Three-M Laws: Tolls On the Road to Foreclosure

New state statutes likely will lengthen the foreclosure process.

November 1, 2010

Experts often disagree about the direction and trajectory of the residential real estate market. They can’t dispute, however, that the Great Recession has brought America its greatest foreclosure crisis since the Great Depression.

The crisis began in 2007 with widespread defaults on subprime mortgages. While many of those defaults have worked their way out of the system, the crisis has spread to prime loans, driven by persistently high unemployment.

State legislatures, seeking to keep borrowers in their homes, have enacted mortgage relief laws that:

  • Provide grants or loans that distressed homeowners can apply toward their mortgage payments;
  • Establish mortgage counseling services to provide mortgagors with information about alternatives to foreclosure, such as forbearance or loan modification agreements and short sales of mortgaged homes; and
  • Lengthen foreclosure periods, giving delinquent borrowers more time to pursue alternatives to foreclosure.  

Several states have enacted laws to ensure borrowers have meaningful opportunities to seek mortgage modifications. These laws will apply regardless of lender- or state-initiated moratoriums on foreclosures, and may have a significant impact on lenders’ and borrowers’ experiences in the foreclosure process. The statutes, commonly referred to as mortgage modification mediation laws, or “Three-M laws,” apply to owner-occupant borrowers. In some cases, income limitations apply to borrowers who seek modification.

The Three-M laws—enacted by Maine, Maryland, Minnesota, Nevada, and Vermont—differ in some of their particulars, but are similar in their general approach. They prescribe a process that begins with a borrower receiving a notice of the right to invoke mediation and ends with 1) a court or administrative agency ruling that a borrower is ineligible for mediation, 2) mediation occurring and modification being agreed upon, or 3) mediation being concluded without a modification agreement, leading to completion of foreclosure.

Under each law, lenders must notify borrowers of the right to have mediation through the lender’s notification of intent to foreclose or notice of commencement of foreclosure. A borrower then has a specified period of time to request mediation by notifying the lender and the court or administrative agency that has authority over the mediation process.

If the borrower elects mediation, the court or agency reviews the request. If the borrower meets all eligibility requirements, mediation is ordered. If the borrower is ineligible for mediation, the court or agency permits foreclosure to proceed.

Licensed or certified mediators, or other appointed officials, conduct the mediations. Most mediation costs are paid from funds appropriated by the state legislatures, although in some cases lenders will directly or indirectly pay costs. In Maine, mediation will be partially funded through a special transfer tax on deeds of foreclosure and deeds in lieu of foreclosure, payable by lenders.

The Three-M laws generally give mediators wide latitude in exploring foreclosure options with borrowers and lenders.

Mediation may extend theforeclosure period by a matter of months. Under the Maryland law, mediation must be completed within 60 days after being ordered, subject to extension for good cause. In Vermont, mediation must be completed before expiration of the statutory redemption period.(The foreclosure action in Vermont isn’t stayed by the mediation process, and thus may proceed while mediation is occurring.)

With the exception of the Vermont statute, the Three-M laws will be effective indefinitely. In Vermont, only loans eligible for modification under the federal Home Affordable Modification Program (HAMP) may be considered for mediation, and the state mediation program will expire concurrently with HAMP, set for Dec. 31, 2012.

It remains to be seen how frequently credit union borrowers exercise their mediation rights. To the extent they do, credit unions will incur greater foreclosure expenses. In states that have adopted the Three-M laws (and in those where similar laws may be enacted) credit unions may determine they have a significant incentive to seek effective pre-foreclosure loan modifications to minimize the likelihood that a mortgage modification mediation process will be imposed on them.

Chris Johnson is vice president of state governmental affairs for the Credit Union National Association. Contact him at 202-824-6298.