Ah, the District of Columbia, where to begin. To those of us in the business, just the mention of working in DC with the Recorder of Deeds, the Office of Tax & Revenue or any of their subdivisions evokes a painful smile, followed by a deep sigh . . . of anguish as opposed to relief. Ever wonder why title insurance rates are so much higher in DC than in any of the surrounding areas? Okay, probably not; but, if you did, all you need to do to understand is to work with them for a month or two. Rates are tied to risk. Let’s just say that rates could be significantly higher based on what is really going on behind the curtain and leave it at that.
The one thing that actually used to be simple and easy in DC was foreclosures. In comparison to the surrounding jurisdictions, Maryland and Virginia, doing a foreclosure in DC was a piece of cake. All one really needed to do was provide the required notices to the borrower in default and to any junior lien holders and creditors, wait the prescribed amount of time, conduct the sale and record the proper documents with the Recorder of Deeds. No doubt that is a gross overgeneralization of the process and I am sure that my colleagues and counterparts that used to conduct DC foreclosures would take me to task on it; but, compared to Maryland and Virginia, I am not that far off for purposes of this Post.
If you were reading carefully, you noticed that I said “used to conduct DC foreclosures” in the last paragraph. That is a true statement as there are currently no foreclosures taking place in DC. How can that be you ask? Are we not in the middle of the worst foreclosure crisis in history? How can it be then that nobody in DC is losing their home for not paying their mortgage? Easy answer – like the eye of Sauron, the DC government turned its focus to this arena and got involved. As a result, foreclosures and REO sales (the sale of the foreclosed upon home by the foreclosing bank to a third party purchaser) in DC have come to a grinding halt. While that is good for people that are not paying their mortgages in the short term, the long term consequences for the District and those homeowners and the rest of the City are growing and will eventually come home to roost.
Hmmmm, where have I seen that theme before – push out the consequences until later and deal with it then or, as is usually the case, just push it out even further. Perhaps a similar theme runs through the whole housing crisis, the artificially low interest rates, the environment, our consumption over saving culture generally, and so on. Actually, that push it out theory worked great for me in all those and other arenas right up until the day I had a kid. Game changer; but, that is a story for a different Post. Back to DC.
So, what exactly did DC do to turn a relatively straightforward foreclosure process into a no fly zone for foreclosures and REO’s? It basically boils down to (i) an emergency law signed on November 17, 2010; and (ii) a Statement of Enforcement Intent Regarding Deceptive Foreclosure Sale Notices released by the DC Attorney General on October 17, 2010. I will address each of these catalysts in turn.
First we have D.C. Act 18-599, cited as the “Saving D.C. Homes from Foreclosure Emergency Amendment Act of 2010.” What a wonderful piece of legislation this is. To give you a reference point for how this Act reads, think of a room full of one hundred people, each with a different puzzle piece, where nobody gets to leave until they finish putting the puzzle together. Here’s the kicker – each of the puzzle pieces is from a different puzzle! Now you are starting to get the picture (no pun intended). This Act is a poorly constructed, barely thought out, mashed together piece of junk complied by people who at best have a slight clue about the realities of foreclosures, REO’s and the title insurance business.
Before addressing some of the internal absurdities of this Act, let me first let you know that the regular Act is not yet in effect as Congress’ review period does not expire until later this month. However; it is expected to be approved and it is likely that DC is going to be stuck with it.
Right off the bat, this Act was laughable. For example, while the Act set out the broad strokes of what the new foreclosure system would look like in DC, those conducting foreclosures in DC are required by the Act to conduct them in accordance with the Act’s supporting regulations. Sounds fair, right? I guess it would be if they actually bothered to draft the regulations! So, here’s a new Act that must be followed or else the foreclosure sale is void (not voidable, void) and the guidelines do not even exist. That is certainly one very effective way of protecting homeowners; create a process that is impossible to navigate. Hence the instant shut down of foreclosures.
Now that it has been several months since the Act was enrolled, the proposed regulations do exist. Not well thought out, run past the experts (public and private) and tested regulations, put in place so that foreclosures could actually happen where warranted. Nope. Just proposed regulations. Luckily, DC does not disappoint. If the Act is Abbott or Laurel or Yogi, the proposed regulations are Costello, Hardy or Boo Boo. Here are a few reasons why.
First, the Act calls for borrowers and record owners to be given written notice of default by certified mail, postage prepaid, return receipt requested, and by first class mail. Good idea. Definitely want to tell people they are in danger of losing their homes. Nothing different here from the way it was done in the past.
The regulations; however, call for the notice of default to be “served.” That my friends is just a wee little bit different from delivering notice by certified mail, postage prepaid, return receipt requested and by first class mail. “Service” requires hiring a process server and attempting to personally hand deliver notice. If that fails, there are other permitted options such as posting or publication; however, they are time consuming and cost significantly more than certified and/or first class mail.
As if the service requirement wasn’t enough, and trust me, it is and then some, the regulations have a special surprise in them. Not only does the borrower, record owner (luckily, most often the same person), occupants and the new Mediation Administrator’s office need to be served with the notice of default; but, they have to be served on the same day! Let that sink in for a moment.
That’s right, per the proposed regulations; they have to be served on the same day. Ludicrous. What possible purpose could that serve? To the best of my knowledge, there is no other arena in civil, criminal or administrative law that requires notice of any kind to be delivered, served, posted, published, announced, broadcasted or disseminated in any other way on the same day. The logistical challenge and financial burden for making that a reality are staggering if not flat out impossible. Either way, their inclusion here is comical and beyond justification in my book. Moving on. There’s more.
The final example of the myriad of internal issues with the proposed regulations before getting to the Attorney General’s remarks relates to a cutoff date in the process leading up to the foreclosure sale. Getting past the notice versus service and service all at once issues for the moment, there is generally a date certain after which the foreclosing party does not have to continue to search for people to notice/serve with default or intention to foreclose paperwork. The new DC framework does not provide for such a cutoff date. How is that an issue? Why should you care? Let me explain.
Imagine that you and your spouse own a home in DC and for whatever reason are not making the mortgage payments. One thing leads to another and you are facing foreclosure. Imagine that it has gone so far that the foreclosure sale is bearing down on you. Ah, but; you are familiar with the new foreclosure Act and regulations or read something in some amazingly insightful blog somewhere about them and you know that all “record owners” must receive notice of the default (whether served or not is not relevant here) in order for the sale to be valid and there is no cutoff date. So, you stroll on down to the Recorder of Deeds office and casually record a deed adding good old Aunt Marcia to the title and, voila, you have just scuttled the current foreclosure case.
There is now an additional record owner that must be in the loop on the default. No way the lender or the lender’s attorney is going to know about the recording and the need to include this new record owner for several days at a minimum to more like weeks or perhaps months. Now, when going to the required mediation or to the sale itself, the lender can get blindsided by this since there is no cutoff date. While it is not entirely back to square one for the lender, you can bet the case won’t be moving forward until that new record owner is in the loop and that takes time; both actual and procedural. Not to mention the economic loss associated with the lender getting blindsided.
Don’t get me wrong. It is not my intention to support lenders here or show them sympathy. If you read my kick off post (if you didn’t, check it out), you know about the crazy, unprecedented fraud committed by lenders and those connected to them above and below the chain of commerce. My issue here is with a flawed and broken system that can’t work and is poised to fail. That failure has short term and long term costs and other consequences for us all; but, not yet, we will get to that.
First, let us take a brief look at the DC Attorney General’s comments and their impact on this debacle. The AG’s Statement of Enforcement Intent Regarding Deceptive Foreclosure Sale Notices released on October 17, 2010, was a giant shot across the bow of the foreclosure and REO arenas.
That Statement basically called into question the validity of the overwhelming majority of foreclosures conducted in the District. The focus of the Statement was on the contents of the notice of default. Specifically, on the name of the foreclosing party which is most often NOT the name of the original lender that made the loan to the borrower. This is so due to the secondary mortgage market, mortgage backed securities and the greed that fed that frenzy. The Statement said that if there were not recorded assignments from the original lender all the way through to the present owner and holder of the mortgage obligation, there was or likely was a violation of DC’s consumer protection laws in play. The kicker, yes, again, there is always a kicker with DC, is that never before were assignments required to be recorded! Talk about legislating backwards.
Can you imagine what that Statement does to the entire system and especially the insurance landscape? Exactly how many tens of thousands of foreclosures are implicated here? Is DC going to now go back and unwind them in whole or in part? What about the properties that are now owed by bona fide third parties? Is DC going to take the homes away from them and give them back to the people who were not paying and/or could not afford them only to have them lose the home again later on? These questions and more jump right out.
Needless to say, that Statement in and of itself was enough to send lenders, asset managers, title insurance companies and settlement firms handling REO business running for cover. Hence, the crashing to a halt of the DC foreclosure system even before the Act was finalized. On the REO side, how could any of the banks that bought back these homes at foreclosure move forward on putting them into the hands of new owners when those sales may be invalid or void? No can do. Those transactions get put on hold as well as the foreclosures themselves.
From the title insurance underwriter’s perspective, it is even worse. Remember, insurance companies lose money when claims are made whether or not they win or lose the ultimate claim. Just like getting sued costs money even if you win, so to do claims, even totally baseless ones, cost insurance companies when they get made. All claims cost money and require resources to investigate. If a claim is strong enough to go forward, they cost money to defend. Even in victory, there is tremendous economic loss. Just the nature of the business. As a result, title insurance companies want to avoid claims being made as much as, or perhaps even more so, than losing claims.
Now, since that Statement was released, the AG has clarified it and recanted some of it and has otherwise diluted it. However; based on what I related above about trying to avoid claims getting made, how many title insurance companies do you think were or are chomping at the bit to get back into DC with the original Statement being out there and then followed up by the wonderful Act and its proposed regulations? Yeah, exactly, not too many.
To bring this all home, it is important to examine the real consequences of this situation. First, in the small, immediate picture, the consequences are that lenders are going to lose a great deal of money. The service requirement is a real doozie as is the endless loop of delay created by the lack of a cutoff date insofar as it relates to adding new record owners. Remember, I am not having a pity party for the lenders here. What have we learned when banks have problems? I am talking big banks, the too big to fail banks, you know, the ones that are still around and who are the very ones foreclosing and selling REO assets in DC and just about everywhere else. I think it is fair to say that banks being in trouble are a whole lot worse for consumers than it is for the bank. Who gets bailed out – banks or consumers? Hmmm, let’s see. Do the names AIG, Chase, Citibank, Wells Fargo (Wachovia, Bank of Obama, I mean Bank of America (Merrill Lynch, Countrywide), and Bear Stearns ring any bells. Damn, I must not have been home the day my bailout check came.
See where I am going with this? The more banks that are foreclosing in DC lose as a result of the newly legislated quagmire, the worse it ends up being for consumers and the general public in the end. Somehow, the banks wind up okay and their executives still manage to survive with seven instead of eight figure salaries.
There are long term problems as well. What do you think happens once all of the regulatory and practical issues get worked out in DC and foreclosures and REO transactions being moving forward again in earnest? The massive backlog is going to create a giant flood of foreclosures. A sudden wave of supply will drive down prices, it is only natural. That will be good for purchasers and investors at foreclosure sales. That will lead to a tremendous increase in the supply of bank owned REO assets that will have to be resold to third party purchasers.
How is this for a double dip: the assets that were purchased at foreclosure sale for less due to increased supply will now be sold as REO assets in a market that just got flooded with REO assets. Once again, we know that a flood of supply will drive down prices. That will drop the prices on the REO assets even further. Every time a REO asset goes for less, the next one will go for less because the comps will be less. That in turn devalues the entire area whether or not it is a REO asset or the home of someone that has never missed a mortgage payment in their lives. Now, through no fault of their own and without any way to avoid or escape it, their property is losing value every time a double devalued REO home goes into the hands of a new owner. Not good. Not good at all.
So, to conclude and get off my soap box, there are no easy answers right now for conducing foreclosures or REO transactions in the District of Columbia. The emergency law signed on November 17, 2010 and the Statement of Enforcement Intent Regarding Deceptive Foreclosure Sale Notices released by the DC Attorney General on October 17, 2010, have left the distressed property landscape in DC in utter disarray. It is dangerous for foreclosure practitioners, for title insurance companies and, worst of all, it is going to lead to a future drop in home value in DC once foreclosure and REO sales resume. At least people that are not paying their mortgages are safe . . . for now.