New York, NY – May 19, 2015 – (RealEstateRama) — Benjamin M. Lawsky, Superintendent of Financial Services for the State of New York, is delivering remarks today at the Mortgage Bankers Association’s National Secondary Market Conference & Expo in New York, NY.
Superintendent Lawsky’s remarks on reforming New York’s foreclosure process are below as prepared for delivery.
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Superintendent Lawsky’s Remarks at the Mortgage Bankers Association’s National Secondary Market Conference & Expo
New York, NY
May 19, 2015
As Prepared for Delivery
I’m pleased to be here and I want to thank you for the invitation. I also want to thank you for the important and meaningful work that you do.
I would like to speak to you today about an issue that has a very significant impact on the secondary market, as well the broader housing market and economy.
Now, as you know, your business, when practiced responsibly, helps New Yorkers achieve what many regard as the embodiment of the American Dream – owning a home.
Responsible homeownership can help families secure their financial futures, strengthen local communities, and boost our economy.
However, as we saw during the financial crisis, that American Dream became an American nightmare for the many homeowners who went into foreclosure.
In New York and elsewhere across the country, we have certainly come a long way since the height of the financial crisis in restarting economic growth and job creation.
And in many states, that economic growth has translated into foreclosures returning to pre-recession levels.
But not here in New York.
The chronic nature of New York’s foreclosure problem is not a result of a new wave of defaulting homeowners.
Rather, the long tail of the crisis is due, in significant part, to problems in the way our state’s broken judicial foreclosure process is currently applied.
Averaging over 900 days from the date of filing to sale – nearly double the national average – the foreclosure process is not only unacceptably protracted, but also unquestionably damaging for New Yorkers, including the homeowners it is intended to protect.
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Before I discuss this issue further, I want to make one point crystal clear: Protecting homeowners should be a paramount goal. The monstrous foreclosure abuses we saw during the financial crisis demonstrate we should never let our guard down when pursuing well-intentioned reforms.
That said, we believe there are some sensible and responsible changes we can make to improve our broken foreclosure process that will benefit homeowners, lenders, and our local communities.
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Indeed, although it may not be immediately obvious, our current system hurts virtually everyone involved in the foreclosure process.
It burdens our towns and cities, which are forced to expend scarce resources to maintain and police foreclosed homes that have long since been abandoned.
It impairs the full recovery of our housing market by postponing the return of foreclosed homes to the market, leading to depressed property values in neighborhoods across the state.
It hurts lenders and mortgage investors, who, bogged down in unnecessary delays, can only watch passively as their investments lose value.
It strains our overworked court system, with foreclosure cases amounting to a disproportionate share of the state’s civil caseload – nearly 30 percent of all civil cases.
But perhaps the greatest harm is inflicted on those who most need the process to work the best: The thousands of foreclosed homeowners and their families – and the thousands more at risk – who lose opportunity after opportunity to save their home as fees and interest pile up, and who are denied the chance to live a life free of crushing debt.
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At the Department of Financial Services, we have been studying this issue for some time and are today issuing a report that reaches an inescapable conclusion: The state’s foreclosure process is broken and badly in need of change.
But recognizing a problem and the scope of its impact, however, is not a substitute for a solution.
And that is why we are outlining a number of reforms that we believe could help bring us out from under the weight of the foreclosure crisis, and to give our lenders, our courts, our communities, our homeowners, and our state, the opportunity to better recover from the missteps of the past.
To be clear, this is a problem long in the making. And I doubt it is one that we will definitively solve this legislative session.
Nevertheless, we believe it is important to spark a conversation about how to address this problem effectively and responsibly – in a way that protects the rights and dignity of homeowners.
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Before I dive into specifics, I want to tell you briefly why this issue is important to us at DFS.
When Governor Cuomo first proposed creating DFS, he did so, in part, as a direct response to the single-most defining economic event of our time – the unprecedented real estate collapse of 2007 and 2008.
In this context, we are committed to preventing excessive risk-taking and homeowner abuses that led to the collapse, and to ensuring fair treatment for all homeowners, especially those struggling to save their homes.
And we have sought to live up to that commitment by intervening forcefully to protect homeowners from mortgage servicing abuses and wrongful foreclosures.
But we also strive to avoid ineffective regulation and its associated pitfalls.
We understand, of course, that your business – the mortgage business – is still recovering from the crisis.
And despite the role that some in this industry played in creating the crisis, restoring confidence to the mortgage market is essential to New York’s recovery.
So we look to pursue the twin goals of protecting homeowners from foreclosure abuses and encouraging the efficient return of foreclosed properties to the market.
Contrary to popular belief, these goals are not mutually exclusive. The key to achieving both is having a sound and timely judicial foreclosure process that is fair to both homeowners and the mortgage industry.
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To find out whether this fairness standard is being met in practice, we commissioned a survey of 26 mortgage servicers to gather additional data about their foreclosure procedures and timelines for residential properties.
Collectively, those servicers represent the vast majority of all the foreclosure actions filed in the New York court system, and the survey results provided us with a great deal of information on where the foreclosure process works and where it doesn’t work.
In addition to collecting and analyzing the survey data, DFS engaged in productive discussions with stakeholders, including non-profit housing groups, the New York State Office of Court Administration, and representatives of the mortgage industry.
The result of these efforts is the Foreclosure Report we are releasing today, which is now available on the DFS website.
We encourage you all to take a look at it since the Report examines – in much more detail than I will go into today – the root causes for delays in the foreclosure process.
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The most significant cause for delay in the foreclosure process that I will highlight today relates to the phase known as mandatory settlement conferences.
Though the goal of this phase of the process is commendable, it is in need of reform.
Following the foreclosure crisis, New York foreclosure law was amended to require all banks and mortgage servicers attempting to foreclose on a home to engage in a face-to-face settlement conference with the borrower and negotiate in good faith, in order to give the borrower every opportunity to save his or her home. No case can move forward until the conference process ends.
This practice has made a real, positive difference in helping families keep their homes – with various estimates showing it has driven default judgments down significantly.
Unfortunately, however, the mandatory settlement conference has not been the timely and efficient forum for foreclosure resolution that was once envisioned.
Our data show that in downstate New York, the first settlement conference is, on average, not scheduled for five months after filing of the foreclosure action. And it takes an average of nine months from foreclosure filing for the entire settlement conference process to run its course.
For borrowers that are already at the end of their rope, any interruption– let alone nine months of start-and-stop delays – can be the death knell to any chance of saving their home.
Compounding the problem, each month of delay adds interest, penalties, and fees to a borrower’s outstanding loan balance. If this new loan amount becomes too high, then it becomes impossible for borrowers to afford the monthly payments for a loan modification, even if the interest rate is at the lowest allowable limit.
So, as the settlement conferences drag on for months on end, many borrowers become unable to qualify for a loan modification. And, as a result, their homes inevitably proceed through the foreclosure process to a foreclosure sale.
Having concluded that the settlement conference is the chief cause of delay in the foreclosure process, we set out to determine what causes delays within the settlement conference process itself.
Everyone seems to agree that the principal hold up is that one side or the other is not prepared at a given conference, which results in a 60-to-90-day delay for conference adjournments.
As you might imagine, there is a difference of opinion as to which side – borrowers or lenders – are more often responsible for these adjournments.
Lenders and servicers generally blame borrowers for not showing up to these conferences, or for not showing up with the paperwork needed to settle the case.
Borrower advocates, however, blame lenders and servicers for showing up to the conferences without settlement authority, or for giving borrowers the run-around as to what paperwork is needed in order to settle.
Regardless of who is at fault, few deny there is a problem. And our main goal at NYDFS is to find the right solution. And that solution is accountability. Whoever is responsible for delay in a given case should be held accountable. And that will encourage more productive and prompt settlement negotiations.
From conversations during our inquiry, we understand that judges and court-appointed referees are similarly frustrated by delays in this settlement conference process and agree in principle with holding those responsible for the delays accountable. However, while current law requires both sides in these conferences to negotiate in good faith, that key term – “negotiate in good faith” – is not defined in the law. Nor does the law impose any consequences for a party’s failure to negotiate in good faith.
Without further guidance from the law, judges and referees generally do not feel empowered to address the issue. Instead, when confronted with a party unprepared for constructive participation in a settlement conference, these court officers simply put off the conference for a few months and try again.
This is not a flaw in the court system; it is a flaw in the law. The unintended consequences of this legal flaw are unproductive conference sessions, useless delays, waste of court resources, and, most importantly, needless foreclosures.
In our report, we propose fixing the law to clarify, in detail, what it means to “negotiate in good faith.” This should mean, for example, showing up at the settlement conference, and not just on time, but with full authority to settle the case. And with the paperwork required by the court.
The legislative fix should also spell out an appropriate remedy to impose on a party that fails to negotiate in good faith.
For a lender or servicer who fails to negotiate in good faith, the minimum sanction should be a tolling of the accumulation of any interest, costs, and fees during any delays caused by the plaintiff. A party should not benefit from its own delay.
This tolling can help borrowers qualify for a home-saving loan modification or secure a short-sale, a big improvement over the current situation where the odds are continually stacked against the borrower as time goes by.
For a borrower who fails to negotiate in good faith, the judge could terminate the settlement conference, which, after all, exists for the borrower’s benefit.
Of course, for the many borrowers not represented by counsel in these proceedings, the law will need to be forgiving of genuinely inadvertent mistakes by the borrower. This is of paramount importance and we would work closely with consumer groups on this issue to make sure that borrowers are appropriately protected.
With over 115,000 settlement conferences conducted last year – a record number– these reforms will significantly reduce the number of court appearances per case, easing congestion in an overburdened court system and helping preserve the court’s limited resources.
We believe that these reforms are fair to both homeowners and lenders because they hold both sides equally accountable for any harmful delays. By coloring in the lines of what is already a good and well-purposed law, we can discourage adjournments, all without compromising consumer protections or hurting business, which could be a win for everyone.
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Our report also highlights several other causes for delay in the foreclosure process that I will mention briefly but not discuss in detail here. One is the so-called shadow docket, whereby lenders file foreclosure cases but delay in filing the required affirmation – the sworn statement by the plaintiff’s attorney attesting to the accuracy of the information submitted in support of a foreclosure claim.
Without a doubt, the affirmation has been an important tool in combatting robo-signing and other deceptive or harmful practices. However, when a plaintiff brings a foreclosure case but is unprepared to file an affirmation, the case cannot proceed and is stuck in legal limbo. However, I mention this issue only in passing because it was resolved by legislation that Governor Cuomo signed in 2013 requiring that the affirmation be executed near the time of filing of the case. This legislation will eliminate the “shadow docket” going forward.
The report also discusses the long period of time between the end of an unsuccessful settlement conference and the entry of a judgment of foreclosure and sale. Here, again, there is a difference of opinion as to whether this delay is attributable to lenders failing to advance their lawsuits expediently, or to a general judicial backlog. In the report, we recommend that the Office of Court Administration engage in something of a “surge” to require litigants to advance their cases with diligence and to urge judges to clear their dockets of these cases. In other words, a one-time effort to prioritize those cases – in concert with these broader reforms – could make a significant difference in fixing the problem. We also hope that the legislative measures that I’m discussing today will reduce judicial backlog so judges can focus on moving foreclosure cases through the system, to the extent they are not already doing so.
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I’d also like to discuss a specific type of foreclosure case that deserves special consideration, and that is foreclosures involving vacant and abandoned homes.
Thousands and thousands of homes currently in foreclosure are vacant and abandoned. And these so-called “zombie homes” are particularly concentrated in underserved communities in western and upstate New York, as well as Long Island.
In these areas, nearly a third of all homes subject to a pending foreclosure action started out vacant or became vacant at some point during the foreclosure process.
Homes that are truly vacant – where borrowers are long gone and do not show up to contest foreclosure – should not be subject to the same long foreclosure process as contested foreclosures, where real people are trying to save their homes.
We, as a state and as a society, have a great interest in seeing vacant homes return to the market, to shelter another family eager to make it their own, rather than being left to rot for three years or more while the foreclosure case proceeds.
A look at how these homes become vacant is particularly instructive. In one typical scenario, a borrower struggling to make ends meet stops paying his or her mortgage and soon receives a notice that a foreclosure action may soon commence.
Either because they mistakenly believe that this notice obligates them to leave, or that the foreclosure action is a lost cause and not wanting to fight it, the borrower abandons the home.
Regardless of the reasons, the borrower in this circumstance generally does not know that he or she remains responsible for paying property taxes and for maintaining the property until the foreclosure action is complete. Such a borrower would be better off pursuing a graceful exit such as a short sale or deed-in-lieu of foreclosure and turning over the keys to the lender, but, sadly, the borrower does not know this.
Once the borrower has vacated the property, it quickly falls into disrepair. Vegetation is overgrown. Rodents move in. Windows are broken. And the property becomes a blight on the community and a magnet for crime – rapidly brings down property values for neighboring homes.
New York law makes lenders responsible for maintenance of abandoned property only after the foreclosure process ends. And, as we’ve discussed, that point in time may be a long way off.
Towns and other local governments in New York do what they can to maintain abandoned properties and reduce related safety hazards, but it’s an uphill battle and puts a significant burden on property taxes. Maintenance is expensive, and vacant properties abound.
Local governments may try to collect taxes and maintenance costs from abandoning homeowners, but those homeowners are now difficult to find. Operating under strained budgets, these local governments may even pursue judgments against vacating homeowners for these debts, and such judgments may follow around the vacating homeowners, tragically leading to garnished wages and depressed credit scores for years after they have moved out and moved on with their lives.
Meanwhile, lenders have to decide whether it’s worthwhile for them to pursue foreclosure, which may mean years of incurring legal fees and paying property taxes, paying for insurance, and, then, upon finally obtaining a judgment of foreclosure, paying to fix up a property that’s been neglected for years and to market it for sale.
It is not surprising, then, why some lenders faced with this choice do not pursue foreclosure. But the result of such a decision is that the home remains in legal limbo, haunting neighbors and the local government and the now-vacant homeowner.
This limbo status has earned such homes an appropriate name: zombie homes. And these zombie homes haunt all areas of our state, from Buffalo to Montauk.
Well beyond being just an eyesore and a money pit, vacant properties are an economic albatross for families, the towns they live in, and New York’s overall housing market. We need better options.
First, we need to prevent properties from becoming vacant in the first place by improving communications with struggling borrowers about their responsibilities to maintain the property and to pay property taxes until the foreclosure process is complete. We need struggling borrowers to understand that a foreclosure notice does not require the borrower to immediately vacate the property – and that there may still be hope. We need to reach people with this message before they abandon their homes.
However, we recognize that education alone will not be a cure all. Some homeowners will continue to desert their homes no matter how clear the notice that they receive. And we need to address the scores of vacant homes already dotting our neighborhoods.
Yesterday, we announced an agreement that will help do just that with 11of the nation’s largest banks, credit unions, and mortgage servicers representing nearly 70 percent of the loans in our state. We should seek to codify these reforms into law. But, beyond that, there is more we can do.
We should also have an expedited foreclosure process for truly vacant and abandoned homes. Lenders who can prove that the property is in fact abandoned will be able to fast-track their foreclosure actions. In return for taking advantage of this expedited process, lenders will be legally responsible for maintaining the property during this faster foreclosure process, rather than waiting until the process concludes. It is a fair trade-off.
Vacant properties will spend less time in the foreclosure process and much less time being left to rot. As a result, these properties will maintain more of their value, which is a benefit both to the lender recovering its investment and to neighboring homeowners and the community. Local governments will spend less money maintaining their properties, they will preserve more of their tax base, and they will be free to spend their limited resources in better and more productive ways.
The former homeowners will benefit, too. No longer will they be on the hook to pay maintenance fees and code violations to a town they left long ago, or to pay penalties and interest on a mortgage they thought they no longer had. That gives them a better chance for a fresh start.
Courts, although they may need to dedicate additional resources in the short term to clear a backlog of vacant property foreclosures, will ultimately preserve judicial resources by getting these cases off their dockets sooner. And that will make the foreclosure process less protracted for the remainder of cases.
The Office of Court Administration and several courts around the state already know the effectiveness of a judicial fast track, because they have trialed such programs in Suffolk, Nassau, and the Bronx. Now it’s time to take the best of these trial programs and employ them statewide.
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To conclude, as I noted earlier, New York still has work left to do to repair the damage caused by the foreclosure crisis. And while we are rebuilding, there are a lot of people and institutions still suffering from its effects.
Now, I outlined a number of areas in the foreclosure process that need reform.
But, I’m sure some of you are thinking that these changes really don’t necessarily get to the heart of the foreclosure problem – why people default in the first place.
As we all know, sometimes life doesn’t always work out like you plan. You lose your job, you get sick, or one of any thousand other scenarios happen and you find yourself late on your mortgage payment.
The point is, we’ve all been there or know someone who has. The foreclosure process is a tough enough time without the judicial process making it harder.
And that’s why the foreclosure process should be as simple and straightforward as possible, so New Yorkers – lenders, investors, municipalities, and homeowners and their families – can move on from foreclosure and get a fresh start in a timely manner.
Thank you. And I look forward to your questions
Contact: Matt Anderson, 212-709-1691
