District residents facing foreclosure have a new weapon in their arsenal to delay or prevent the loss of their homes. The Saving D.C. Homes from Foreclosure Act of 2010 became effective March 12. Under this law, District residents can ask for face-to-face mediation with their lenders, who are required to participate, if requested, and to act in good faith.
Mediation means a meeting between a borrower and his lender (or the trustee under a deed of trust) with the help of a neutral third party appointed by the mediation administrator, for the purpose of reaching an agreement that will avoid the lender foreclosing on the borrower’s home. That agreement can include renegotiation of the terms of the loan, loan modifications, refinancing, short sale, deed in lieu of foreclosure and other options that may be available to prevent a foreclosure.
The law covers residential loans in the District secured by a deed of trust or a mortgage that was used to acquire or refinance real property. It includes condominiums and cooperative units, if at least one of the units is the principal residence of the debtor or his immediate family.
Borrowers and lenders may appoint representatives, such as a lawyer, to attend the mediation on their behalf. Neither the act nor the proposed regulations expressly address whether other mortgage holders (such as subordinate lenders) have the right to participate. Because sensitive personal financial information will be exchanged and discussed during the mediation, the meeting is generally not open to the public.
While this act might seem like good news to those in imminent danger of losing their homes to foreclosure, this regulatory process is yet another example of the “law of unintended consequences.” The virtual moratorium on foreclosures caused by the act has created a backlog of hundreds of foreclosures. Not all of this backlog will be successfully mediated. At some point, these foreclosures will emerge from the pipeline and hit the market. That flood of properties on the market will again depress D.C. home prices for those owners who were able to hang on to their homes. The only silver lining to this mess is that such a glut of foreclosed homes hitting the market over a short period could provide the last opportunity for investors to pick up some true bargains on D.C. real estate. Real estate investors should take this foreclosure backlog into account before making any final decisions regarding when, and at what price, to invest in D.C. property.
The D.C. Department of Insurance, Securities and Banking (DISB) has proposed a highly detailed mediation process involving multiple notices, both to and from the borrowers, and to and from lenders. The DISB contemplates that each mediation session would last three hours and that, if necessary, the parties would engage in two sessions. Borrowers must request mediation by returning a completed “Mediation Request Form” and pay a $50 fee to the mediation administrator (a position created by the act). Borrowers must also complete and return a “Loss Mitigation Application” to the lender that would allow it to determine a borrower’s eligibility for all available loss mitigation programs. The lender must provide a statutory “Notice of Default on Residential Mortgage” to the borrower with a copy to the mediation administrator along with a $300 fee. The legislation mandates that these mediation sessions be completed within 90 days after delivery of the notice of default unless extended for 30 days by mutual consent.
There have been virtually no foreclosures in the District since November, and until the DISB finalizes its regulations, no D.C. foreclosures are likely, said Roy L. Kaufmann, a lawyer at Jackson & Campbell and a lobbyist for the D.C. Land Title Association. The main reason that lenders are unwilling to complete any foreclosures is that the act requires the DISB to promulgate the specific procedures to be followed and the forms to be used, and until that occurs, the title industry cannot safely insure any foreclosed properties. Until clear regulations and forms, meeting due process and other constitutional requirements are in place, lenders will not have the required certainty that their foreclosed properties will be insurable from a title insurance perspective. The title industry’s redlined version of the proposed regulations covers almost 50 pages and appears to revise more than half of the DISB’s proposed regulations. Many of these title industry proposals are designed to make the process more “industry-friendly” while still maintaining the act’s strong pro-homeowner stance.
Lenders are understandably reluctant to conduct any foreclosures until they have some assurance that what they are doing complies with new law and regulation. Lenders can be fined $500 for failure to attend the mediation, mediate in good faith or provide all required documents and settlement authority. If a borrower fails to attend or participate in good faith in a scheduled mediation session, the mediation administrator can issue the lender the mediation certificate, the proverbial “holy grail” required under the act to be obtained by the lender before any non-judicial foreclosure sale can occur. Mediation certificates can also be issued by the mediation administrator to the lender if a borrower fails to respond to the notice of default within 30 days, waives the right to mediation or fails to reach an agreement after good-faith mediation. Once a lender obtains a mediation certificate, it can proceed with the foreclosure process.
In addition to the protections of the act, the DISB offers a “Foreclosure Mitigation Kit” online that provides an excellent overview of the steps you might encounter in seeking to prevent the loss of your home. The kit is available at www.disb.dc.gov.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.