This paper discusses how mandatory mediation reduces mortgages servicers’ financial incentives to prefer default management to loss mitigation. Part I introduces mortgage servicers and foreclosure mediation. Part II describes mortgage servicers’ financial incentives when handling defaulted mortgages. Part III describes the increased transaction costs and overhead costs required to engage in loss mitigation. Part IV describes a few ways in which implementing mandatory foreclosure mediation reduces mortgage servicers’ disincentives to engage in loss mitigation, promoting non-foreclosure outcomes. Part V then presents conclusions derived from this discussion.
A. Mortgage Servicers
After mortgage loans are made, they are administered by mortgage servicers. If the initial lender administers the mortgage, then it is a first party servicer.1 If an entity other than the lender that made the loan administers the mortgage, then that entity is a third-party servicer.2
Mortgage servicers are responsible for a broad array of administrative services known as transaction processing, which includes billing and forwarding payments.3 Important for current purposes, mortgage servicers’ responsibilities also extend beyond debtor default and include both loss mitigation and default management.4 Loss mitigation is the use of alternatives to foreclosure such as "loan restructuring accepting a deed in lieu of foreclosure, or approving a short sale."5 Conversly, default management is essentially administering foreclosures.6