Two recent D.C. Court of Appeals decisions saying that lenders have no right to automatically evict tenants from properties on which they have foreclosed has provoked fears among some lending firms and prompted one savings and loan to stop approving any new mortgages in the District.
The John Hanson Savings & Loan Inc., a Beltsville firm that annually lends $25 million to $30 million for home mortgages in the city, stopped making the loans earlier this month, according to its board chairman, Charles A. Dukes Jr.
"We're afraid because of the court decisions we would not be able to get clear title" to a property in the event of a foreclosure, Dukes said. "We don't feel we can make loans where the status of the loan can change after we make it.
"It appears all these people are entitled to stay there even if they don't pay their rent," he said. "The law takes from us retroactively a portion of the value of the property we thought we had going in."
Thomas J. Owen, board chairman of Perpetual American Federal Savings Bank, the biggest home mortgage lender in the District last year with $59.1 million in loans, also voiced concern about the 2-to-1 appellate court decisions and said he has his firm's lawyers studying their ramifications.
"We may well have to stop making home mortgage loans" in the District, Owen said. "Anything that impedes our ability to take possession on a first trust is not acceptable."
City Council member John Ray (D-At Large) said that "if this catches on, it could be devastating. One of the real problems is that you're going to force some people when they assume control of a property into being landlords when they don't want to be."
Some lenders, however, said they were not as concerned about the decisions and had no plans to curtail their home mortgage lending in the District or had not heard about the rulings.
"I'm not overly concerned," said William F. Sinclair, board chairman of Washington Federal Savings & Loan. "Most loans are for owner-occupied homes and of those that are investor-owned, how many are you going to foreclose on?"
The initial decision, handed down April 24, stemmed from an effort by the Veterans Administration to evict Joyce Valentine, 31, and her two children from one of the four apartments in a building at 3221 Massachusetts Ave. SE after the building's owner defaulted on the mortgage. The VA assumed control of the property because it had insured the mortgage and sought to sell it rather than manage it as an apartment building.
The appellate court, in a decision written by Judges Julia Cooper Mack and James A. Belson, ruled that Valentine was protected by the city's 1980 rent control law, which provided specific provisions under which tenants could be evicted, but not in cases where a lender foreclosed on an owner. While that law has now expired, the current rent control law contains similar regulations.
"Before the foreclosure," the judges said, "Valentine's apartment was clearly part of the existing supply of rental housing in the District; to allow the VA to evict her would have opened the way to conversion of that building to other uses."
The ruling said the rent control law "prohibits evictions in contemplation of sale" except when the new owner plans to occupy the property "for his own personal use" and even then the seller must have first offered the building to tenants to see if they wanted to buy it.
"The VA has offered no persuasive reason why a party who has come into ownership as a result of a mortgage default has any different relationship with previous tenants than do other owners," the court said.
Judge John A. Terry, dissenting from the majority's ruling, said that the result of the decision "could very well be a drying up of available mortgage funds for the purchase of rental properties in the District."
The VA has asked the full D.C. Court of Appeals to reconsider the Valentine case, but no decision has been made whether to rehear it. In the second case, on May 16, Judges Theodore R. Newman and John M. Ferren cited the Valentine case in ruling that tenants also can stay in their residences when a deed is defaulted on and a property sold at auction. Terry again dissented.
Felice Busto, a lawyer with the Steptoe & Johnson law firm, which represented Valentine for free, said that decision is "very important for tenants in the District. If things had gone the other way, it would have opened a loophole" under which tenants could have been evicted more easily.
But Busto said that after the VA assumed control of the property, it collected no rent and provided no heat. As a result, Valentine used space heaters, one of which ignited a fire in April 1984. She has lived elsewhere since.