The nation’s largest lenders have found a way around a regulatory snafu that left hundreds of homes in the nation’s capital in foreclosure limbo, and the number of foreclosures in the city may soon rise as a result.
The District of Columbia’s foreclosure process came to a near-standstill in late 2010 after the city adopted a law designed to give borrowers a better shot at saving their homes. The mortgage industry complained that the law was fraught with problems, and lenders basically stopped repossessing homes as they waited for a legislative fix.
With no resolution in sight, a group of lawyers representing some of the nation’s largest banks found another route. They recently joined forces with consumer groups and city officials to initiate a sweeping change in the way the District handles foreclosures, one that leverages the courts. The new system, in place since April, is expected to lead to an increase in foreclosures this year. But housing advocates are not complaining. They say the approach is a model for dealing with the residual effects of the foreclosure crisis.
“It’s a good thing, actually, that the system is starting to unclog,” said Amy Mix, a supervising lawyer at Legal Counsel for the Elderly who helped shape the new process. “Everyone assumes consumer advocates were thrilled when all these foreclosures were put on ice. But we weren’t. It gets harder to help them the longer they’re in default.”
While there’s no longer a crush of foreclosures hobbling the housing market, the lingering effects of the crisis continue to be felt more in some areas than others, depending on the local laws that govern the foreclosures system. States that encourage swift action on loans gone bad, such as Virginia, tend to flush out foreclosures more quickly than states that do not, including Maryland. The District, by contrast, has been stuck in a period of transition and uncertainty until now.
Cathy A. Braxton, a D.C. lawyer, has seen her sister suffer the consequences. Braxton said her sister agreed to surrender an investment property in Northeast Washington when she filed for bankruptcy protection in 2009. Later, her sister learned that the bank had not finalized the foreclosure, and Braxton suspects the complications in the D.C. foreclosure process played a role. Five years later, Braxton is close to reaching a deal with her sister's lender, who has offered to pay the family a small sum of cash in exchange for the property.
“The system in D.C. seems to be working very well now for the borrower,” Braxton said. “The unfortunate thing for my sister is that she has to take a fresh hit on her credit.”
Before 2010, D.C. borrowers who defaulted on their loans received 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. The process was so quick that borrowers had little time to negotiate an alternative to foreclosure.
The 2010 law barred banks from pressing forward with a foreclosure until they offered borrowers a chance at mediation, enabling homeowners to explore their options under the watchful eye of a neutral third party. But the industry balked at the details. It said the law left the door open for homeowners to challenge a foreclosure, even years after the bank seized a home and sold it. None of the city’s repeated efforts to address the concerns worked.
The number of new foreclosure filings in the District fell to 29 a month on average in the year following the bill’s passage, down from an average of 251 a month the previous year, according to the data research firm RealtyTrac.
“There was a level of frustration in the industry about the problems with the process,” said Kevin Hildebeidel, a foreclosure lawyer in Dulles, Va., who represents lenders. “People were looking for an alternative, pretty much any alternative.”
Hildebeidel and a team of lawyers at his firm found one: the court system.
In nearly two dozen states, court approval is required for every foreclosure. It can take a year or more to seize a home in these “judicial” states, which is why many lenders typically frown upon the approach. But as the impasse lingered in the District, the courts emerged as an intriguing option.
Hildebeidel’s firm — Morris Schneider Wittstadt — began testing the waters in late 2013 by filing some foreclosure cases in D.C. Superior Court. But soon after, Judge Neal E. Kravitz questioned whether the court had authority to hear the cases and whether the approach adequately protected homeowners. He called upon the Legal Aid Society of the District of Columbia, Legal Counsel for the Elderly (affiliated with AARP) and the D.C. Attorney General’s Office to weigh in, along with lenders’ attorneys. Eventually, all these stakeholders came up with the plan that the court adopted in April.
“The lenders wanted an avenue to move or resolve cases. The housing advocates wanted a way for homeowners to engage in the cases and find early resolutions,” said Jennifer Ngai Lavallee, a senior staff lawyer at D.C.’s Legal Aid Society. “We came to realize these goals were not inconsistent.”
Now, many of the largest lenders are using the court. They are personally serving borrowers who default on their mortgages with a legal notice. They are telling them in writing that they must show up in court or else risk losing their homes. The borrowers are offered court-sponsored mediation at the start of the process and given a number to call for help. All hearings take place on Fridays. Attorneys and housing counselors show up in court each time to assist the borrowers.
The court now has roughly 680 foreclosure cases pending.
“I’m trying to manage the caseload in a way that sets up a sensible process that everybody can understand, that allows the cases to go to a meaningful mediation,” said Judge Judith Bartnoff, whose court oversees some of the foreclosure cases. “We're learning as we go.”
As for the mediation program initially opposed by the industry, it remains intact. Some smaller banks are using it, possibly because they do not have the resources to take part in the judicial process. Ninety homeowners have opted to go through that mediation system, said Ben Arnold, who oversees the initiative at the D.C. Department of Insurance, Securities and Banking. Thirteen cases have ended in no agreement, meaning the lenders could move to foreclose.