, the issues.”137 In adopting the LossMitigation Program,138 the S.D.N.Y was among the first bank-ruptcy courts to develop a formal program to help alleviate themortgage foreclosure crisis.139

The program reaches any individual debtor who files for bank-ruptcy under chapters 7, 11, 12, or 13.140 A debtor can qualify forthe program so long as the real property or cooperative apartmentis used as a principal residence.141 Through October 21, 2010, theS.D.N.Y reportedly received 1,450 requests for loss mitigation.142

Of these requests, nearly 1,000 requests were made in chapter 13filings; 25 in chapter 11 filings; and 425 in chapter 7 filings.143 Ac-cording to the program’s procedures, either debtor or creditor can

134 Glenn, supra note 20, at 2. R135 Id.136 Bankruptcy Court Offers “Loss Mitigation” Program, supra note 128, at 4. R137 Id.138 The S.D.N.Y. Bankruptcy court program’s definition of loss mitigation:

The term “loss mitigation” is intended to describe the full range of solutions that mayavert either the loss of a debtor’s property to foreclosure, increased costs to thelender, or both. Loss mitigation commonly consists of the following general types ofagreements, or a combination of them: loan modification, loan refinance, forbear-ance, short sale, or surrender of the property in full satisfaction. The terms of a lossmitigation solution will vary in each case according to the particular needs and goalsof the parties.

General Order M-364, supra note 14. R139 Glenn, supra note 20, at 2. R140 Id. A Chapter 7 bankruptcy filing involves the liquidation of all a debtor’s prepetition

property, proceeds are then distributed to creditors by an independent trustee. DAVID GRAY

CARLSON, THE LAW OF DEBTORS AND CREDITORS 179 (2010). A “‘reorganization’ proceedingmay occur under . . . chapters 11(general reorganization), 12 (family farmers and fisherman) and13 (wage earners).” Id.

141 Glenn, supra note 20, at 3. R142 Id. at 4.143 Id.



request to participate in the loss mitigation program.144 However,the program does not require an actual loss mitigation agreementto be entered by the debtor or lender.145 After the entry of a lossmitigation order, the program’s procedures provide various dead-lines and suggested time frames for the parties to exchange infor-mation and negotiate the possible terms of a settlementagreement.146 The loss mitigation sessions can be conducted eitherin person, telephonically, or via video-conference.147

The program’s procedures also provide various duties that theparties must adhere to upon the commencement of the loss mitiga-tion order. First, the parties are required to negotiate in good faithor be subject to sanctions.148 Participation in good faith requiresthat each party have a person with full settlement authority presentduring the loss mitigation sessions.149 In addition, the lender is au-thorized to contact the debtor directly without fear of violating theautomatic stay.150 However, the procedures allow any party to filean objection to the entry of a loss mitigation order should a partybelieve that the entry was done in bad faith.151

Other duties imposed by the procedures include: written no-tice to be provided by each party, with regards to the manner inwhich the party can be contacted; exchange of information be-tween the parties, to be completed at least seven days prior to theloss mitigation session; written or verbal status report to be pro-vided per the Bankruptcy Court’s order; and settlement approvalby the Bankruptcy Court of any resolution reached during the miti-

144 General Order M-364, supra note 14. R145 My Chi To et. al., Bankruptcy Court for the S.D.N.Y. Adopts Loss Mitigation Program,

American Bankruptcy Institute NYC Bankruptcy Conference, A.B.I., May 4, 2009, available atWestlaw: 050409 ABI-CLE 337.

146 The suggested time frames include:(1) each party shall designate contact persons and contact information within sevendays after the entry of the order; (2) a creditor in loss mitigation shall contact thedebtor within 14 days after the entry of the order; (3) each loss mitigation party mustmake any request for information within 14 days after the entry of the order; (4) eachloss mitigation party shall respond to a request for information within 14 days afterthe request is made, or seven days prior to the loss mitigation session, whichever isearlier; (5) the loss mitigation session shall be scheduled within 35 days after the dateof the order; (6) the loss mitigation period shall usually end within 42 days after theentry of the order, unless extended as provided in the loss mitigation procedures.

Glenn, supra note 20, at 7. R147 Id. at 6.148 General Order M-364, supra note 14. R149 Glenn, supra note 20, at 6. R150 Id. at 6.151 Id. at 9.



gation session.152 In addition, the procedures also provide that a“debtor or creditor participating in the loss mitigation programmay request, or the bankruptcy court may order, the appointmentof an independent mediator from the [court’s] register ofmediators.”153 However, requests for mediators have only oc-curred in a few cases.154 During these limited situations, “the courthas been able to select pro bono mediators acceptable to theparties.”155

In light of the foreclosure crisis, two additional federal bank-ruptcy courts implemented similar loss mitigation programs. First,on October 22, 2009, the United States Bankruptcy Court for theDistrict of Rhode Island (“D.R.I.”) created its own program.156

The D.R.I.’s loss mitigation program largely mirrors the languagearticulated in the S.D.N.Y. order, with the exception that it omitsthe section which provides debtors and creditors the opportunity torequest a court-appointed mediator.157 The D.R.I. bankruptcycourt, on November 4, 2010 released a report on its programs lossmitigation statistics, and reported that of 550 cases participating inthe program, 19.57% resulted in an order approving a loan modifi-cation.158 Second, on December 8, 2009, the E.D.N.Y. adopted itsown loss mitigation program, which generally replicates theS.D.N.Y. initiative.159 The question remains as to whether, likeCoelho’s Andalusian shepherd boy who realizes his true treasurewas right in front of his eyes, the Bankruptcy Courts’ decision tominimize mediators’ roles, individuals employed in these courts,was done in error.

II. BRAVE NEW WORLD: WHAT IS MEDIATION? WHAT IS THE

ROLE OF A MEDIATOR?

Mediation represents an expanding frontier, far different thanAldous Huxley’s alien landscape, which may hold the keys to creat-

152 General Order M-364, supra note 14. R153 Glenn, supra note 20, at 6. R154 Id.155 Id.156 General Order 09-003, supra note 14. R157 Id.158 REPORT ON LOSS MITIGATION STATISTICS, BANKR. D.R.I., http://www.rib.uscourts.gov/

newhome/LossMitigation/stats/October%20Report%20-%2011-4-2010.pdf (last visited Feb. 27,2011).

159 General Order M-543, supra note 14. R



ing a more utopian method of dispute resolution. Mediation comesin many different forms, depending on context, mediator goals andstrategies, and party participation and preferences.160 Mediation isa form of alternative dispute resolution (“ADR”) where partiescan work together to achieve a consensual outcome.161 The goal ofmediation is to have an impartial third party, known as a mediator,facilitate communication and negotiation, in order to bring the dis-puting parties to an acceptable and voluntary decision.162 To pro-mote uniform standards within the mediation community, theAmerican Arbitration Association, the American Bar Association,and the Association for Conflict Resolution approved a revision tothe Model Standards of Conduct for Mediators in 2005.163 Theseaspirational standards of ethics define mediation as “serv[ing] vari-ous purposes, including providing the opportunity for parties to de-fine and clarify issues, understand different perspectives, identifyinterests, explore and assess possible solutions, and reach mutuallysatisfactory agreements, when desired.”164

160 MENKEL-MEADOW ET. AL, MEDIATION PRACTICE, POLICY, AND ETHICS 113 (Aspen Pub-lishers 2006).

161 The Department of Justice’s ADA Mediation Program website provides a comprehensivedefinition for Mediation:

Mediation is an informal process where an impartial third party helps disputingparties to find mutually satisfactory solutions to their differences. Mediation can re-solve disputes quickly and satisfactorily, without the expense and delay of formalinvestigation and litigation.

Mediation proceedings are confidential and voluntary for all parties. Mediationtypically involves one or more meetings between the disputing parties and the media-tor. It may also involve one or more confidential sessions between individual partiesand the mediator.

Mediation is neither therapy nor a “day in court.” Rather, mediation shouldprovide a safe environment for the parties to air their differences and reach a mutu-ally agreeable resolution. Mediators are NOT judges. Their role is to manage theprocess through which parties resolve their conflict, not to decide how the conflictshould be resolved. They do this by assuring the fairness of the mediation process,facilitating communication, and maintaining the balance of power between theparties.

Representation by an attorney is permitted, but not required, in mediation.While mediators may not give legal advice or interpret the law, they will refer partiesto impartial outside experts within the disability and legal communities when ques-tions or issues needing clarification arise.

A successful mediation results in a binding agreement between the parties. Ifmediation is unsuccessful and an agreement cannot be reached, parties may still pur-sue legal remedies . . . including private lawsuits.

ADA Mediation Program, U.S. Dep’t of Justice, http://www.ada.gov/mediate.htm (last visitedFeb. 27, 2011).

162 MODEL STANDARDS OF CONDUCT FOR MEDIATORS, Preamble (2005).163 Levitin, supra note 64, at 570. R164 MODEL STANDARDS OF CONDUCT FOR MEDIATORS, supra note 162. R



In addition to these standards, however, “common wisdomholds that a mediation is only as good as the mediator, with thefollowing attributes critical in overall mediation success: interven-tion techniques employed (aggressiveness and diversity of tech-niques); demographic characteristics (age, experience, functionalspecialization); and overall quality of mediators.”165 In essence, amediator acts as a catalyst in order to help others constructivelyaddress and perhaps resolve a dispute, plan a transaction, or definethe contours of a relationship.166 Therefore, selecting an appropri-ate mediator for the type of dispute is “essential to providing dis-putants with the highest probability for a successful mediation.”167

As part of the process of picking a mediator, it is important todetermine whether the parties need a nationally recognized media-tor, a specialized mediator, a local mediator, or someone else.168 Insome circumstances, parties may benefit from having a nationallyrecognized mediator, an individual recognized for mediating high-profile cases.169 On the other hand, parties may be advantaged byselecting a mediator who simply specializes in a specific field or isotherwise well-known within the jurisdiction where the case ispending.170 However, regardless of specialty or notoriety, partiesshould always choose an appropriate mediator, that is, an individ-ual with “a proper combination of characteristics, including suffi-cient knowledge, training, experience, and skill, combined with thetemperament and ability to handle the type of disputants in-volved.”171 For that reason, the most successful mediators sharefour common traits: “flexibility, patience, perseverance, andcuriosity.”172

165 See Douglas A. Henderson, Mediation Success: An Empirical Analysis, 11 OHIO ST. J. ON

DISP. RESOL. 105, 113-17 (1996) (discussing the characteristics of a mediator and how it mightaffect the outcome of mediation).

166 MENKEL-MEADOW, supra note 160, at 91. R167 Jack G. Marcil & Nicholas D. Thornton, Avoiding Pitfalls: Common Reasons for Media-

tion Failure and Solutions for Success, AMER. J. OF MEDIATION, http://www.americanjournalofmediation.com/docs/Avoiding%20Pitfalls%20-%20Common%20Reasons%20for%20Mediation%20Failure%20and%20Solutions%20for%20Success.pdf (last visited Feb. 27, 2011).

168 James E. Miller, A Guide to Successful Mediation, PRACTICING L. INST. 268 (July 22,2010), available at Westlaw: 829 PLI/Lit 265.

169 Id.170 Id.171 Id. at n.14.172 Robert A. Merring, Five Steps (And Several Suggestions) that Lead to a Successful Media-

tion, 50 ORANGE CNTY. L. 34, 34 (2008).



III. A FAREWELL TO ARMS: LOSS MITIGATION IS BEST

ACHIEVED THROUGH MEDIATION VERSUS A

DIRECT NEGOTIATION MODEL

Although projectile weapons rarely make their way to the lossmitigation negotiating table, parties in a direct negotiation can ar-rive at stalemates and failed agreements for a variety of other rea-sons. One example includes a lack of understanding. For instance,a borrower faced with the prospect of foreclosure wants onething—an affordable monthly payment. Generally, borrowers donot understand the way their loans really work; what they under-stand is the amount of money they must pay every month in orderto stay afloat, and they want that number reduced to an amountthey can live with.173 Before the aforementioned federal, state, andbankruptcy court programs were created, homeowners routinelyfound themselves saying, “I have called, I have called, I havecalled. I can’t get through. I’m stuck on the phone in voicemailhell.”174 However, these frustrations only marked the tip of ahomeowner’s foreclosure nightmare. Instead,

For a debtor living at the edge of financial collapse[,] reductionsin monthly mortgage payments . . . can mean the difference be-tween remaining in a family home with children enrolled in localschools and neighborhood stability maintained, or having familylife totally disrupted in searching for new housing and schools,assuming they can be found with the funds available to adebtor.175

As this Note illustrated, not all foreclosure programs createdto combat the foreclosure crises are built the same, “some arehighly structured, mandatory programs requiring mediators whoare well-trained in [Net Present Value] calculations and other lossmitigation tools, while others are essentially voluntary programsthat . . . encourage the parties to come together.”176

In light of the various differences between loss mitigation ini-tiatives, it comes as no surprise that some of the programs dis-cussed previously have met greater success than others. Accordingto various news reports, both the Connecticut and New Jersey state

173 Eric A. Rosen, Negotiating Mortgage Modifications: Leading Lawyers on Navigating theNegotiation Process and Understanding the Impact of the Current Lending Climate on MortgageModifications, ASPATORE 3 (Mar. 2010), available at Westlaw: 2010 WL 895242.

174 Diehl, supra note 16, at 242. R175 Glenn, supra note 20, at 5. R176 Pazdam, supra note 11, at 26. R



mediation programs, which promulgate mediator led mediations,have demonstrated high success rates, with a large majority of theprogram’s participants finding alternatives to foreclosure.177 Forexample, as of December 31, 2009, the Connecticut ForeclosureMediation Program “reported that of the 5,014 cases that had com-pleted statutory mediation, 3,045, or 61% resulted in settlementsthat allowed homeowners to stay in their home.”178

By contrast, the S.D.N.Y. and D.R.I. programs, which moreclosely resemble a direct negotiation model, and the federalHAMP program, which incentivizes servicer participation in directnegotiations, have been met with mixed reviews. In early 2010, theS.D.N.Y.’s Bankruptcy Loss Mitigation Program was criticized be-cause of statistics from the S.D.N.Y. Bankruptcy clerk’s office.179

According to the statistics, of the 808 bankrupt Manhattan, Bronxand northern suburban homeowners who applied for the program,only 452 were granted access and less than ten received permanentmortgage modifications.180 However, in Rhode Island, news re-ports praised the D.R.I. Bankruptcy loss mitigation program, whichwas mirrored after the S.D.N.Y’s program, for its success.181 Yetthrough 2010, only 19.57% of the cases participating in the D.R.I.program resulted in a court approved loan modification.182 In ad-dition, as to the federal HAMP program, a December 14, 2010 re-port by a congressional oversight panel released a reviewlamenting the pitfalls and failures of the program.183 The panelstated, “It now seems clear that the Treasury’s programs, even

177 Fleischer, supra note 108 (reporting that over half of participants have obtained modifica-tions); see Douglas S. Malan, Foreclosure Mediation Becomes Mandatory, CONN. L. TRIB. (June8, 2009), http://www.ctlawtribune.com/getarticle.aspx?ID=33993 (reporting that seven out of tencases in the voluntary program are settled).

178 Foreclosure Mediation Program (FMP) Results: Cases Terminated as of December 31,2009, State of Connecticut Judicial Branch (on file with Roberta Palmer, Foreclosure MediationProgram Manager).

179 Richard Wilner, NY Mortgage Plan Leaving Owners Hanging, N.Y. POST (Feb. 16, 2010),http://www.nypost.com/p/news/business/left_at_the_alter_7dq194jGLw9iWuciR7Qg8O. How-ever, it should be noted that success does not only include instances where parties are able toreach to an agreement, but also where homeowners realize that their best option maybe to let goof a home which they can no longer afford.

180 Id.181 See Christine Dunn, RI bankruptcy court foreclosure mediation role praised, THE PROVI-

DENCE J. (Oct. 28, 2010, 12:25PM), http://bizblog.projo.com/2010/10/whitehouse-laud.html; seealso, Christine Dunn, Court effective in getting loan modifications, THE PROVIDENCE J. (Nov. 7,2010), http://www.projo.com/economy/Foreclosure_Grind_11-07-10_16KLDU3_v16.1ece75f.html.

182 REPORT ON LOSS MITIGATION STATISTICS, supra note 158. R183 CONGRESSIONAL OVERSIGHT PANEL, supra note 51, at 4. R



when they are fully operational, will not reach the overwhelmingmajority of homeowners in trouble.”184 According to the congres-sional report,

As of mid-December [2010], HAMP had processed almost520,000 permanent loan modifications. The panel estimatedthat by the time the program is finished it will have preventedonly 700,000 foreclosures overall—quite a contrast to the threemillion to four million modifications that the Treasury antici-pated when it rolled out its plan.185

Part I of this Note examined the various federal government,state legislature, and federal bankruptcy court responses to effectu-ating a resolution to the national foreclosure crisis, while Part IIintroduced the concept of mediation as an alternative dispute reso-lution venue. This section argues that the foreclosure mediationprograms constructed by states are preferable to the “direct negoti-ation” programs promoted by the S.D.N.Y., E.D.N.Y., and D.R.I.bankruptcy orders; and also the federal HAMP initiative, which at-tempted to incentivize negotiation participation and create serviceraccountability and transparency through the use of the NPV calcu-lation. The following discussion will conclude that the state media-tion programs represent a superior structure for helping debtorsand creditors avoid foreclosure because in mediator led mediationsessions, a mediator can eliminate the common barriers associatedwith direct negotiation which include: failure to communicate, gapsin information, inability to understand core issues, party imbal-ances, inability to align interests, emotional barriers including an-ger and frustration, and the inability to generate creativesolutions.186 It should be clarified, however, that this Note pro-poses that a mediator’s presence is only a necessary factor in creat-ing a successful loss mitigation program, but not the Holy Grail toforeclosure avoidance.

A mediator is better suited to keep lines of communicationopen between a homeowner and lender/servicer, and to assure thatgaps in information necessary for settlement are filled. As dis-cussed previously, the two largest complaints by homeowners seek-ing foreclosure avoidance were: (1) that they were unable to get intouch with their mortgage servicers in order to negotiate possiblesettlement proposals and (2) even if contact was made, borrowers

184 Id.185 Gretchen Morgenson, A Mortgage Nightmare’s Happy Ending, N.Y. TIMES, Dec. 25, 2010,

at BU1.186 BENNETT G. PICKER, MEDIATION PRACTICE GUIDE 56-61 (H. Kyo Suh ed., A.B.A. 2003).



had to routinely resubmit documents requested by the servicers.187

To eliminate these issues, the bankruptcy courts’ loss mitigationprograms require that a lender, from the outset, disclose directcontact information for a person who has full authority to make asettlement decision.188 In addition, the parties are also required toexchange information relevant to loss mitigation seven days priorto the loss mitigation session.189 According to one of the S.D.N.Y.bankruptcy judges, the idea behind the Loss Mitigation Programwas simple:

[T]o identify the decision makers for both the debtor and thelender, to prescribe a period for them to meet and discuss a con-sensual solution, and to provide a uniform set of guidelines andjudicial oversight. Just putting the authorized parties in touchwith one another, with the information they need, is a majorstep. Debtors benefit from having a clear structure as to whomthey should be talking to, what they have to do, and when theyhave to do it.190

Although this facet of the bankruptcy courts’ initiative marksa significant step towards foreclosure avoidance, the presence of amediator during loss mitigation sessions can ensure that the successof ongoing communication and information exchange continues af-ter the parties arrive at the loss mitigation table. In fact, a media-tor’s ability to provide effective case management and mediationtechniques are the best methods to ensuring that communicationsoccur early enough in the case in order to avoid wasted time andresources for the courts and the parties.191

For example, a mediator can promote party communication bybreaking down complex foreclosure law and loan modification op-tions for homeowners. When dealing with loss mitigation, “fore-closure law can be very complicated—you are negotiating loanmodifications. Very specific skills are necessary to be a foreclosuremediator.”192 A skilled mediator can help a homeowner navigatethe various loan modification options which can be very technicalincluding: interest rate reductions, capitalization of arrears, exten-sion of the terms, freeze of interest rates, principal balance reduc-

187 See Glenn, supra note 20, at 4. R188 General Order M-364, supra note 14. R189 Id.190 My Chi To, supra note 145, at 1. R191 A.A.A., Florida Supreme Court Orders Residential Foreclosures to Mediation, 65 DISP.

RESOL. J. 9, 9 (2010).192 Julie Kay, Foreclosure Mediation Grows, But Some Wonder if it’s the Best Option, 95

A.B.A. J. 14, 14 (2009).



tions, and step interest rate reductions.193 To clear up anyconfusion on behalf of the homeowner, a mediator can frequentlycheck in with the homeowner during the session by asking whetherthere is anything the servicer can better explain. Therefore, abankruptcy courts’ loss mitigation program could receive time-sav-ing benefits by having a mediator assist a homeowner in under-standing the technical information a servicer provides so that theparties can freely focus on other issues presented during the lossmitigation session.

In addition, a mediator can also assist the flow of negotiationand aid communication between the lender and borrower by ad-ding structure during the loss mitigation session. According toJudge Morris, “Debtors benefit from having a clear structure as towhom they should be talking to, what they have to do, and whenthey have to do it.”194 However, the S.D.N.Y.’s attempt to addstructure by mandating: (1) the exchange of relevant informationprior to the loss mitigation session; (2) a time to negotiate; and (3)individuals who must participate in good faith,195 is yet another ex-ample of a prophylactic measure that overlooks the need for con-tinued structure during the actual loss mitigation session.

By contrast, a mediator creates structure within a mediationsession by telling the parties about the issues that the mediator un-derstands need resolution, subsequent to each of the parties’ open-ing statements, and then by identifying the order in which eachissue will be addressed.196 This plan of attack, known as “develop-ing a bargaining agenda,” can play a vital role in how fluid andsuccessful negotiations can be.197 The mediator develops theagenda by logically ordering the issues presented at the table in away which will “most likely . . . result in the parties coming to [a]better understanding . . . and possible resolution of all issues.”198

Generally, this means starting with issues that can be most easilyresolved so that the parties can build momentum as well as trust inthe mediation process.199 Thus, the “creation of an agenda takesthe dispute from a relatively chaotic jumble of accusations . . . andblocked interest[s][,] to an organized group of topics that the par-

193 Enric, supra note 49. R194 My Chi To, supra note 145, at 1. R195 General Order M-364, supra note 14. R196 JOSEPH B. STULBERG & LELA P. LOVE, THE MIDDLE VOICE 79 (N.C. Academic Press

2009).197 Id. at 79.198 Id. at 79.199 Id.



ties can address.”200 For that reason, by having a mediator create alogical and well thought out ordering of the various issues, the par-ties can gain “confidence that the dispute may be manageable afterall.”201 In the case of loan modifications, a mediator with experi-ence in foreclosure mediation can quickly identify two optionswhich are almost always open to negotiation: interest rate reduc-tion and modification of the arrears.202 In addition, if the mediatorsenses that certain issues create an impasse, the mediator canrestructure the agenda and move the discussion towards the otherremaining issues on the table, before returning to more challengingconcerns.203 Typically, parties in negotiation overlook the valueand importance of ordering the issues for discussion.204 Instead,parties too often focus on the “wrongs they have suffered and get-ting what they want.”205 Therefore, the Bankruptcy Courts’ lossmitigation programs would significantly benefit from having a me-diator create structure within the loss mitigation session.

In addition to moderating the flow of negotiations, a skilledmediator can also ensure that the parties construct realistic and du-rable agreements by facilitating communication and understandingregarding why the homeowner originally defaulted. In order totruly avoid foreclosure, a mediator must assist the parties in devel-oping a tailored solution that fits the “troubled borrower’s personaland financial situation . . . in other words, one must ‘treat the dis-ease, not the symptom.’”206 In the case of loss mitigation, a media-tor can “treat the disease” by helping the borrower explore andidentify the circumstances responsible for the original default, in-stead of simply “treating the symptom” by reviewing monthly ex-penses that can be curbed. A major reason why foreclosureavoidance is difficult is because mortgages are, in practice, farmore complicated than a simple one-to-one relationship betweenborrower and lender.207 Take for instance Jane Doe homeownerwhose decision, to charge her single family home renovation ex-penses on various credit cards, contributed to her inability totimely make mortgage payments. In a direct negotiation setting

200 Id. at 79.201 Id. at 79.202 Rosen, supra note 173, at 3. R203 STULBERG, supra note 196, at 84. R204 Id. at 79.205 Id. at 84.206 Samuel C. Waters, A View from the Trenches: The Legal Practitioner and Loss Mitigation,

60 S.C. L. REV. 807, 811-12 (2009).207 CONGRESSIONAL OVERSIGHT PANEL, supra note 51, at 4. R



between a homeowner and servicer, the servicer may fail to recog-nize the importance of understanding why Jane Doe decided torenovate. Instead, the servicer may come to the negotiation tablewith a singular view that Jane Doe’s purported financial irresponsi-bility created the dilemma. In addition, the servicer may not evenbelieve that accumulating information about this particular eventmay enrich any ultimate resolution.

However, a mediator’s role as an educator can overcomepreconceived assumptions, which can prevent the creation of last-ing agreements.208 In the case of Jane Doe, a mediator can askopen-ended questions such as, “Can you tell us why you decided torenovate three years ago?,” in order to educate and promote un-derstanding. Although this question may seem insignificant at firstglance, it can lead to the servicer’s and mediator’s understandingthat the renovation began because a disabled child required a morefunctional living environment. One might ask, “So what, why doparties need to address these ancillary domestic issues?” However,as discussed previously, in order to develop a lasting solution, par-ties must treat the disease and not the symptom; and in the case ofloan modifications, this can only be achieved by allowing Jane Doethe opportunity to voluntarily provide information as to why sheinitiated the renovation. Part of a mediator’s role is to gather in-formation about each party’s concerns in order to promote lastingresolutions based on a “heightened level of understanding.”209 Inthe case of Jane Doe, the parties heightened understanding canlead to an agreement that sets up a future payment plan that takesinto account when other expenses, such as a child’s medical bills,need to be paid. In fact, one of the “unique strengths [a mediatorhas is the] ability to address the infinitely wide range of concernsthat the disputing parties have.”210 Therefore, by taking a moreholistic approach to the negotiation process, a mediator can assistthe lender in creating an agreement which will last.

Beyond a mediator’s ability to help parties construct durableagreements, a mediator can also assist negotiations by minimizingpower imbalances between the parties, which are created by con-flicting core interests and positions.211 However, before identifying

208 STULBERG, supra note 196, at 25. R209 Lela P. Love, Training Mediators to Listen: Deconstructing Dialogue and Constructing Un-

derstanding, Agendas, and Agreements, in MENKEL-MEADOW ET. AL, MEDIATION PRACTICE,POLICY, AND ETHICS 232 (Aspen Publishers 2006).

210 Id. at 229.211 DOUGLAS H. YARN & GREGORY T. JONES, ALTERNATIVE DISPUTE RESOLUTION: PRAC-

TICE AND PROCEDURE IN GEORGIA § 7:5 (Thomson ed., West 2010) (2006).



specific practices a mediator can utilize in the loan modificationarena, it is critical to first evaluate why a servicer’s position andinterests before coming to the loss mitigation table creates a powerimbalance.

According to a recent report by the National Consumer LawCenter (“NCLC”), which reviewed foreclosure mediation practicesacross the country, “servicers have all the discretion [, with regardsto whether to pursue loan modification,] and homeowners have lit-tle or no power.”212 In part, the general issue of discretion stemsfrom certain “barriers—strategic, psychological, or situational—that make it difficult to formulate, and/or get on the table, a pro-posal that both parties, given their different interest and views andtheir conflicting strategic goals, deem preferable, at least tempora-rily, to perpetuation of the status quo.”213 In the case of loan modi-fications, servicers that administer mortgages for banks andinvestors are prospering from foreclosures and may have little in-centive to negotiate.214 They have dissimilar financial incentivesthan the investors who make the loans.215 In fact, a recent congres-sional oversight panel, which reviewed the failed HAMP initiative,noted that loan servicers can profit significantly by steering home-owners into foreclosure.216 According to the report, “The servicersare interested in maximizing their revenue from each loan whileminimizing their expenses.”217 Furthermore, when a debtor’smortgage is in default,

the servicer typically must continue to make payments to theinvestor out of its own pocket. It may also incur other expensesrelated to holding the troubled mortgage in its portfolio. If themortgage goes into foreclosure, the servicer is reimbursed forthese expenses before any of the money passes to the investors.Moreover, if a mortgage goes into foreclosure, the servicer hold-ing the loan at that time typically handles the foreclosure, earn-ing various fees for this service. Additionally, servicers earnincome from float on the payments they collect – interest earnedfrom the short-term investment of mortgage payments made be-tween the time the servicer receives it from the borrower andthe time it must be remitted to the investors.

212 Kay, supra note 192, at 14. R213 Lee Ross, Reactive Devaluation in Negotiation and Conflict Resolution, in MENKEL-

MEADOW ET. AL, MEDIATION PRACTICE, POLICY, AND ETHICS 85 (Erwin Chemerinsky et. al.eds., Aspen Publishers 2006).

214 Morgenson, supra note 185. R215 CONGRESSIONAL OVERSIGHT PANEL, supra note 51, at 59. R216 Morgenson, supra note 185. R217 CONGRESSIONAL OVERSIGHT PANEL, supra note 51, at 59. R



Therefore, once default occurs, a servicer’s interests change.218 Fora servicer, mortgage default represents a decrease in profit because“the costs associated with servicing a delinquent loan often exceedthe revenues that a servicer can generate from the same loan.”219

Due to these realities, servicers often push for foreclosure.220

Another servicer reality, which creates an imbalance at theloss mitigation table, was identified as pitfall of the federal HAMPinitiative—that the bank formula “for arriving at a permanentmodification is secret.”221 According to Kurt Eggert, a professor atChapman University School of Law, “I think a big part of the prob-lem is that nobody is effectively holding servicers’ feet to the fire tosay, ‘Where are the loan modifications that you should be deliver-ing that help both borrowers and investors?’”222

After reviewing the servicer’s interests and position prior tonegotiation, which ultimately leads to the servicer-homeowner im-balance at the loss mitigation table, this Note now shifts towardsidentifying the techniques a skilled mediator can utilize to alleviatethis issue. In a 2008 ABA study rating the success of certain tech-niques employed by mediators, the following practices were con-sidered most beneficial to advance negotiation discussions: (1)pointed questions that raise issues (95%) and (2) questions assist-ing parties to find possible ways to resolve issues (100%).223 In-deed, a mediator’s use of these techniques can negate the adverseeffects of destructive negotiation tactics and severe power imbal-ances.224 In a commercial dispute setting, mediators often inquireabout the parties’ business interests,225 and can employ the afore-mentioned practices to the parties’ advantage in order to reachagreement. For example, one challenge creating an imbalance wasthe fact that the NPV calculation, which provides a servicer withdiscretion on whether a loan modification is economically feasible,is done in private.226 However, during loss mitigation, a mediatorcan overcome this issue by simply asking the servicer to explain the

218 Id.219 Id.220 Id.221 Wilner, supra note 179. R222 Morgenson, supra note 186. R223 See A.B.A. SECTION OF DISPUTE RESOLUTION, TASK FORCE ON IMPROVING MEDIATION

QUALITY FINAL REPORT (Apr. 2006–Feb. 2008), http://www.abanet.org/dispute/documents/FinalTaskForceMediation.pdf.

224 YARN, supra note 211, at § 7:5. R225 Don Peters, Can We Talk? Overcoming Barriers to Mediating Private Transborder Com-

mercial Disputes, 41 VAND. J. TRANSNAT’L L. 1251, 1286 (2008).226 Wilner, supra note 179. R



calculation and/or share the documentation associated with makingthe evaluation. These conversations, which may occur while bothparties are present with a mediator, or individually between a me-diator and servicer during a caucus,227 can explore the servicers’“core concerns and strongest motivators.”228 Accordingly, by usingprobative questioning techniques, a mediator trained in foreclosuremediation can ask a servicer to show all his cards when the timingis right. Therefore, the presence of a mediator during loss mitiga-tion can be valuable because servicers can be requested to explainand produce documents “showing [that] they considered all theoptions.”229

An additional obstacle to the success of direct negotiation be-tween a servicer and homeowner is the impact that a homeowner’semotions, such as anger and frustration, can have in preventing ordelaying resolution. In fact, the reality that a homeowner’s familymay need to surrender their property to a bank, before being ableto find a new home, only adds to the homeowner’s already sensi-tive emotional state and inability to communicate effectively at thenegotiation table.230 However, during instances where a home-owner’s emotions cause conflict during negotiation, a mediator canutilize a technique known as “reframing” in order to prevent stale-mates.231 The idea behind a mediator’s reframing technique is toalter the parties conceptual and/or emotional viewpoint, with re-gards to how a situation is experienced, and to place it in anotherframe which still “fits the ‘facts’ of the party’s statement,” butwhich enables both of the parties to consider forward-looking op-tions.232 For example, a distraught homeowner who yells, “I[bleeping] called these idiots over and over, no one remembers the[bleeping] documents I sent previously, and then I get hung up onwhen placed on hold. The entire process is [bleeping] ridiculous,”

227 “Caucus” defined: “A caucus is where the mediator meets individually with one side . . . Ina caucus, parties are invited to speak openly with the assurance that the mediator will not shareinformation conveyed unless given permission to do so.” MENKEL-MEADOW, supra note 160, at R245. In addition, “a caucus allows the mediator to obtain information and insights and impartinformation and encourage insights that a mediator does not believe can occur—or occur con-structively—in joint discussions.” STULBERG, supra note 196, at 99. R

228 Peters, supra note 225, at 1286. R229 Kay, supra note 192, at 14. R230 Rosen, supra note 173, at 7. R231 VALERIE F. BUTLER, MEDIATION ESSENTIALS AND EXPECTATIONS 8 (Dorrance Publish-

ing Co. 2004).232 SIDNEY ROSEN, MY VOICE WILL GO WITH YOU: THE TEACHING TALES OF MILTON H.

ERICKSON 143 (1982), quoting PAUL WATZLAWICK, JOHN WEAKLAND & RICHARD FISCH,CHANGE: PRINCIPLES OF PROBLEM FORMATION AND PROBLEM RESOLUTION (1974).



can obviously engender a hostile negotiation environment. At thisjuncture, a mediator can step in and reframe the debtor’s hostilestatement by saying, “It sounds like this process has been incredi-bly frustrating for you, but I also understand that if the servicercould work with you by being more available with a direct numberin the future, and could better organize documents relating to yourloan, that you would be willing to move forward with discussions tofinding a resolution.” Hence, by acknowledging the homeowner’semotions and creating a positive spin on his statement, the media-tor’s reframe can change the homeowner’s “self-serving focus to amore problem-solving focus.”233 According to Burton I. Zoub, “inorder to eliminate behavior that is unproductive and positional, themediator is challenged to reframe and intervene.”234 Althoughparties can engage in reframing on their own, it can be extremelyadvantageous to have the neutral mediator guide the negotia-tion.235 Therefore, loss mitigation sessions would greatly benefitfrom having a mediator assist “disputants communicate and rede-fine the way they think about the dispute, in the hopes of enablingcooperation between opposing sides,” as well as creating a com-mon understanding of the problem, while increasing the possibilityfor collaborative and integrative resolutions.236

A final benefit that mediators bring to the loss mitigation tableis their ability to assist parties in generating creative solutions. In-deed, many proponents of mediation underscore its ability to en-gage parties in a forward-looking exercise of developing customtailored agreements in order to create more value for the parties.237

With regards to the direct negotiation of loan modifications, it is“often difficult to get [the parties] to be creative in terms of pay-ment options [because] . . . [i]t is a volume-based business on thelender/servicer end—and creativity does not work in the context ofvolume.”238 For servicers, the only way to manage that volume isto adhere to a strict formula.239 However, mediators can helphomeowners identify creative solutions, which can still be accept-able to servicers, such as: (1) arranging a scale of payments where

233 BURTON I. ZOUB, CHILD CUSTODY LITIGATION, CH. 5: MEDIATION IN CUSTODY DISPUTES

§ 5.29 (Illinois Institute for Continuing Legal Education, 1998).234 Id.235 Brad Spangler, Setting the Stage for Reframing, BEYOND INTRACTABILITY (Nov. 2003),

http://www.beyondintractability.org/essay/joint_reframing/.236 Id.237 MENKEL-MEADOW, supra note 160, at 95. R238 Id.239 Rosen, supra note 173, at 6. R



the amount that is paid is adjusted over time; (2) proposals thatform a combination payment—i.e., a down payment combinedwith a shifting of the arrears, whether those arrears are added on tothe back of the loan or partly satisfied in exchange for the downpayment; and (3) a reduced interest rate that will change over time,or some combination of all of the above.240 Therefore, a media-tor’s presence during loss mitigation sessions may increase the op-portunity for disputants to find modification strategies that canuniquely fit each individual client and the facts associated withtheir circumstances.241

IV. METAMORPHOSIS: REDRAFTING THE FEDERAL

BANKRUPTCY COURTS’ LOSS MITIGATION ORDERS

The change required to mandate the presence of a mediator,during loss mitigation sessions in the S.D.N.Y., E.D.N.Y., andD.R.I. bankruptcy courts, involves editing Section IV of thesecourts’ general orders, and is far simpler than Kafka’s human-in-sect transformation. Currently, Section IV, entitled “AdditionalParties,”242 of the S.D.N.Y. and E.D.N.Y.’s general orders containa provision regarding mediators; however, as discussed previously,the D.R.I. order omits the following language:

D. MEDIATOR

At any time, a Debtor or Creditor participating in the Loss Miti-gation Program may request, or the bankruptcy court may or-der, the appointment of an independent mediator from theUnited States Bankruptcy Court for the _____ District of______’s Register of Mediators, which may be viewed at http://www.____.uscourts.gov/mediators.html. A mediator will assist inloss mitigation in accordance with these Procedures and with theUnited States Bankruptcy Court of the District of _____’s [Gen-eral Orders for the Adoption of Procedures Governing Media-tion of Matters in Bankruptcy Cases].243

Instead, to require a mediator’s presence, the section below shouldreplace the current language of the S.D.N.Y. and E.D.N.Y. orders,and should correspondingly be inserted into the R.D.I. order:

D. MEDIATOR

240 Id.241 Id.242 The General Orders, supra note 14. R243 Id.



An independent mediator shall be appointed from the UnitedStates Bankruptcy Court for the _____ District of ______’s Reg-ister of Mediators, which may be viewed at http://www.____.uscourts.gov/mediators.html. A mediator will assistin loss mitigation in accordance with these Procedures and withthe United States Bankruptcy Court of the District of _____’s[General Orders for the Adoption of Procedures GoverningMediation of Matters in Bankruptcy Cases].

CONCLUSION

The S.D.N.Y., E.D.N.Y., and D.R.I. bankruptcy courts’ lossmitigation programs currently provide a lender and borrower witha unique opportunity to salvage their existing relationship throughstructured direct negotiation sessions aimed towards preventingforeclosure. However, “[o]ne need only pick up the morning news-paper . . . to see that [direct] negotiations frequently fail and dead-locks persist even in conflicts where preservation of the status quoclearly seems to be against the best interest of the relevant par-ties.”244 A major reason for this result is because parties to a dis-pute “often fail to properly consider the human elements insettlement negotiations where the people involved are equally, ifnot more important, than the issues.”245

The meaning behind Harper Lee’s title, To Kill a Mocking-bird, is readily applicable when considering the role of mediators inforeclosure avoidance programs. Mediators, like mockingbirds,enrich the settings they are in with their unique talents and theirpresence should not be overlooked or killed off lightly. It is highlyunlikely that proponents of any foreclosure avoidance programpurposefully devalued a mediator’s abilities or questioned theirpositive impacts; however, the chilling effect of ignoring a media-tor’s beneficial role during negotiation may contribute to the hor-ror many Americans face of losing their homes due to failed lossmitigation agreements. Therefore, in order to best serve the inter-ests of debtors and creditors seeking home foreclosure avoidancein bankruptcy, a loss mitigation program should provide partieswith a mediator. A mediator promotes communication and under-standing within the loss mitigation session by “generating addi-tional information germane to the controversy, suggesting new

244 Ross, supra note 213, at 85. R245 Merring, supra note 172, at 34. R



ideas for settlement when the parties are stuck,”246 focusing thediscussion, controlling participant behavior, and sustaining a posi-tive conversational dynamic.247 A mediator performs these dutiesin every dispute, “although the extent to which it applies varieswith the situation.”248 Mediators thus provide any foreclosureavoidance program with superior odds to achieving loss mitigationagreements.

246 STULBERG, supra note 196, at 25. R247 Id. at 23.248 Id.

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