Banks stopped repossessing District homes in mid-November as they waited on city officials to set the ground rules for an ambitious new foreclosure-prevention program.
The final rules were unveiled Friday, but that’s unlikely to jump-start D.C.’s foreclosure process. Lenders must sort through a backlog of troubled loans, set up new systems and reach out to struggling borrowers as they ramp up for the program.
Starting May 25, before lenders press forward with a foreclosure, they must first offer the affected homeowners a shot at mediation, which will enable them and the borrowers to explore foreclosure alternatives under the watchful eye of a neutral third party. Those alternatives can include lowering a borrower’s payment to an affordable level.
The program’s launch promises to slow the District’s ultra-speedy foreclosure process, though housing advocates and counselors are unsure whether it will indeed help borrowers save their homes or simply delay the inevitable. A similar program in Maryland offers mixed results.
“Our biggest fear is that people’s expectations for mediation will be too high,” said Marian Siegel, executive director of Housing Counseling Services in the District. “If the numbers don’t work, they don’t work.”
Even so, the program triggers a sea change in the way the District handles foreclosures.
Until recently, D.C. borrowers who defaulted on their loans would get a notice in the mail informing them that their homes would be sold at a foreclosure auction, typically 30 days after the notice was mailed. The lender’s only obligation was to send the notice. It did not have to verify whether the homeowner had received it.
Some D.C. homeowners got a break in September, when a few of the nation’s largest lenders temporarily halted foreclosures in some areas because of paperwork errors.
But on Nov. 17, then-Mayor Adrian Fenty (D) signed emergency legislation that revamped the city’s entire foreclosure system. Lenders were banned from initiating foreclosures until the rules were finalized on Friday. Those rules require lenders to send a notice to borrowers when they default on their loans. In that notice, the lenders must offer borrowers a chance to opt for mediation. Borrowers must pay $50 to participate.
“People are going to get a very heavy packet and they should open it,” said Wendy Weinberg, a supervising attorney at the Legal Aid Society of D.C. “They will have only 30 days to elect mediation and if they don’t, they will lose the opportunity and the lender will have the right to sell their homes in 30 days.”
If borrowers do not respond or opt out, the District’s Department of Insurance, Securities and Banking (DISB) will issue a certificate to the lender confirming that it complied with the law and enabling the lender to move forward with a foreclosure.
The new rules are not likely to immediately open the floodgates on default notices. Lenders may want to send a few borrowers through this process to test it out before they commit to sending out hundreds of foreclosure notices, several attorneys said.
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