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QUESTION: What is the Washington State Foreclosure Fairness Act?

ANSWER:


"One of the most powerful tools available to help homeowners fight their lender."
 
If you are a homeowner being faced with foreclosure, the prospects may seem bleak, especially after your bank has conspicuously posted a nasty message on your front door. However, it’s important for you to know that there are options available to you that can help you resolve your mortgage debt issues.

The Washington State Foreclosure Fairness Act, which took effect on July 22, 2011, was created to provide distressed homeowners with foreclosure assistance.

The Act allows homeowners and borrowers faced with foreclosure to require that the banks mediate about the mortgage debt issues prior to foreclosing on the property and to discuss possible alternatives to foreclosure including loan modification, reinstatement, short sales, restructuring of debt, and other avenues for resolution.  
 
While there are no hard and fast rules governing how the mediation is to be conducted, the Act requires all participating parties at mediation to address any and all issues germane to the foreclosure process, giving the parties the opportunity to reach mutual accord and resolution and explore various workout plans. The individual charged with facilitating the mediation (the mediator) is required to ensure that the lender considers the following factors in reaching resolution: 1.) the borrower’s financial circumstances; 2.) loan modification and net present value calculations established by the FDIC; 3.) net present value of mortgage payments under a loan mod versus the expected recovery of the distressed asset following a foreclosure; and 4.) other applicable loss mitigation guidelines for federally backed loans.  
 
The FFA recognizes the borrower’s eligibility for mediation based on a borrower's foreclosure status. Pursuant to the Act, a borrower who is being referred to mediation AFTER June 7, 2012, may only be referred to mediation AFTER a notice of default has been issued but no later than 20 days from the date a notice of sale is recorded (NOTS).

For individuals who have been referred to mediation BEFORE June 7, 2012, they can continue through the mediation process and do NOT lose their right to mediate, regardless of when the Notice of Default or the NOTS have been issued. Dovetailing off of that, for borrowers who have received a Notice of Default BEFORE July 22, 2011 may be referred to mediation up to ONE day prior to the Trustee’s Sale.

Borrowers that received the Notice of Default after July 22, 2011 are eligible for referral to mediation up to 20 days after a Notice of Trustee sale has been recorded and issued. Timing is critical; depending on when the various notices have been issued and when the matter has been submitted to mediation, that will determine a borrower’s eligibility to have the matter heard by a mediator.
 
In the short sale setting, we generally recommend that any borrower who has received a Notice of Default request a referral to mediation, irrespective of how close you are to the closing date or how doubtful a loan mod or other debt restructuring resolution may be.

A buyer can walk or the deal can fall through or go sideways in a number of other ways, so it’s good to have that mediation as a back-stop to foreclosure. Simply by filing for mediation upon receipt of a Notice of Default you just bought yourself an additional 60 days before the banks can even consider issuing a Notice of Trustee Sale. Assuming that the borrowers get approvals for the short sale from the lenders and the deal successfully closes, you can always cancel the mediation hearing down the line.
 
There is yet another notice along this lonely road of foreclosure, and this is typically the first correspondence that a borrower will receive from a lender following a late payment or default.

The lender is required to send to send a notice of pre-foreclosure options letter, which is the lender’s first attempting at collecting on the debt and attempting to resolve the borrower’s mortgage debt issues.

In this letter, the lender will offer the option to “meet and confer” with a lender’s representative to discuss the borrower’s situation and discuss possible avenues for resolution.
 
The meet and confer is a very informal meeting between the borrowers, their agent and the lender's representative. The agent ought to be present for the meet and confer; however, there is no real need for an attorney to be involved at that stage. If the house is currently listed at the time of the meeting, the parties will discuss general items like when the property was listed and where they're at in the approval process. In most cases, the meet and confer does not result in any “final resolution” between the bank and the lender. However,  the underlying purpose of the meeting from the standpoint of the borrower is merely to buy additional time on the foreclosure timeline.
 
Pursuant to the Act, a lender may NOT issue a notice of default until 90 days AFTER the initial pre-foreclosure letter is sent to the borrower if the borrower responds to that initial notice from the lender within 30 days of receipt.

Moreover, the statute reads: “IF YOU DO RESPOND within 30 days of the date of this letter, you will have an additional sixty days to meet with your lender before a notice of default may be issued.” Thus, simply by requesting a meeting within 30 days of receiving that notice, the borrower just bought themselves upwards of 90 days.

It’s important to note than in order to properly “respond” to the pre-foreclosure notice, the response should be in writing and sent via overnight mail along with a tracking number. In the context of a short sale, if a buyer backs out or if an offer is rejected by a lender, it will be nice having that additional buffer to find a new buyer or put together a new deal. Even if a borrower is skeptical about the outcome of the meet and confer or the mediation hearings, it is always a good idea to have those options in your back pocket, as it gives the buyer additional time and bargaining power in dealing with the lender.

Moreover, if the lender fails to clearly demonstrate that a foreclosure will yield a greater net recovery value on the property than approving the sale at the then-current offer price, then the borrower may be able obtain a court order forcing the short sale, recover any legal fees related to filing suit, as well as possibly recovering punitive damages from the lender for acting in bad faith.

Net present value is simply the value of proceeds—present or future—that a bank can expect to recover when taking into consideration the time-value of money.

Let’s say the bank can expect to recover $100,000 in a foreclosure 6 months from today. For illustrative purposes, let’s say that the bank would also recover $100,000 if they approved the short sale today.

Intuitively, we all know that we would rather have that money in hand now rather than wait six months from now to get it. But why? Doesn’t $100,000 today have the same value as $100,000 six months from now? Actually, although the dollar amount may be the same, it’s what you can DO with that money that determines the net present value, because over time you can earn interest on that cash in hand.

At an annual rate of 12% interest, $100,000 six months from now has a value of $106,000. However, if you don’t have that cash in your possession during that six month period, you won’t be able to earn interest on it.

I guess it’s true what they say, a bird in the hand really is worth two in the bush. Thus, even if the anticipated proceeds from a foreclosure are equal to the offer price in a short sale, because of the time-value of money and the added costs related to a foreclosure and trustee sale, lenders would be hard-pressed to clearly demonstrate that the net recovery value in a foreclosure would exceed that of a short sale.

Failure to demonstrate that the anticipated net recovery following a foreclosure would exceed other mortgage debt alternatives may result in the lender being exposed to punitive damages for failing to act in good faith.

We advise all of our clients faced with the threat of foreclosure to explore the option of filing for mediation in an effort to empower them and take full advantage of the requirement that the lender act in good faith as leverage to reach a favorable outcome for the borrower.

If you are a homeowner, and would like to learn more about mediation rights and/or short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/