The state of New York is still facing a massive glut of foreclosures that are choking an over-stressed system and threatening the state’s homeowners, New York Department of Financial Services Superintendent Benjamin Lawsky told the crowd at the Mortgage Bankers Association’s National Secondary Market Conference on Tuesday morning.
“The state’s foreclosure process is broken and badly in need of change,” Lawsky said.
Due to New York’s judicial foreclosure process, a private-label RMBS loan in New York currently spends an average of 1,498 days in foreclosure proceedings before exiting. That’s up from 1,339 days compared to 2013.
Lawsky told the crowd that the “chronic nature” of the state’s foreclosure problems are not due to new foreclosures, but rather due to the “long tail” of the financial crisis, which sees homes in the state spend more than 900 days in the foreclosure process, which is more than double the national average, Lawsky said.
Homes spend that long in the foreclosure process due “in significant part, to problems in the way our state’s very broken judicial foreclosure process is currently applied,” Lawsky said.
“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,” Lawsky said.
“I want to make one point crystal clear: Protecting homeowners should be a paramount goal,” Lawsky said. “The monstrous foreclosure abuses we saw during the financial crisis demonstrate we should never let our guard down when pursuing well-intentioned reforms.”
Lawsky said he believes that the state needs to enact changes in the state’s foreclosure process to fix the “broken” system.
“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,” Lawsky said.
The state’s broken foreclosure system has far-reaching impact throughout the state’s population and the financial system as well.
“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,” Lawsky said.
“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,” Lawsky said.
“It strains our overworked court system, with foreclosure cases amounting to a disproportionate share of the state’s civil caseload – nearly 30% of all civil cases, Lawsky continued. “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.”
Lawsky said the foreclosure process is a very serious problem and said that his office is putting forth a system of reforms that he believes 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 that end, Lawsky announced a new NYDFS report that outlines four changes that need to be made to the state’s foreclosure laws.
The NYDFS report recommends defining “failure to negotiate in good faith” in the context of the mandatory settlement conferences and imposing penalties for such failure; requiring foreclosure plaintiffs to inform homeowners about their rights and obligations with respect to remaining in and maintaining their homes; streamlining the foreclosure process for properties that are truly vacant and have been abandoned by their owners; and offering a non-judicial process for uncontested mortgage foreclosures of commercial properties.
Lawsky said that the most significant cause for delays in the state’s foreclosure process is the settlement conference, which is mandated by state law.
After the foreclosure crisis, Lawsky said that the state’s laws were 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.”
These efforts are designed to allow the borrower every opportunity to save their home.
But the process is not functioning as designed, Lawsky said.
“Unfortunately, however, the mandatory settlement conference has not been the timely and efficient forum for foreclosure resolution that was once envisioned,” Lawsky said.
“Our data shows 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,” Lawsky said.
“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.”
Click below to read more of Lawsky's plans for the state's foreclosures and his plans for so-called "zombie properties."
Lawsky said that the delays are especially rough for homeowners because 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, Lawsky said.
Lawsky said the state needs to address the settlement conference system immediately
One area that needs improvement is the requirement of each party, the servicer and the homeowner to negotiate in good faith. While the law states that “failure to negotiate in good faith” is a violation of the law, Lawsky said that the law does not define what a failure to negotiate in good faith actually is.
Lawsky outlined potential sanctions for both sides of the settlement conference.
“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,” Lawsky said.
“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,” he continued.
“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,” Lawsky said. “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.”
Lawsky also spoke at length about the state’s “zombie foreclosures,” which are properties that are in the foreclosure process that have been abandoned by the homeowner.
On Monday, the NYDFS released a set of best practices to help combat the neighborhood blight and economic damage caused by zombie homes.
Under these best practices, a number of the largest banks and mortgage companies will regularly inspect properties that fall into delinquency to determine if they are vacant and/or abandoned, and make sure that those properties are safe and properly maintained, among other measures.
“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,” Lawsky said Tuesday.
“We should also have an expedited foreclosure process for truly vacant and abandoned homes,” Lawsky said. “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.”
Lawsky said that while these proposed changes should help to address the lingering foreclosure glut in the state, foreclosures will still be a part of any lending environment going forward.
“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,” Lawsky said.
“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,” he continued. “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.”