11/02/10: District Issues Foreclosure Protection Statement
Housing Counsel
By: Benny L.Kass
Do you live in the District of Columbia and are facing foreclosure action? If so, and depending on the facts and circumstances of your original mortgage transaction, you may be able to get relief from the District’s Attorney General’s office.
On October 27, 2010, Attorney General Peter Nickels issued an enforcement statement on foreclosures conducted on District properties. According to Mr. Nickels, “a foreclosure may not be commenced against a D.C. homeowner unless the security interest of the current noteholder is properly supported by public filings with the District’s Recorder of Deeds.”
This is a complex – and greatly debated – issue throughout the country.
Let’s start at the beginning. You obtain a mortgage from a local lender. Actually, in the District – and in most jurisdictions throughout the United States – lenders use Deeds of Trusts instead of mortgage documents. For this column, the word “mortgage” is synonymous with a Deed of Trust.
When you buy your house (or condominium unit) you get a Deed from your seller. That Deed is recorded among the land records with the District’s Recorder of Deed. You then sign a promissory note – the IOU to the lender, and also sign a Deed of Trust. That document is a security instrument. It is also recorded with the Recorder of Deeds.
What is a Deed of Trust? Oversimplified, you deed the property that you just bought – in trust – to a trustee (or trustees) selected by the lender. If you pay off your mortgage loan in full. the trustees will release their Trust deed, again by filing a certificate of satisfaction with the Recorder of Deeds.
However, if you go into default, and cannot make your monthly payments, the Trustee has the power – spelled out in the Deed of Trust – to sell your house at a public auction. Unfortunately, although legislation to protect homeowners is currently working its way through the DC City Council, there is currently no required judicial review of foreclosure actions in the District. If you, as a homeowner, believe the foreclosure was wrong, the burden is on you to institute a lawsuit against the lender and the trustee.
Have you heard the word “securitization”? That’s a concept that many economists and public officials believe created the financial mess we currently are in. This is a process whereby lenders packaged up many of their loans, and sold them to other lenders – some of which were not even located in the United States.
Furthermore, back in 1995, a company known as Mortgage Electronic Registration System (MERS) was created. According to the MERS website, it is an “innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.” (www.mersinc.org).
Peter Nickels agrees that MERS is a private tracking company of mortgage interests. But he points out that District law requires that the holder of a mortgage interest must be reflected in the District’s public records, and not merely in the computers of a private company.
Why is this significant? Because of securitization, the original lender may no longer be the owner of the promissory note you signed. When a lender forecloses, it must send the delinquent homeowner a form “notice of foreclosure sale”. The actual sale cannot take place until a minimum of 30 days from the time the homeowner – and the Recorder of Deeds -received the notice.
The information contained in the form notice must be accurate. For example, it advises the homeowner of the date, time and place where the foreclosure sale will take place. It indicates the amount owed on the loan, as well as the minimum balance required to cure the default and stop the foreclosure.
Who has the right to cure? Anyone can if he is able to pay off the mortgage, as well as all foreclosure costs and attorneys fees. But District law has a unique provision for residential homeowners (including condos or cooperative units). Once every two years, you can cure the default and stop any foreclosure sale by sending the lender all sums, including any reasonable late penalties, required only to bring the account current. You also have to pay any and all expenses associated with the foreclosure, such as advertising and trustees fees, and reasonable lender’s attorneys fees. (DC Law 42-815.01).
The form also requires that homeowners facing foreclosure be advised of the name of the holder of the note. Here is where the Attorney General’s position comes into play. Mr. Nickels points out that “in contrast to the laws of many states, District law imposes a recordation obligation on each transferee of a security interest in real property”.
Thus, if the land records do not show that the “holder of the note” identified in the form notice in fact does not have the security interest, then – according to the Attorney General – “the notice form is misleading”.
What does this mean? Such a misrepresentation is a violation of the District’s Consumer Protection Procedures Act, which allows a consumer/homeowner to file suit against the foreclosing party. If successful in court, not only will the homeowner get the foreclosure sale stopped, but the court can award reasonable attorneys fees in favor of the homeowner plaintiff.
MERS immediately responded to the enforcement statement. They agreed that “no homeowner should be subjected to deceptive practices during the foreclosure process.” But they go on to state that the MERS system provides free access to any member of the general public to identify the current servicer and the note owner. MERS defends its position by claiming that they are “already recorded in the land records as the security interest holder” in their capacity as “nominee” for the lender.
This is an issue that will ultimately have to be resolved by our local Courts, first at the Superior Court level and then at the DC Court of Appeals. Several state supreme courts have already ruled against MERS, and have stopped the foreclosure actions. In other states, MERS actions have been upheld. Ultimately, this may have to be resolved by the United State Supreme Court.
In the meantime, if you live in the District and are facing foreclosure, have an attorney review your specific situation – and your legal documents. And you can also call the Attorney General’s Consumer Hotline at 202 442-9828.