D.C. puts a brake on foreclosures

By Benny L. Kass
Saturday, December 4, 2010; E01

If you are a District homeowner facing foreclosure, there may be some good news. Last month, Mayor Adrian Fenty signed into law emergency legislation intended to help struggling homeowners.

Under the new law, effective Nov. 17, before a lender can foreclose on a residential property, the borrower must be given the opportunity to enter into mediation with the lender in an attempt to prevent the loss of the family home.

The question now is straightforward: Will mediation work?

Experience elsewhere may offer some insight. Currently, 23 states - including Maryland but not Virginia - have enacted some form of mediation legislation.

The Maryland program is under the auspices of the Office of Administrative Hearings. Chief Judge Thomas Dewberry said, "Our research with other mediation states indicated that only 12 percent of pending foreclosures would be resolved through mediation. Our law just started this year on July 1. We had 96 homeowners request mediation, and 43 cases successfully avoided mediation. We are pleased with that number."

However, that's a small share of Marylanders facing foreclosure. In October alone, lenders filed 3,169 notices of foreclosure throughout the state, according to RealtyTrac, a company that tracks foreclosure statistics.

Mediation is a process in which two or more people or organizations with differing opinions sit down before a neutral person in an effort to reach a satisfactory compromise. Unlike arbitration - or litigation - mediation is absolutely nonbinding.

The old way

Before the new law was enacted, to initiate foreclosure in the District, a lender had only to send the borrower, by certified mail, a formal notice of foreclosure sale. A copy of that notice had to be sent to the District government. The lender could not foreclose until 30 days elapsed from the date the notice was delivered to the District.

The only consumer protection available to a borrower was the right to stop the foreclosure by bringing the loan up to date and paying such foreclosure costs as advertising, trustee and attorney's fees. This right of redemption was only available once every two years.

In the District, there is absolutely no judicial review of foreclosure actions. The burden is on the homeowner to file a lawsuit seeking to prohibit the sale. In Maryland, the foreclosure sale does not have to be conducted by a judge (and so it is called a nonjudicial sale). But the court must audit the sale before it becomes final, and homeowners have the right to file objections to the sale with the court.

In Virginia, the only court involvement is to audit how the sale's proceeds were distributed.

When the D.C. Council was considering foreclosure legislation, it wrestled with the fact that in many states - including New York, New Jersey, Florida and Illinois - judicial foreclosure is the predominant method. The council wasn't ready to go that far. As the Committee on Public Service and Consumer Affairs explained in its report: The committee "is continuing to study the appropriateness of requiring the District to adopt judicial foreclosure in lieu of current practice. In the committee's view, until such studies are completed, it would be premature to recommend the adoption of judicial foreclosure. . . . However, in light of current developments, the committee believes requiring foreclosure mediation is a step in the right direction."

Perhaps it is, but only time will tell. Council member Muriel Bowser, who chairs the committee and sponsored the legislation to require mediation, said she is optimistic. She told this columnist, "The hope is that through mediation, we can help families stay in their homes where they belong."

Details of the new law

For purposes of the District's new law - the Saving D.C. Homes from Foreclosure Emergency Amendment Act of 2010 - residential property is defined as condominium or cooperative units and real property that has four or fewer single-family dwellings, at least one of which must be the principal residence of the debtor or his immediate family.

To foreclose under the new law, a lender must follow a two-step process. First, the lender must send the homeowner a notice of default not only by certified mail but also by first-class mail. This is a significant change; many homeowners faced with adversity bury their heads in the proverbial sand and refuse to accept certified mail. This change is designed to make sure that the borrower is notified of the default and the right to mediation.

Along with notice of the right to participate in mediation, the document must contain contact information for the lender and at least one local housing counseling service, a description of all loss-mitigation programs available from the lender, and a loss-mitigation application.

Lenders are required to pay the District $300 for each notice of default they issue. However, if the foreclosure sale takes place and - after paying off the lender and all associated auction and legal fees - there is any surplus left for the borrower, the $300 is returned to the lender. As a practical matter, rarely will there be a surplus after a foreclosure sale.

The District's Department of Insurance, Securities and Banking (DISB) has been authorized to implement, monitor and enforce the law. That agency will appoint a mediation administrator to oversee the process.

Once the homeowner receives the notice, two scenarios can take place.

If the homeowner does nothing, the right to mediation is waived. The administrator is required to issue a mediation certificate no more than 60 days after the initial notice of default was sent to the borrower.

Once the certificate has been issued, the lender is free to foreclose by taking the second step: sending a notice of foreclosure sale and waiting the required 30 days.

A homeowner who wants to pursue mediation must pay a mandatory $50 fee and send it with a mediation-election form to DISB within 30 days of receiving the first notice. The homeowner must also send the loss-mitigation application to the lender.

DISB is required to schedule mediation within 45 days from the date the lender mailed the default notice. Mediation will be conducted by a neutral third party trained in foreclosure mediation. To assist the mediator, the lender is required to produce a loss-mitigation analysis, showing options short of foreclosure that might be available to the homeowner.

According to the council committee's report, "the intent of the mediation provision is to provide a homeowner the opportunity to meet face-to-face with the lender in an environment where they can discuss options that are available in lieu of foreclosure, such as loan modification, refinancing, short sales, etc."

If mediation ends up with the parties agreeing that foreclosure is the only option, the mediator will report back to DISB. If the department is satisfied that the rules have been met, a mediation certificate will be issued, and the lender will be free to start the foreclosure process.

However, if another solution is agreed upon, the department will continue to monitor the process to make sure that the settlement is honored. A lender can be fined $1,000 for failure to implement the terms of the agreement with the borrower.

Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.

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