The New York foreclosure system reached a crisis point in late 2010.
Banks were filing more foreclosure cases than the courts could resolve, creating a backlog in the state that could take more than a decade to unwind. Many homeowners entered court without legal representation, and banks kept piling on the cases before the robo-signing scandal brought operations to a standstill.
In February, pending foreclosure cases in the system reached roughly 80,000, according to a paper published by the state's Chief Judge Jonathan Lippman. Each property a bank repossessed in March spent an average 900 days stalled in the system – roughly two and a half years and the longest timeline in the country, according to RealtyTrac.
But the state's administrative board of high-level judges implemented an affirmation rule in October 2010 to alleviate the situation. Banking attorneys had to sign an affidavit vouching for the accuracy of the records in a foreclosure, forcing these lawyers to go back and check reams of documentation before filing a case.
The rule worked. The courts were freed up to begin moving through the backlog, but no one knows for sure how long the progress will last.
Right-side up
"The number of filings has dropped drastically," said Paul Lewis, chief of staff to Ann Pfau, chief administrative judge of New York.
As of March 28, pending foreclosure cases in the New York system had been cut to 74,000, a reduction of almost 7.5% since Lippman's paper was published.
Before the affirmation rule, banks were filing roughly 850 foreclosure cases in New York courts per week. That rate dropped to 150 filings per week in March, a direct result of the affirmation rule, Lewis said.
This, he said, allowed the court system to finally begin resolving more cases than were coming in. In March, the courts disposed of or resolved 5,044 cases either through modification or foreclosure, up from 3,200 in February and 1,573 in January.
In all of 2010, the state worked through 27,617 cases.
"We certainly weren't keeping up with the flooding," Lewis said, in an interview with HousingWire. "Whether that's real or not, whether that's sustainable or not, no one is sure."
What he is sure of is without the rule, the backlog would have spiraled out of control.
"Based on projections, we would probably have hit 90,000 pending cases this spring without the affirmation rule. By the end of the summer, you're looking at close to 100,000," Lewis said. "It really stopped it in its tracks."
Reasons for delay
David Dunn has been practicing law for roughly 30 years. As a partner of Hogan Lovells in New York, he defends lender liability claims, counterclaims and bankruptcy filings on behalf of lenders.
He said the new affirmation rule slowed things down, but the problem isn't solved, merely delayed. Defaults continue to pour into the system, and the state, which is experiencing financial difficulties of its own won't be hiring new judges to help work through the backlog any time soon, he said.
"It's like a totally different world right now," Dunn said. "There is an enormously large number of cases. They've increased exponentially."
Ivan Young has been defending borrowers in the state for roughly five years as partner of the Young Law Group. He welcomed the affirmation rule as it imposes a new sense of due diligence on attorneys and holds those accountable who do not check their information.
"The effect is that a lot of the bank attorneys are scared to put in that affirmation," Young said. "It's clear they have some robo-signers involved, some assignments and affidavits, and they are reluctant to submit that affirmation. That is one of the side effects. It is causing a delay on the front-end."
Young also complained of "a constant pattern" of delays from the banks themselves. Some New York court judges hold settlement conferences where the borrower can seek a modification or some type of resolution with the bank, but he claims the banks are not reviewing the documentation submitted in a timely manner.
"I've had cases stuck in settlement conferences for a year or so," Young said.
Dunn, the lender lawyer, doesn't buy it. "That's just fantasy," Dunn said. "Banks do not want to be in the business of REO. If they can work out a modification within their guidelines, it has not been my experience that there isn't any resistance."
Dunn stops short of blaming borrowers directly. Instead, he points out a disconnect between what the bank needs and what the borrower thinks the bank needs when it comes to documentation. The bank, he said, needs every bit of financial documentation it asks for, but no decision on a modification or short sale or foreclosure can be made until all of it is submitted.
"I know that it is a common occurrence," Dunn said. "A borrower says, 'Gee, I gave you 90% of what I have.' But there is no resolution until we get it all."
The waiting game
In testimony before the Senate Banking Committee last week, Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators are at work not only cracking down on banks that improperly sped up the system through robo-signing, but they are looking for quicker resolutions to get the housing market back on the road to recovery.
"We've been exploring ways to provide relocation incentives. We think that will save us money, because the foreclosure process is so backed up now," Bair said. "Short sales and relocation assistance can shorten the time to get these properties back on the market. The market is not going to clear until we get this fixed."
Dunn said in his experience a significant number of modification applicants simply do not qualify because so many mortgages, especially in New York, are underwater. President Obama said in a town hall meeting last week that his administration will put more pressure on banks to pursue principal reduction, and the ongoing negotiations between the 50 state attorneys general and mortgage servicers continues to keep that option open. However, executives at Fannie Mae and Freddie Mac are unlikely to support such an initiative.
Both Young and Dunn expressed concern over whether the New York system can be solved with one simple rule change. Young said he still has pending cases with index numbers beginning in 2007, meaning the foreclosure started in 2006 but has still not been resolved nearly five years later.
"It's very frustrating because every month that the backlog continues and there is no resolution on these foreclosure actions, these interest and penalties keep growing for these homeowners," Young said.
Dunn said the system changed so rapidly and so quickly that it became overwhelmed by a foreclosure crisis it simply wasn't designed to handle. In the past, a borrower took out a mortgage with a savings and loan institution, "you're friendly neighborhood banker," Dunn said. But that model has been long abandoned.
"Now, we have a mess out there," Dunn said. "It's going to get worse before it gets better."
Write to Jon Prior.
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