D.C. foreclosure law is too weak to protect homeowners
By Benny L. Kass, Published: January 2, 2014
The D.C. Council recently revised the foreclosure mediation law it passed three years ago. Known as the Saving D.C. Homes From Foreclosure Act of 2010, the law was created to address the foreclosure crisis in the District.
But in tinkering with the measure, the council avoided the basic issue: The District needs a strong foreclosure law that protects consumers.
The original law created a mediation process that was supposed to give homeowners and lenders an opportunity to meet face to face so they could work out an alternative to foreclosure. But mediation has become merely a stopgap, and not a very effective one.
According to the District's Department of Insurance, Securities and Banking, which oversees the law, between May 2011 and November 2013, lenders initiated the process for 234 mediations. In 90 such cases, the homeowner had not asked for mediation, and those properties could have gone into foreclosure. But seven homeowners arranged for a short sale or deed in lieu of foreclosure, 31 loans were modified and 12 loans were reinstated. In 11 situations, no agreement was reached, and thus mediation certificates - the green light for foreclosure - were issued.
One reason the law has problems is that lenders and title insurers were not satisfied with the mediation certificate. They feared that homeowners might bring additional challenges to the foreclosure after mediation. The D.C. Council sought to address that problem by passing an amendment in November that made the mediation certificate irrevocable. It is too early to know whether lenders and title insurers will be reassured by this language, or whether it will benefit or create more complications for homeowners.
Although the law has slowed down, if not all but stopped, foreclosures in the District, lenders still aren't being paid and homeowners are getting more and more behind on their mortgages. As a result, lenders are now trying to circumvent the mediation requirements by asking the court to permit a foreclosure. About 100 such cases are pending in the D.C. Superior Court. In one case, the D.C. government in a "friend of the court" brief wrote that the lender "is not seeking a true judicial foreclosure, and essentially is asking the Court to sanction a foreclosure using procedures that are available only in non-judicial foreclosures. The Court should therefore invoke the statutory protections applicable to non-judicial foreclosures, including foreclosure mediation, in deference to the expressed public policy of the District of Columbia."
In the District, there is no mandatory judicial review of foreclosures. The burden is on the homeowner to file a lawsuit. But a homeowner who can't make mortgage payments probably can't afford a lawyer, either.
One way to fix the law would be to require that all foreclosures be authorized by the D.C. Superior Court. Most cases in that court already go through mediation before a trial is held. The current mediation law requirements easily can be incorporated into the judicial review, since a face-to-face conversation between lender and borrower may result in an acceptable resolution.
Here are some other legislative fixes:
- The District should prohibit lenders from procuring deficiency judgments that allow them to sue borrowers to recover the balance in foreclosures and short sales. That could become an issue this year now that the mortgage debt forgiveness law has expired. This year, the Internal Revenue Service will be able to tax the debt that borrowers were forgiven in short sales. But according to the IRS, if the law says there is no deficiency, then there is no cancellation of debt - and thus the borrower would not be obligated to pay tax on the forgiven debt.
- Given that the council's goal is to save homes from foreclosure, the borrower whose house has been foreclosed upon should have the right to redeem the property under certain conditions. Some states allow the former homeowner a limited time to buy back the house; other states, such as Maryland, give a judge the discretion to let the former homeowner rent back for a period of time.
- Superior Court judges should have the right to restructure the terms and conditions of mortgage documents if the lenders refuse.
- If the lender's eventual resale of the home results in surplus funds over and above the loan obligation, the homeowner should get that money; the lender should not be entitled to a windfall.
- The required publication of a notice of foreclosure in a general-circulation newspaper often is not a fair notice to homeowners. Any foreclosure law should require that a notice be sent by both certified mail and regular mail.
Under the current mediation law, if a lender decides to use the courts for the foreclosure, mediation is not required. Accordingly, the need for legislation is especially important because many lenders go straight to court to foreclose, skirting the mediation process.
The foreclosure crisis had a devastating effect on the District's housing market. No one wants to see more foreclosures. But in my opinion, the mediation law is not working very well.
If lenders are required to obtain a true judicial foreclosure, the court should require mediation, and even a homeowner who can't afford legal counsel will be able to negotiate with a lender who has authority to seek a deal. Equally important, the court will be the buffer between the lender and the homeowner.
The D.C. Council has promised that the mediation law is but the first step; it now needs to do more to address this.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining 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.