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Thursday, June 9

There have been no – i.e., ZERO – residential foreclosures instituted in the District of Columbia since November of last year. This is because the DC City Counsel enacted emergency legislation November 17, 2010, which required mediation prior to foreclosure of owner occupied property. As there was no mechanism for Mediation there could be no foreclosures. The City had to draft and adopt regulations governing Mediation and to establish an office to administer the Mediation process.

The regulations were proposed on April 8, and finalized to be effective May 25, 2011. I understand that the City has hired and trained a cadre of Mediators and is now prepared to administer the process. I also understand that only a couple foreclosures have been started so far, and none has progressed very far into the process.

As I’ll summarize below, the 44-page single-spaced regulations are extremely detailed and complex. Notwithstanding the detail, there are many ambiguities and unanswered questions. The requirements placed upon lenders are burdensome. It remains to be seen what effect they will have on the volume of foreclosures in DC.

The procedures will allow lenders on residential properties to begin foreclosing when loans are in default. Lenders will be required to “dot ALL of the ‘i’s’ and cross ALL of the ‘t’s’” and thereby provide a level of protection for consumers. If there is sloppy documentation on loans that have been combined into pools and sold on Wall Street, lenders may be unable to ever foreclose. I would be surprised if someone doesn’t challenge the law and/or regulations in court. I would also expect that the increased cost to lenders will somehow raise the cost of borrowing in the District of Columbia and/or tighten underwriting standards for DC loans, thereby making it more difficult for the rest of us to obtain financing.

Another thought – the strict time limits will put pressure on all parties – including the DC government – to efficiently manage the process. Especially if the number of foreclosures is more than a trickle, I’d be amazed if there isn’t a multitude of problems. In a nutshell, when a lender of owner-occupied residential property desires to foreclose, it must send Notice of Default to all Borrowers. The Notice form and the attachments are specified in detail. One of the forms is a “Mediation Election” form and another is a “Loss Mitigation Application.” The Lender is required to send a copy of all forms and a $300 fee to the DC Department of Insurance, Securities, and Banking (“DISB”).

The upshot of the Notice is that the Borrower has 30 days to elect Mediation. The Borrower must return the completed forms to the Lender and to DISB (with a $50 fee) within 30 days in order to avoid immediate foreclosure.

Once validly elected, DISB will schedule Mediation. Prior to Mediation the Lender is required to provide detailed documentation of the loan and default, including an itemization of the amount to cure, complete payment history, copies of the Note, Deed of Trust, & every assignment, the name of the holder of the Note, documentation of the Lender’s right to foreclose, details of the Lender’s loss mitigation analysis, and copies of all pooling and servicing agreements. Mediation must begin within 45 days from the date the Notice of Default was mailed, and must be completed within 90 days from the same date. Only one 30 day extension is available. All parties are required to attend Mediation and have decision-making authority, or have access to someone with decision-making authority, on all loss mitigation programs, loan modification, and other available options.

All parties are required to mediate in good faith, as determined by DISB. The lender is required to enter into a loan modification agreement if the Borrower qualifies under any available program. If the Borrower doesn’t qualify, the Lender is required to provide written explanation for the rejection.

If a party fails to attend Mediation, or fails to mediate in good faith, that party loses the benefit of Mediation. If it is the Borrower, the Lender can proceed to foreclose. If it is the Lender, the Lender can be fined and/or lose its right to foreclose.

If the Borrower does not elect Mediation or the Mediation process does not result in the agreement of a foreclosure alternative, DISB will issue a “Mediation Certificate.” The Certificate is to be recorded in the land records and will permit the Lender to proceed with foreclosure. It constitutes conclusive proof of the Lender’s compliance with the law and can be relied upon by bona fide purchasers of the property after foreclosure. Without the Certificate, the Lender cannot foreclose.

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