February 4, 2014
by Ronald S. Deutsch
Cohn, Goldberg & Deutsch, L.L.C.
USFN Member (Washington, D.C.)
On November 19, 2013, First American Title Insurance Company issued a bulletin updating its guidance on insuring sales of foreclosure and REO property in the District of Columbia. That bulletin supplements its prior bulletins and provides new guidance that permits nonjudicial foreclosures to resume, with some assurance of insurability, subject to various stipulations and the effect of new regulations to be promulgated shortly.
As background, the brakes were applied to the District of Columbia nonjudicial foreclosures on November 9, 2010 when the “Saving D.C. Homes from Foreclosure Emergency Amendment Act of 2010” was enacted by the City Council. That Act became effective on November 17, 2010 and was so successful in “Saving D.C. Homes from Foreclosure” that all residential foreclosure activity, effectively, ceased immediately. Thereafter, the lending and title insurance industries had widespread concerns with insuring title on foreclosed properties in the District. In response to those concerns regarding provisions that provided for voiding foreclosure sales under vaguely-defined circumstances, as well as several other items, the Council reacted by enacting the “Saving D.C. Homes from Foreclosure Temporary Amendment Act of 2011,” D.C. Law 19-41, which became effective November 26, 2011.
Reacting to further industry uneasiness, a plethora of emergency and temporary bills was enacted, which further modified and extended the 2010 and 2011 Acts. Final resolution of many of the concerns occurred when the D.C. City Council enacted Act 20-0156, “Saving D.C. Homes From Foreclosure Clarification and Title Insurance Clarification Amendment Act of 2013” on August 20, 2013, which became law on November 5, 2013.
As a result of the qualified assurance of receiving title insurance on nonjudicial foreclosures, two potential methods of foreclosure now exist. Each offers certain advantages and disadvantages. To briefly summarize the District of Columbia’s procedure, lenders seeking to foreclose nonjudicially on residential mortgages must first provide a notice of default (NOD – Form FM-1). The requisite NOD entails substantial details and time to complete.
Borrowers must be given the right to elect mediation prior to the initiation of nonjudicial foreclosures. At the mediation hearing, a discussion will take place with respect to alternatives to foreclosure. Lenders are required to participate in the process in “good faith.” Good faith has been defined to mean that lenders must: (a) evaluate the borrower’s eligibility for all available loss mitigation options and alternatives to foreclosure applicable to the residential mortgage in default, including the Home Affordable Modification Program and the Federal Deposit Insurance Corporation’s Loan Modification Program, and offer all options for which the borrower is eligible; (b) if the lender does not reach a settlement with the borrower(s) during mediation, an analysis of the net present value of receiving modified payments compared to the anticipated net recovery following foreclosure; and (c) provide a written explanation for the rejection of a proposed settlement involving a loss mitigation option or alternatives to foreclosure, which shall include an analysis of the proposal. This standard, arguably, is a higher one than that applied by D.C.’s sister state, Maryland.
A final mediation certificate must be furnished by the mediation administrator in order for lenders to proceed with a nonjudicial foreclosure. That certificate will be issued if the parties reach an agreement or if the borrower fails to elect mediation. If, however, the borrower and lender cannot come to a satisfactory resolution during mediation, the mediator prepares and submits a recommendation that the matter be concluded.
After review of the mediator’s report, the administrator shall do one of the following: (a) issue a preliminary mediation certificate, indicating that the lender acted in good faith; (b) issue a determination that the lender did not act in good faith; or (c) refer the matter to another mediator. This preliminary mediation certificate serves as an initial decision for a 30-day period, after which time the lender may request a final mediation certificate, provided that no appeal is filed. Appeals, of course, will entail delays. A determination by the mediator that a lender did not act in good faith can similarly be appealed. The recording of the final mediation certificate serves as “conclusive evidence” that the provisions of the Act have been complied with.
Finally, title insurance, is available only after the premises has been surrendered. Additionally, title insurance companies will require as a condition of underwriting that no litigation alleging defects in the foreclosure process has been commenced or threatened. Moreover, if the parties have been unable to agree to a resolution of the issues in mediation, title insurance companies will need to be contacted to determine whether the foreclosure will be insurable. Lastly, title insurance companies will require verification that the auction price is reasonable and that a recorded chain of assignments for mortgages has been provided. Thus, in short, title insurance is not assured if the borrower threatens litigation or where a mediation agreement has not been reached.
In any event, the nonjudicial foreclosure process, whether desirable or not, has received a qualified green light to shortly resume. During the hiatus of nonjudicial foreclosures, some lenders had attempted to move forward by conducting foreclosures judicially. That was met with mixed success as some judges raised issues with either the process itself or the submissions made. It is clear, however, that the new changes in the legislation recognize that judicial foreclosure is a valid process. Judicial foreclosures might offer more certainty. However, they can also cost more. Judicial foreclosures may take more or less time, but that depends on whether a borrower has elected mediation or has raised any nonjudicial contests.
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