02/25/09: Foreclosure Laws Hurt Homeowners
By Benny L. Kass
Is your home in danger of being foreclosed upon? Will you be yet another statistic among the large numbers of American homeowners who have lost (or will soon lose) their home. When the numbers for 2008 have been compiled, it is projected that over 3700 foreclosures every business day will have taken place.
And that was last year. Many homeowners who bought their dream home (or condominium) at the peak of the market back in 2005, and obtained an interest-free three year loan, may wake up this year to the realization that they now have to pay a much larger monthly payment – which they cannot afford.
“Antiquated state laws in some ways afford fewer protections to homeowners than to renters”. This was the conclusion of a report issued last Thursday by the National Consumer Law Center, (NCLC) located in Boston, Massachusetts.
What is a foreclosure and how does it work? When you buy your house in the Washington Metropolitan area, you sign a promissory note and a deed of trust. The note is simply a legal “IOU”. If you do not comply with the terms and conditions of the note, your lender can sue you.
But litigation is time-consuming, expensive and always uncertain. Accordingly, the lender requires that you sign a deed of trust. This is a lengthy document, usually ranging between 12-15 pages, which is recorded among the land records where your property is located.
I doubt that most consumers have even read this document. If they did, they would learn that by signing it, they conveyed their property – in trust – to a trustee (or trustees) selected by the bank. They would also learn that they have provided the trustees the “power to sell” the property in the event of a default. A default can be non-payment of money. But there are other kinds of default, such as failure to pay the real estate tax, failure to maintain adequate insurance, and in some cases, even the failure to properly maintain the house. Indeed, with Home Equity Loans (known as HELOCs), there is language in most deeds of trust that if the property declines in value (as determined by the lender in its sole discretion), the amount of the loan will either be curtailed, or the entire loan may become immediately due and payable.
When the homeowner is in default, there are two ways that the lender can foreclose: “judicially” – go to court and ask a Judge for authority, or “non-judicially – don’t go to court. From my experience, almost all foreclosures in the Washington metropolitan area are non-judicial. This means that the lender and its attorneys follow the minimal legal requirements in the jurisdiction, and the foreclosure takes place either at an auctioneers office, on the court house steps or in front of the property. The trustee – who already has this “power of sale” – conveys title to the successful bidder, or to the bank if no one shows up at the auction sale.
There is a basic concept of due process built into our American legal system. Generally, before your property can be taken away, you have the right to be informed of the pending procedure, and the right to go to Court to challenge the taking. If you owe money to a credit card company, for example, that company must file a lawsuit against you and get a legal judgment before it can take any collection action. If a local government wants to sell your property at a tax sale, because you failed to pay your real estate taxes, you must be provided with advance notice of the tax sale. You also have the absolute right to redeem your delinquency and save your house – both before the sale and even for several months thereafter.
To my knowledge, the only two exceptions to this due process right are in the areas of condemnation and foreclosures. In the former, a government has the absolute right to take your property for legitimate public purposes, but you have the absolute right to challenge the amount of compensation that the government is willing to pay for your property,
In a foreclosure, however, lip service is often given to due process. According to the NCLC report (which surveyed foreclosure laws in all 50 states), “in 35 states and the District of Columbia, there is no requirement that homeowners be personally served with a foreclosure notice or legal documents that start a court foreclosure case”. Virginia is also one of these states. In Maryland, however, the law now requires that mortgage holders serve the notice of a non-judicial sale personally on the homeowner. In the District of Columbia, while notice is required, it only has to be delivered by certified mail, return receipt requested, at the last known address of the property owner. While such notice complies with the legal requirements, it is a known fact that it often does not actually reach the homeowner. I remember a case several years ago involving a Virginia foreclosure. The homeowner was away on extended military service, and never actually received the mailing. His house was foreclosed upon. Fortunately, when this was discovered, the homeowner raised such a fuss – and generated so much publicity – that the lender rescinded the sale.
The NCLC report covers many aspects of the foreclosure process. For example:
– right to cure: when a lender is about to institute foreclosure – or already has started the process, what rights does the homeowner have to cure the default? According to the NCLC, Virginia law does not assist the homeowner in any way. In the District, homeowners have up to five days prior to the actual sale to bring themselves current; however, this right cannot be exercised more than once every two years. In Maryland, the homeowner has the right to reinstate the loan up to one day before the sale.
Even though these seems like some element of protection for the homeowner, in reality it is not. Homeowners in the District of Columbia, for example, are often not able to get the exact amount needed to reinstate, because the lender’s attorney does not always have accurate information from its client as to the status of the mortgage loan. Additionally, DC law permits the lender to require that homeowners pay – in addition to the outstanding delinquent payments– such expenses as “advertising fees, trustees fees, and reasonable attorney’s fees.” When a homeowner has trouble just making the monthly mortgage, these additional fees and costs become prohibitive.
– deficiency judgments: this is an area that adds insult to injury. According to the NCLC report:
The dream of homeownership ends in eviction, forced relocation, and the loss of the family’s most significant investment. Yet this may not be the end of the hardships. Months or years later, after sustaining these losses, the former homeowners may encounter what seems like the ultimate cruelty. They discover that the mortgage holder is suing them to recover a substantial money judgment. To recover the difference between the price the home sold for at the foreclosure sale and the total debt that was due under the mortgage and note at the time of the foreclosure.
This is known as a deficiency judgment. While 45 states have enacted legislation to either place limits or even prohibit such actions, the District of Columbia, Maryland and Virginia permit the lender to pursue a deficiency judgment.
The NCLC report deserves reading by everyone, especially our elected State legislatures. Maryland has in the past year strengthened some of the consumer protections in the foreclosure law. The District of Columbia, under Councilmember Mary Cheh – Chairperson of the Committee on Government Operations and the Environment – introduced and held hearings last year on a bill entitled “Fairness in Foreclosure Act. However, the bill died in committee and has not been introduced again this year. And Virginia remains a lender-oriented state.
The report is available at www.nclc.org.