The Case for Mediation in Mortgage RepossessionJune 6, 2016
Pre-Action Protocol for Possession Proceedings
The current Pre-action Protocol for possession proceedings based on mortgage arrears in respect of residential property (“the Protocol”) outlines the behaviour expected by the Court in mortgage repossession cases.
Its aim, as noted in the Protocol, is to ensure that a lender and home owner act fairly and reasonably with each other in resolving any matter concerning mortgage or home purchase plan arrears and to encourage more pre-action contact between the lender and the borrower in an effort to seek agreement between the parties, and where this cannot be reached, to enable efficient use of the court’s time and resources.
It is also noted that the Court takes the view that commencing proceedings is a last resort and that proceedings should not normally be commenced when a settlement agreement is still actively being explored. The current Protocol makes a number of suggested options for discussion between the parties in this regard:
- extending the term of the mortgage;
- changing the type of a mortgage;
- deferring payment of interest due under the mortgage;
- capitalising the arrears;
- payment holiday;
- reducing the interest rate; and
- alternative affordable mortgage products.
The Protocol also states that the lender should accept a reasonable request from the borrower to consider any of the above options.
Due to the nature of these proceedings, the Court is often not aware of the full extent of discussions between the parties, which usually involves numerous telephone calls from the lender to the borrower in an attempt to engage in a settlement process prior to proceedings. Experience shows that the borrowers in these cases often do not engage until the later stage of the proceedings when further costs have been incurred by the lender and the Court’s time has been consumed.
The Overriding Objective
The Overriding Objective as set out in Order 1 A of the Rules of the Court of Judicature, is to enable the court to deal with cases justly and so far as is practicable:
(a) ensuring that the parties are on an equal footing;
(b) saving expense;
(c) dealing with the case in ways which are proportionate to –
(i) the amount of money involved;
(ii) the importance of the case;
(iii) the complexity of the issues; and
(iv) the financial position of each party;
(d) ensuring that it is dealt with expeditiously and fairly; and
(e) allotting to it an appropriate share of the Court’s resources, while taking into account the need to allot resources to other cases.
The Court must seek to give effect to the Overriding Objective when it –
(a) exercises any power given to it by the Rules; or
(b) interprets any rule.
Benefits of Mediation
Mediation is a confidential, voluntary and flexible form of alternative dispute resolution in which a neutral independent third party, a Mediator, supports parties in working towards a negotiated settlement of their dispute. Mediation usually takes place at a confidential and without prejudice meeting of the parties.
The benefits of mediation include:
- Allowing the parties to communicate problems in a safe environment;
- It is a confidential and privileged process;
- Saving legal costs and management time;
- Allowing the parties to negotiate creative and flexible settlement options that may not be possible in a Court process;
- Identifying the underlying interests of the parties;
- It is a short process that can be organised relatively swiftly;
- The parties are active participants in the process and control the outcome;
- The process is voluntary and the parties can terminate it at any time;
- It has a high success rate;
- If not successful it often allows the parties to benefit from having an open discussion so as to understand each other’s position and to understand the strengths and weaknesses of the case.
There are disadvantages to the mediation process also. The most common criticisms of mediation include the argument that the process adds an additional layer of costs and delay to the proceedings. It is a non-binding process unless a settlement agreement is signed and it can be used as a “fishing expedition” by parties who hope to obtain information about their opposing party’s case strategy.
Would Mediation work in Mortgage Possession cases?
Mediation is commonly used in other cases in Northern Ireland. The Commercial Court has introduced a “Pre Action Meeting” into the Commercial List Pre-Action Protocol. One of the aims of this without prejudice meeting is to consider whether some form of alternative dispute resolution would be more suitable than litigation. This process appears to have been favourably received by the legal profession.
Indeed, mediation is also common across the UK and Ireland particularly due to the cost and time saving benefits recognised by the parties.
Whilst mediation does not appear to be part of the mortgage possession Court process in the UK or Ireland, we are aware of cases in which mediation has been conducted, particularly for more complex repossession cases, that end up in the Chancery Court.
There are some examples of how mediation is applied to cases of this nature in other jurisdictions.
In the United States, there are many local foreclosure mediation programmes which are usually associated with the County Courts. Our research shows that these programmes were initiated at the time of the economic crisis.
For example, there is a programme in Cook County in Chicago which was set up with the intention of helping “homeowners in foreclosure to explore their options to stay in their homes or negotiate a respectable exit.”
Once a homeowner receives a Summons, they can schedule a free meeting with a housing counsellor and have the opportunity to meet with an on-site attorney to discuss the housing counsellor’s recommendations and prepare for a court date that will determine whether the foreclosure case can be mediated with the lender.
It is challenging to gather data in the United States as there are numerous Court systems across the country. For example, in Illinois alone, there are 24 Circuit Court systems covering 104 counties. According to legal website Nolo, around half of the 50 states have implemented mediation programmes. In certain states, the borrower must opt in to the mediation programme whereas in other states enrolment is automatic. It is suggested that participation is higher in opt-out programmes. In certain States, the State pays for the mediation programme whereas in other States charges are added to the filing fee that lenders pay when issuing proceedings, or the homeowner pays a fee.
By way of a working example, in Maine, there is a Foreclosure Diversion Program (“FDP”) that offers homeowners the opportunity to participate in court-sponsored mediation as part of the foreclosure process. This process appears to be governed by Statute, which, in brief, applies the following process:
- At the commencement of proceedings, the lender attaches a form notice which states that:
- Failure to answer the complaint will result in foreclosure of the property;
- A sample answer and explanation that the borrower may fill and return to the Court in an envelope provided as the answer to the complaint. If the form is returned, the borrower will be scheduled for mediation;
- A description of the mediation programme.
- When the form is returned or a request for mediation is made by the borrower or an appearance is made in the action, the Court shall refer the parties to mediation;
- The Court shall assign mediators who are trained in mediation and relevant aspects of the law related to this area;
- The Mediator may refer the borrower to housing counselling or mortgage assistance programmes;
- Mediation is mandatory for the mortgagee, who may participate by telephone or electronic means as well as the borrower and Counsel for the parties if represented;
- Each party must be present at mediation and make a good faith effort to mediate all issues. The court may impose appropriate sanctions if a good faith effort is not applied;
- The mediator completes a report for each mediation indicating that the parties completed a full determination of net present value. If settlement is not reached, the mediator must include the outcomes of the net present value. The Mediator may notify the Court if either party failed to negotiate in good faith. The report must include a statement of all agreements reached at mediation with sufficient specificity to put all parties on notice of their obligations.
According to a report dated 13 February 2014 to the Joint Standing Committee on Insurance and Financial Services and the Joint Standing Committee on Judiciary, the FDP has “achieved positive results”. The Executive Summary states:
“The FDP continues to see a high level of activity. In 2013, the FDP conducted 2,518 mediation sessions in 1,697 foreclosure cases. A total of 4,756 foreclosure cases were filed in Maine in 2013, an increase from the 4,339 cases filed in 2012.
The FDP has achieved positive results. An increasing number of foreclosure cases in the FDP have concluded in dismissal, thereby saving homes from foreclosure. To date, 60% of cases mediated in 2010 and 59% of cases mediated in 2011 have been dismissed. Of cases mediated in 2013, 21% have been dismissed so far.”
A 2014 study by The European Parliament, Directorate for Internal Policies, commenting on the mediation programs in the United States, noted that “The European housing crisis could benefit from the implementation of similar programs.”
We are awaiting confirmed data from Australia but believe that no such process exists for mortgage repossession cases in that jurisdiction. However pilot mediation projects have been successful in many civil claims leading to significant savings in legal fees and court time.
A mediation scheme for mortgage repossession in residential cases does not appear to exist in New Zealand, however, there is a scheme in place for farm debt which obliges mortgagees to mediate with farmer customers before taking possession of farm land. The schemes exist in New South Wales, Victoria, Queensland and Western Australia.
It is clear that the aims of the Protocol, including efforts to seek agreement between the parties and efficient use of the Court’s time and resources, suggest that mediation is not only a viable option for mortgage repossession cases but also one that is in accordance with the Overriding Objective.
Our belief is that an independent Court Appointed Mediation Scheme would garner trust from the Borrower and Lenders and would facilitate early resolution of a significant number of cases presently before the Chancery Master.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Dispute Resolution Team at Cleaver Fulton Rankin for further advice or information.