Monday, April 11, 2011

Foreclosure Mediation: Poking the Bear

Have you ever heard the phrase, "don't poke the bear?"  Of course you have, unless you are 7 years old and never read anything in your life.  Even by context, it seems like a bad idea.  Well, after some 30,000 foreclosures last year, the bear has had enough, and I mean the voters.  If you have been following me while I tracked SB 5275 and HB 1362, you know that I was of the belief that the banks had won.  In the first substitute of the bill I went to Olympia to fight for, the legislators had gutted the bill.  See Paper Tiger. 

Much to my wonderment and excitement, the second substitute put almost every tooth back in, and those dentures are sharp.  You can read the text of the new bill here, but only if you are a glutton for monotonous punishment.  The bill is about 28 pages and it has twists and turns, new definitions, rules, traps, and in the end, I believe a tool that will allow homeowners to hold banks responsible. 

The bill has not yet been signed.  I didn't want to get scooped here, so I am posting this before Gregoire puts pen to paper.  She got the bill on Friday and it has not been scheduled when she will sign the bill.  Some of the highlights are mediation, of course, bad faith, and attorney opinion letters to HUD.  I always like new business.  there are some traps as well, the provisions are not automatic, they are not free, and in many ways, they will be ineffective, but that doesn't mean you ignore them.

I will write more on this later this week.   So stay positioned, the great bear of the northwest has been poked out of its cave for long enough, and some bankers better be wary.


  1. Thanks for the interesting post.

    When poking bears, or "waking sleeping giants," one should also beware the law of unintended consequences.

    Of course, normally, "unintended consequences" means something bad. But you could make the argument, in this situation, that one unintended consequence might be good...

    I mean this: A policy which requires banks to be more restrained in foreclosures also requires that of their competitors...

    and, thereby, "allows" all of them, in those cases, to act in a more sane fashion with regard to their own portfolio, which is to say, the money that belongs to their investors and depositors...

    which is to say, the bear's money to begin with (!) -- even though the banks forgot this for a while in the 2005-2010 era.

    This would happily defuse, in part, a lemming-like race to liquidity in which each of the banks would like to stop destroying the market that underlies their whole loan portfolio, but cannot, because its own restraint is too small to have any meaningful impact. I.e., a tragedy of the commons.

    It wouldn't be the first time that something an industry fought bitterly to prevent actually helped it.... take a look at what private courier services did for the post office.

    And you know what? If financial institutions turn out to benefit, despite themselves, so be it. A rising tide lifts all boats. Even, I suppose, those that have been running around poking bears and sleeping giants ;-) while over-grazing the commons. Okay, I'm all out of metaphors.

    Gregory Fossedal

  2. You take an incredibly insightful policy tack on these unintended consequences. In light of my most recent post, it would be interesting to see what the positive unintended consequences of the AG settlement may bring.

    I have been advising clients to use the Protecting Tenants in Foreclosure Act, to guarantee lease terms despite upcoming foreclosures, but in reality, the benefit is to the banks who are holding shadow inventories at almost two times the average sales volume in the US for a year. The benefit for the banks is one, they are getting cash payments each month, and two, the home does not sit vacant, deteriorating and further compromising its newly acquired asset.
    It is likely that this bill, though lengthening the process, may actually limit the banks final liability if it has a chance to get its ducks in a row prior to actual foreclosure. The homeowner benefit is longer living in a rent free home.

  3. Nic - thanks for the response. And kudos to you for being out in front on this important policy issue.