Background:

Most loan obligations for residential real property in Washington are secured by deeds of trust. In 2011 the Foreclosure Fairness Act was enacted, making changes to the process related to the nonjudicial foreclosure of deeds of trust. As part of those changes, the Foreclosure Fairness Program (Program) was established.

A variety of agencies are involved with the Program. Their roles and responsibilities, and the services they provide, are set forth below:

The Department of Commerce (Department) is charged with the overall development and management of the Program. The Department is also responsible for training, approving, and maintaining a list of approved foreclosure mediators and assigning them to mediation cases. The Director of the Department authorizes expenditures from the Foreclosure Fairness Account (the Account).
The Housing Finance Commission administers the homeowner counseling program and oversees a toll-free hotline where homeowners in need of foreclosure prevention assistance can call and receive free foreclosure prevention counseling.
The Office of the Attorney General Consumer Protection Division investigates consumer protection complaints and enforces deed of trust foreclosure laws.
The Office of Civil Legal Aid contracts with qualified legal aid programs to provide free legal assistance to low-income and moderate-income homeowners in matters related to foreclosure.

Certain beneficiaries must remit $250 to the Department for every notice of trustee's sale recorded on residential real property, excluding the recording of an amended notice of trustee's sale. For purposes of this section:

"Residential real property" includes residential real property with up to four dwelling units, whether or not the property or any part thereof is owner-occupied.
The remittance requirement does not apply to: any beneficiary or loan servicer that is a federally insured depository institution and that certifies under penalty of perjury that fewer than 50 notices of trustee's sale were recorded on its behalf in the preceding year; or, any homeowners' or condominium association beneficiaries.

Monies in the Account pay for the Program, including mediation, counseling, consumer protection, and legal representation.

Staff Summary of Public Testimony:

(In support) Over the years, the stakeholder group has spent countless hours negotiating the Foreclosure Fairness Act (FFA). The funding formula for the FFA services was changed last year. It is not bringing in the amount of money that was anticipated. Some of this is due to a decrease in foreclosures, as well as the manner of collection, and this issue must be dealt with this year. In addition, there is a new partnership between local communities, banks, and homeowners to deal with the problem of abandoned properties. There will be ongoing work on these issues and this bill.

The lead attorney in the Jordan case has six years of experience and insight on the issue that was at the heart of Jordan. There were numerous forcible entries based on uniform contractual provisions in deeds of trust. In Jordan, the court said this violated a Washington statute that has been on the books since territorial days that grants exclusive right of possession to the borrower until foreclosure is complete. This bill provides a framework for preforeclosure entry when a house is truly abandoned and truly suffering waste. It contains important definitions. It also assists municipalities that truly suffer when homes are abandoned. Support is still contingent on not changing protections found in the bill. In addition, the bill needs some additions, such as express requirements regarding the licensing of businesses that actually enter the homes. Typically, loans are securitized and held in trust. Servicers administer the loans and handle the default process, too. Servicers, in turn, contract with property preservation companies. National property preservation companies contract with regionals, and then the regionals contract with a local contractor. These are not necessarily licensed contractors, but people found on Craigslist. There have been entries into homes that are not abandoned, and removal of personal property. This is why it is important that there be a licensing component. Also, there needs to be more direct language that servicers cannot disavow their agency relationship as they have been known to do. Do not include a retroactivity provision. It is unclear that such a provision would even be constitutional.

The bankers want to support this. It is very important for the industry. Inclusion of a retroactivity provision should also be considered. Consideration should be given to clarifying that servicers should not be sued for what has gone before and measures that were taken that were in accord with requirements imposed by Fannie Mae and Freddie Mac and were pursuant to contracts that they had with homeowners. The bankers do not represent government-sponsored entities such as Fannie Mae and Freddie Mac, but banking representatives have spoken to them about this issue because it has the potential to impact them. Retroactivity is not a request made for those who acted in bad faith, but for the others who did not. Also, a provision should be included with respect to successors in interest. There is a need for certainty when the borrower is deceased. The bankers will continue to negotiate in good faith.

A bipartisan group of legislators created the FFA. It isn't perfect, but it is considered a model in the nation. Two important fixes need to be made. First, Jordan has led to uncertainty. Second, funding changes are needed so as to ensure counseling and mediation services. Jordan invalidated a key provision that has been included in deeds of trust for decades. As a result, banks cannot maintain abandoned properties and cannot preserve the value of the property. The bill will protect homeowners and will regulate property preservation companies. It will allow servicers and agents access to maintain the properties, and it will create a duty to maintain properties, both in foreclosure and post-foreclosure. This effort is complicated, but there is confidence that it will get done. A further change is needed to the funding to make sure that those who should pay are paying. Financial institutions have agreed to raise the fee and pay up front. The smallest will be able to apply for a refund for fees paid upfront. This will allow full funding of the program and tracking.

Cities such as Tacoma, SeaTac, and Spokane Valley have seen increased numbers of vacant and abandoned homes. Cities support the bill. The sponsor's leadership on the issue, and the inclusion of cities as partners in this effort is appreciated. When neighbors notice crime and graffiti, they contact their local city and the city looks into it. Under current law, cities have limited options. Cities try to contact the owner, but who that is can be unclear. One element of the bill increases communication with the locals. This allows the city to know the status of the property. Cities do have nuisance abatement authority, but ideally they would like the lenders and owners to do the work and not impose this cost on taxpayers. There should be a provision added that requires financial institutions to continue to maintain homes that are in mid-foreclosure as well as post-foreclosure. It is recommended that the Oregon model be examined. Cities like Bremerton must keep neighborhoods healthy and fight blight and want to see this move forward.

Much work has been done over the last few years to protect homeowners and make sure there is a fair process. The impetus to work on the issue of abandoned properties comes from an economic justice perspective. Homes that are abandoned and crime-ridden become a problem for the municipalities and the neighbors. For this reason, there is interest in seeing a narrow exception to the longstanding law that says the homeowner has possession until foreclosure is complete. But, homeowner rights must be protected. There are numerous stories of what clients have faced at the hands of property preservationists who have taken property and replaced locks on doors. Many times in these situations the homeowners think that they cannot come back, and they leave long before they have to. In this state, they have the right to occupy until 20 days after the foreclosure is complete. Columbia Legal Services' support is limited to fixing the funding and providing for prescribed, limited entry into abandoned property.

Although there have been about 12,000 recorded notice of trustee's sales (NOTS), only about 7,000 NOTS' worth of funds have been paid into the account. It is recognized that it is a big, bold request to require that the fee be paid upfront at the time of recording, but it is necessary. The funding problem may be due to exemptions. Some of those on the list that the Department of Commerce kept were not entitled to exemptions. After pushing on this issue, those not entitled to be on the list were removed from the list. This new method will work better.

An attorney in private practice representing a wide range of clients, not just lower income clients, has seen that these issues affect people of all different income levels. Property preservationists have a perverse incentive to break into a house because, if a house is not abandoned, and they don't break in, they don't get paid. There have been instances when: a condo unit was broken into for the purported purpose to winterize, but this condo unit was inside a condo building, and such action, therefore, makes no sense; and a new lock box was put on a home where there was a real estate sales sign up. Retroactivity is a no-go and would be unconstitutional. Homeowners will never agree to it. Homeowners and their representatives want to stop blight but a lot of responsibility falls on banks who are letting properties become blighted.

The trustees support this and hope that all can be resolved. Trustees are third parties in the process. There are other updates that should be included in addition to the Jordan fix. One issue is around a beneficiary declaration and when it is provided. Perhaps, this will be provided at the notice of default stage. Another issue being looked at concerns trustees being able to get out of a dispute by saying they have no financial interest. The last component is funding. Trustees float fees during the foreclosure process and don’t get paid until the end. This can be a very long wait. Trustees have been asked what they think about paying this fee on NOTS at the time of recording, and they should be responding in the near future.

(Opposed) None.

(Other) Representative Orwall deserves thanks for working on this. The City of Spokane is concerned with over 500 abandoned homes. This weekend there was a fire in a home that had been in foreclosure for two years. A squatter set the house on fire. This bill needs more work. The major item for Spokane is that the city already has in place a registry and fees with respect to abandoned homes and wants to make sure the city can continue to do what it is doing, or that the legislation does at least as good a job. The Jordan fix is important to community banks. A standard part of these contracts allows the lender to maintain the property. As to the funding issue, the actions that precipitated the foreclosure crisis were not the actions of community banks. Community banks are not comfortable yet with the way this is structured for payment, but are willing to continue to work on this going forward.