A District effort to help distressed homeowners threatens to bring a halt to the sale of foreclosed properties in the city, depress home prices and cast new uncertainty on the local housing market.
The District implemented regulations in May requiring lenders to enter into mediation with a homeowner before foreclosing on a home. But now, two large title insurers, which have about 80 percent of the D.C. market share, have stopped insuring the sale of foreclosed properties, saying the law makes it too risky.
Without title insurance, obtaining a home loan is extremely difficult. The policy protects mortgage lenders from challenges to the title of a property. The problems could move beyond the foreclosure market to all home sales if lenders decide that any District home that could potentially fall into delinquency would face a similar problem down the road, according to industry officials and local lawyers. If these foreclosed properties linger on the market, unable to be sold, they could bring down neighborhood prices, they said.
These laws “are incredibly destructive economically. They’re really creating a dead zone in the housing market,” said Kurt Pfotenhauer, chief executive of the American Land Title Association, an industry group.
The D.C. Department of Insurance, Securities and Banking, which wrote the regulations, proposed an amendment this week to the D.C. Council legislation on which they’re based. But the issue is not likely to be addressed before fall, said council member Muriel Bowser (D-Ward 4), who co-sponsored the legislation.
“This is one way that the business tries to get its way — with threats of calamity. This is how the little guy gets [hurt],” Bowser said.
The insurers’ concerns should not be used as an excuse to delay the implementation of the legislation, said Marian Siegel, executive director of Housing Counseling Services. “I am not saying that there aren’t many changes that could improve this law but . . . it’s an important law,” she said.
The District has been shielded from the worst of the housing crisis but still faced an increase in foreclosures during the recession. That, along with widespread problems in mortgage documentation uncovered last fall, prompted the D.C. Council to pass foreclosure mediation legislation in November aimed at helping struggling homeowners come to terms with their mortgage lenders.
During the rule-making process, members of the title industry asked for a certification asserting that a foreclosure had complied with the legislation, said Christopher Weaver, the D.C. associate commissioner for banking. But that would have shifted the liability for any mistakes to the city, he said.
“I personally think that’s just too much risk for the District of Columbia,” Weaver said.
At issue is one sentence in the council’s legislation: “Each foreclosure sale in violation of this act shall be void.”
That means a foreclosure sale could be challenged for a variety of issues, including because “somebody used a wrong-size envelope,” said Roy Kaufmann, a real estate lawyer in the District and a lobbyist for the D.C. Land Title Association.
First American Title Insurance and Fidelity National Title Group argue that the new regulations make it more likely that someone could challenge the validity of a foreclosure sale, forcing them to pay or defend claims in court. First American and Fidelity have 50 percent and 28 percent of the D.C. market respectively, according to data from American Land Title Association.
“The conditions put in place have created hurdles that are difficult to deal with,” Steven Day, executive vice president of Fidelity, said in an interview.
First American declined to comment but said in a letter to its agents that the regulations make it “virtually impossible” to write insurance. A borrower would have to sign a long affidavit certifying that the foreclosure had been carried out properly, according to the letter obtained by The Washington Post.
There are 18 other title insurers in the D.C. market, but many are likely to follow suit if the legislation is not changed, said Frank Donnelly, a board member at the Mortgage Bankers Association of Metropolitan Washington. “I am not aware of lenders who will make loans on a foreclosed property without appropriate title insurance. They wouldn’t even do it at a higher interest rate,” he said.
That is something the insurance department wants to avoid, Weaver said. “Obviously, we want to do what we can to keep this from happening,” he said.