With nearly half-a-million foreclosure proceedings underway in the Florida courts in the beginning of 2010, the Florida Supreme Court issued an administrative order instituting a statewide “managed mediation” program to facilitate communication between lenders and distressed borrowers and encourage foreclosure alternatives including Short Sales.
Florida is a Judicial Foreclosure state which means foreclosures actually go through the courts and involve a lawsuit. The massive amount of foreclosures is putting a great burden on the court system in general which has an interest in finding alternatives to foreclosure. Under the new program, all foreclosure cases in the state courts that involve residential homestead property will be referred to mediation, unless the plaintiff and borrower agree otherwise.”
The mediation program specifically anticipates Short Sales and qualification standards for mediators includes an understanding of Short Sales as an option.
Borrowers who participate in the program and have a Short Sale in the works should submit the standard Short Sale requirements through the mediation online system including:
- Signed purchase contract for the homestead residence
- Listing agreement for sale of the homestead residence
- Preliminary HUD-1
- Written authorizing to release information
Also, the borrower should be reminded that the sale MUST be an arm’s length transaction, and the property cannot be sold to anyone with close personal or business ties to the borrower.
A mediation must be scheduled within 120 days of a foreclosure filing, with the cost of the mediation being paid for by the lender and the Borrowers must meet with a HUD-approved foreclosure counselor prior to the mediation.
The Court noted that “Florida has the third highest mortgage delinquency rate, the worst foreclosure inventory, and the most foreclosure starts in the nation. The crisis continues unabated.” The state has consistently been ranked as having one of the nation’s highest foreclosure rates since the onset of the housing crisis.
The Supreme Court acknowledged lack of communication between plaintiffs and borrowers as the most significant issue impeding early resolution of foreclosure cases, and concluded that effective case management and mediation techniques are the best methods the courts can employ to ensure that such communications occur early enough in the case. “No action will be taken by the court to set a final hearing or enter a summary or default final judgment until the requirements of [the mediation program] have been met.”
While the referral to mediation is required, the parties are not forced to agree to anything in the mediation. Also, the borrower cannot be compelled to particiate. If the borrower does not participate it just means the lender can go forward with the foreclore.
Also, it doesn’t mean that this is the only place a short sale could be considered. Even if the parties do not agree to a settlement in the mediation, the opportunity to do a short sale still exists as always.
What does this mean for Short Sale investors?
First, any program that faciliates a borrower avoiding a foreclosure and working out a deal with their lender is a good thing for sellers, the enonomy, the housing market, and our country. This is true regardless of whether the resolution is a short sale for an investor or not. To the extent that a mediation program helps find (or pressures lenders into agreeing to) solutions that benenfit sellers – that can only be good for the larger economy and therefore you and me.
However, the more ‘proceedure’ that is added to the foreclosure ‘process’, the longer and more expensive it gets for the lender . . . and the math behind the added process and expense makes a short sale more attractive to the lender. Requiring mediation will add steps, time, and expense to the lender’s foreclosure process.
If you have been to one of our live trainings or have access to the RE$ource Vault, you’ve seen the Lender Short Sale Analysis spreadsheet which illustrates how a bank weighs a short sale offer against what they think they will get if they foreclose on the property and eventually sell it REO. The longer and more expensive the foreclosure process is, the relatively more attractive the Short Sale offer looks. To keep it simple . . . the further away the bird-in-the-bush (the bank’s REO proceeds) appears, the more attractive the bird-in-hand (short sale offer) is.
At the end of the day, the effectiveness of the program will depend on how it is administered. The court asknoweldged that judicial resources for such an undertaking were “limited”. I hope the program is successful in addressing the blazing hot foreclosure crisis in the state where I grew up and were most of my family still lives. By adding more process, confusion and delay to the foreclosure pipeline, I predict one impact will be that a wholesale short sale offer from an investor will appear more attrative to lenders in the Sunshine State.
