11/29/10: Mandatory Mediation Now Required Before DC Foreclosures
By: Benny L. Kass
If you are a homeowner in the District facing foreclosure, there may be some good news. Effective November 17, 2010, Mayor Adrian Fenty signed into law the "Saving D.C. Homes from Foreclosure Emergency Amendment Act of 2010."
Before a lender can foreclose on residential property, it must provide its borrower the opportunity to mediate with the lender, with the hope that some relief will be available short of losing the family home. Residential property is defined as condominiums, cooperatives, and real property which has four or less single family dwellings, at least one of which must be the principal residence of the debtor or his immediate family.
What is mediation? It is where two or more persons or organizations with differing opinions sit down before a neutral person in an effort to reach a satisfactory comprise. Unlike arbitration – or litigation – mediation is absolutely non-binding.
Before the new law was enacted, when a lender decided to foreclose, it only had to send the borrower, by certified mail, a formal notice of foreclosure sale. A copy of that notice also 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 current, plus paying such foreclosure costs as advertising, trustee and attorney’s fees. This right of redemption was only available once every two years.
Under the new DC law, sponsored by Councilperson Muriel Bowser, when a lender now decides to foreclose, it must follow a two-step process. First, it must send the homeowner a notice of default, this time not only by certified mail but also by first-class mail. This is a significant change; many homeowners –faced with adversity –often bury their heads in the proverbial sand and refuse to accept formal, certified mail. This change is designed to make sure that the borrower is put on notice of the default and the right to mediation.
The notice sent to the borrower must contain such information as: the right to participate in mediation, contact information for the lender as well as at least one local housing counseling service, and a description of all loss mitigation programs available from the lender, as well as a loss-mitigation application.
Lenders are required to pay the District $300 for each notice of default they issue. However, if the foreclosure sale actually takes place, and there is money left over that may be owed to the borrower, this money is returned to the lender. As a practical matter, rarely will there be a surplus after a foreclosure sale. The moneys will not be returned to the lender if there is a deficiency.
The District’s Department of Insurance, Securities and Banking (DISB) has been authorized to implement, monitor and enforce the new law. That agency will appoint a Mediation Administrator to oversee the process.
Once the homeowner gets the notice, two different scenarios can take place.
If the homeowner does nothing, the right to mediate is waived. The Administrator is then authorized to issue a mediation certificate, which has to be done 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 then free to foreclose by taking the second step: sending a notice of foreclosure sale and waiting the required 30 days.
But if the homeowner wants to pursue mediation, he must pay a mandatory $50 fee and send it – together with a mediation election form – to DISB within 30 days of receiving the first notice. He must also send the loss mitigation application to the lender.
DISB is required to schedule the mediation within 45 days from the date the lender mailed the default notice. Mediation will be conducted by a neutral third-party who will be trained in foreclosure mediation. In order to assist the mediator, the lender is required to prepare and produce a loss mitigation analysis, showing options short of foreclosure that may be available to the homeowner.
According to the Council’s Committee report on the proposed law, "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 that agency is satisfied that the rules have been met, a mediation certificate will be issued and the lender is then free to start the foreclosure process.
However, if an alternative solution is agreed upon, the agency will continue to monitor to assure that the settlement is, in fact, honored. Lenders can be fined $1000 for failure to implement the terms of the agreement between lender and homeowner.
According to Realtytrac – an organization which tracks foreclosure statistics – just in October of this year, 294 District of Columbia homes received foreclosure notices. And the Council reported that last year, 2,726 homes received such notices.
Will mediation work? Currently, some 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. According to Chief Judge Thomas Dewberry, "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, according to Realtytrac, in just the month of October, lenders filed 3169 notices of foreclosure in the State of Maryland.
In the District, there is absolutely no judicial review of foreclosure actions. The burden is on the homeowner to file a lawsuit seeking to enjoin the sale. In Maryland, although the sale itself does not have be conducted by a judge (called a non-judicial sale), the court must audit the sale before it becomes final. Homeowners have the right to files objections to the sale with the court,. In Virginia, the only court involvement is to audit how the sales proceeds were distributed.
When the DC council was considering foreclosure legislation, it wrestled with the fact that in many states – such as New York, New Jersey, Florida and Illinois – judicial foreclosure was the predominant method. However, as the committee on Public Service and Consumer Affairs concluded, "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 at this time. 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. Councilmember Muriel Bowser, chair of the committee is optimistic, as she told this columnist "the hope is that through mediation, we can help families stay in their homes where they belong.