The D.C. Council recently revised the foreclosure mediation law it passed three years ago. Known as "Saving D.C. Homes From Foreclosure," the law was created in 2010 to address the foreclosure crisis in the District.
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 provide homeowners and lenders with an opportunity to meet face-to-face to work out an alternative to foreclosure. But mediation has become merely a stop-gap and not a very effective one.
According to the District's Department of Insurance, Securities and Banking (DISB), which oversees the law, between May 2011 and last month lenders initiated the process for 234 mediations. In 90 such cases, the homeowner did not ask for mediation, and those properties could have gone into foreclosure. But seven homeowners arranged for a short sale or deed in lieu, 31 loans were modified and 12 loans were reinstated. In 11 situations, no agreement was reached, and thus mediation certificates were issued. In comparison, there were 600 notices of foreclosure sent out in September and October of 2010, just prior to the law's passage.
One reason the law hasn't worked is because lenders and title insurers were not satisfied with the mediation certificate, which is the green light for foreclosure. They feared homeowners might bring additional challenges to the foreclosure after mediation. The D.C. Council sought to address this problem by passing an amendment last month that made the mediation certificate irrevocable. It is too early to know if lenders and title insurers will be reassured by this language, or if it benefits or creates more complications for homeowners.
The law clearly has slowed down, if not all but stopped foreclosures in the District. However, lenders aren't being paid and homeowners are getting more and more behind on their mortgages. As a result, lenders are now trying to circumvent their mediation requirements by asking the court to permit the foreclosure. It is my understand that there are approximately 100 such cases currently pending in the DC Superior Court. In one case involving Bank of America, the District Government in a "friend of the court brief", wrote: 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. However, a homeowner who can't make his mortgage payments most likely can't afford a lawyer, either.
One way to fix the foreclosure law would be to have all foreclosures 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 getting deficiency judgments that allow them to sue borrowers to recover the balance in foreclosures and short sales. While it may not be an issue now, it could be in 2014 when the mortgage debt forgiveness law expires. Next year, the IRS will be able to tax the debt borrowers were forgiven in short sales. But the IRS says if 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 public policy of the District is "saving homes," the borrower whose home has been foreclosed upon should have the right to redeem the property upon certain conditions. Some states allow the former homeowner to buy back the house for a limited amount of time; other states, such as Maryland, give the judge discretion to allow the former homeowner to rent back for a period of time.
Superior Court judges should have the right to restructure the terms and conditions of the mortgage documents, if the lenders refuse.
If there are any surplus funds over and above the loan obligation, the homeowner should get those funds; the lender should not be entitled to a windfall.
Currently, publishing a notice of foreclosure in a newspaper of general circulation is often not real notice to homeowners. The requirement that notice be sent both by certified mail and regular mail should be incorporated into any foreclosure law.
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 since the current thinking of many lenders is to go to court to foreclose, instead of having to go through the mediation process.
The foreclosure crisis had a severely negative impact on the housing market. No one wants to see more foreclosures. But in my opinion, the mediation law is not working. If lenders are required to obtain a true judicial foreclosure, even if the homeowner cannot afford legal counsel, the court should require mediation and they still will be able to negotiate with a lender who has authority to negotiate a deal. And 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.