The Washington, D.C., foreclosure system remains frozen 18 months after the city council passed a law that made it possible to void a future filing.
In November 2010, the D.C. city council passed an emergency ordinance forcing lenders to provide mediation to borrowers in danger of foreclosure. The meeting must take place within 45 days of the notice of default, and mortgage servicers must navigate a slew of other requirements.
If a servicer files a foreclosure notice without documenting that loss-mitigation options were offered before the foreclosure, the new act can declare the subsequent sale of that property null and void, according to the ordinance.
This has kept both the amount of new foreclosure filings and the sale of REO close to nil, according to industry players.
"I have not insured title on an REO for a completed foreclosure filed since the ordinance passed," said Ricardo Lasso, a real estate attorney who also runs a title insurance business in the D.C. area. "In the whole area, we're looking at below 50 foreclosures filed in two years."
The ordinance came just one month after a coalition of state attorneys general and federal prosecutors began their investigation into wide-scale foreclosure abuses by the mortgage servicers. Banks themselves froze the process to correct faulty affidavits during the robo-signing scandal.
But as with ordinances in other cities seeking to tighten the foreclosure process, servicers had to adjust. Some of the rule changes happened statewide, such as recent laws passed in Nevada and Hawaii.
In D.C., Lasso said the way the ordinance is written, homeowners could void a foreclosure based on even the slightest errors.
"One of the most amazing things is you can void the foreclosure if the notice is mailed using the wrong envelope. They have a required type of envelope. If you don't use the right color, that is enough ground to make the foreclosure voidable," Lasso said. "That's just an example."
According to RealtyTrac, mortgage servicers filed just three notices of trustee sales and completed 38 foreclosures in D.C. for the first three months of 2012. Foreclosure activity dropped 35% from the first quarter of 2011.
The ordinance passed in the fourth quarter of 2010. For that period, servicers record 245 trustee sale notices and completed 159 foreclosures. Over the next quarter, activity dropped to just eight trustee sale notices and 15 completions, an 85% drop from one year prior, according to RealtyTrac data.
"It's been paralyzed," Lasso said. "They need to really clarify some things."