The Attorney General for the District of Columbia has issued an enforcement statement that makes foreclosure on D.C. residential property virtually impossible for all purchased loans—a statement that runs contrary to D.C. law and violates due process under the U.S. Constitution.

The statement—based on an incorrect reading of a D.C. tax statute—joins several recent announcements by state attorneys general, federal and state banking regulators, and state courts reacting to the "robo-signer" issue. Click here to read an earlier Ballard Spahr legal alert on mortgage-foreclosure documentation problems.

In the Statement of Enforcement Intent Regarding Deceptive Foreclosure Sale Notices, issued October 27 2010, D.C. Attorney General Peter Nickles opines that a tax provision in a D.C. statute regarding recordation of property deeds requires that all assignments of deeds of trust be recorded, and renders it a deceptive practice under the D.C. Consumer Protection Procedures Act (CPPA) for a servicer to issue a Notice of Foreclosure (required under D.C. law) because that implicitly misrepresents that all such deeds have been recorded.

Recordation under the D.C. statute serves two purposes: collection of taxes and notice to potentially competing owners of property as to rightful ownership—neither of which applies here. Although the industry largely relies upon the Mortgage Electronic Registration Systems (MERS) registry, this is not good enough for the Attorney General, as MERS is not a publicly owned forum (although the registry is open to the public).

Clearly, the Attorney General aims to stem the unfortunate rising tide of D.C. foreclosures, but his statement causes substantial mischief. And it is not just the threatened maximum $1,000 fine per violation under the CPPA—it is also the threat of injunctive relief and the fact that every desperate borrower will now cling to another meritless defense.

Furthermore, the enforcement statement constitutes an unconstitutional deprivation of property rights. It would make it cumbersome, if not impossible, for trustees of mortgage-backed securities (MBS) to exercise rights to collateral.

The Attorney General is conspicuously silent about what servicers should do now. Could a servicer track down every single entity that has at one time owned a given note to obtain that entity’s signature on an assignment? Must the servicer also obtain that entity’s corporate seal, a requisite for recording, before the servicer may foreclose?

Since the "robo-signer" issue surfaced, several clients have retained Ballard Spahr to do due diligence reviews of mortgage foreclosure procedures and files and to help them respond to regulatory inquiries. The firm has also conducted a webinar and an in-person program on the issue.