Laws That Fail to Protect Homeowners Add to Foreclosure Crisis
When the national numbers from 2008 are tallied, they're expected to show that more than 3,700 foreclosures took place every business day.
And that was last year.
What's worrying policymakers -- and homeowners -- is that the situation could get even worse. For those who get caught up in the foreclosure wave, "antiquated state laws in some ways afford fewer protections to homeowners than to renters," concludes a report issued Thursday by the National Consumer Law Center, an advocacy group based in Boston.
What is a foreclosure, and how does it work? When you buy your house in the Washington area, you sign a promissory note and a deed of trust. The note is a legal IOU. If you do not comply with the terms and conditions of the note, your lender can sue you.
But litigation is time-consuming, expensive and always uncertain. Thus, the lender also requires that you sign a deed of trust. This is a lengthy document that is recorded among the land records where your property is.
I doubt that most homeowners have ever read this document. If they did, they would learn that by signing it, they conveyed their property -- in trust -- to a trustee or trustees selected by the bank. They would also learn that they have provided the trustees the "power to sell" the property in the event of a default.
A default can be non-payment of money. But there are other kinds of default, such as failure to pay the real estate tax, failure to maintain adequate insurance and, in some cases, even the failure to properly maintain the house.
When the homeowner is in default, there are two ways that the lender can foreclose: judicially -- go to court and ask a judge for authority -- or non-judicially -- don't go to court. From my experience, almost all foreclosures in the D.C. area are non-judicial.
This means that the lender and its attorneys follow the minimal legal requirements in the jurisdiction, and the foreclosure takes place either at an auctioneer's office, on the courthouse steps or in front of the property. These are "trustee sales."
There is a basic concept of due process built into the American legal system. Generally, before your property can be taken away, you have the right to be informed of the pending procedure, and the right to go to court to challenge it.
If you owe money to a credit card company, for example, that company must file a suit against you and get a legal judgment before it can take any collection action. If a local government wants to sell your property at a tax sale because you failed to pay your real estate taxes, you must be provided with notice of the tax sale. You also have the right to redeem your delinquency and save your house -- both before the sale and even for several months thereafter.
In a foreclosure, however, due process often receives only lip service. According to the Consumer Law Center report, which surveyed foreclosure laws in all 50 states, "in 35 states and the District of Columbia, there is no requirement that homeowners be personally served with a foreclosure notice or legal documents that start a court foreclosure case."