By Scott Van Voorhis
The Empire State’s banking industry may be in for a rocky 2011 as regulators, politicians and judges turn up the heat amid a never-ending flood of mortgages gone bad. With the foreclosure crisis making headlines, New York’s financial institutions face unprecedented pressure as state regulators and lawmakers alike scramble to grab a piece of the spotlight.
The challenges range from a new law that gives a boost to homeowners who contest foreclosure proceedings to promises of a wide-ranging probe into alleged mortgage fraud schemes on Wall Street by the state’s incoming attorney general, Eric Schneiderman whose victory puts two activist Democrats eager to mix it up with the financial industry at top power positions in state government, with Attorney General Andrew Cuomo having won a promotion to the governor’s office.
State bank regulators are stepping it up as well, and have just rolled out new rules forcing lenders to respond in a timely fashion to struggling homeowners seeking to modify their mortgages.
And in a widely watched Long Island case, a state judge canceled a couple’s six-figure mortgage debt after ruling the lender had made a number of serious errors in the foreclosure process.
It is shaping up to be an eventful 2011 for New York’s banking industry, notes Joshua Stein, chair of the education committee for the New York Mortgage Bankers Association. Stein, in agreeing to an interview with Banking New York, made it clear he is speaking personally and not as a representative of the mortgage bankers group.
“Certain mortgage lenders and holders are attractive targets for politicians at all levels, and New York is no exception to that,” said Stein, a lawyer and real estate expert based in New York City who works on financing deals involving both multifamily housing and commercial properties.
The mounting regulatory challenges facing banks across New York should not come as a total surprise to local lenders. In fact, the Empire State has taken an activist approach to the foreclosure crisis all along. Practical efforts to delay or stop home takings by judges, regulators and lawmakers have been matched by campaigns targeted at the corporate suite by Cuomo.
On the micro level, New York is one of a handful of states that mandates negotiations between banks and homeowners before court officials will allow lenders to move ahead with foreclosures. For banks seeking to foreclose on homeowners who have fallen behind in their payments, the mandated conferences have made New York the slowest state in the country to do business in. The average foreclosure case in the state has dragged on for nearly two years.
The result has been tens of thousands of potential foreclosures caught in limbo, reducing the rate of bank seizures, though not necessarily producing permanent solutions, such as loan modifications, banks have argued. Overall, New York has had one of the lowest foreclosure rates in the country, though filings did jump 37 percent in August before leveling out in the fall.
Along with such street level battles, Cuomo has been a leading player in a crusade by state attorneys general across the country in a new front in the foreclosure crisis. The aim has been to force the nation’s biggest banks, many of them headquartered in New York, to freeze foreclosures while allegations of robo-signing are sorted out.
In the middle of his campaign for governor in October, Cuomo donned his AG hat to ramp up the pressure on the biggest lenders, calling robo-signing a “fraud upon the courts.” Cuomo has demanded more information from Bank of America, JPMorgan Chase, Wells Fargo and GMAC mortgage on the foreclosure process, including details of the different bank’s procedures and verification practices. He also pressed for a moratorium on new foreclosures as the robo-signing allegations are addressed – a command with which banks have mostly complied.
Cuomo’s incoming replacement, fellow Democrat Eric Schneiderman, looks every bit as aggressive as his predecessor. A state lawmaker who once held a hearing on the “underprosecution” of mortgage fraud,
Schneiderman has called for raising the stakes in the foreclosure battle by going after potential fraud in how faulty mortgages were packaged, securitized and sold on Wall Street. In particular, the incoming AG has vowed to investigate abuses surrounding the sale of mortgage-backed securities on Wall Street, including phony credit ratings and misleading marketing. He contends fraud in high places helped fuel dishonest behavior on the neighborhood level, and vice versa, citing the parallel explosion in “liar loans” and appraisal fraud.
Schneiderman has also pledged to aggressively pursue robo-signing allegations, with plans to add “resources to the ongoing national investigations into fraudulent mortgage processing.” And New York’s next top law enforcement official is also pledging to enforce a 2009 law that requires banks and other lenders to pay for the maintenance of foreclosed properties.
“Mortgage fraud schemes on Wall Street are devastating working families on Main Street, and they are threatening our economic recovery upstate and downstate,” Schneiderman said in a press statement. “As attorney general, I will do everything in my power to protect homeowners. That means using every tool in the attorney general’s toolbox to hold these criminals accountable and keep middle class New Yorkers from being thrown out of their homes.”
“There is always that fear that the new sheriff in town will try to change the world,” noted Ed Mermelstein, a New York real estate lawyer who closely tracks the foreclosure issue. “If it’s not thought out properly, it can cause more harm than good.”
Meanwhile, New York banking regulators have also been busy.
The New York Banking Department this fall issued a tough new set of rules requiring banks and other lenders to respond in a timely fashion when struggling homeowners seek to modify their mortgages.
The new rules went into effect on Oct. 1 and require mortgage servicers to let homeowners know, in writing, that their application has been received and whether more information is needed. The deadline for the first step is 10 days, and the servicer is required to let the homeowner know within a month if it has decided to modify the loan.
The push for a swifter response comes after the release of a report this summer that found that 60 percent of homeowners behind two months or more on their mortgages had not been referred to their loan servicer’s loss mitigation department.
New York’s top banking regulator, Robert Neiman, has made it clear his department will judge not only responsiveness on part of mortgage servicers to modification requests, but also their willingness to write down loans as well. In fact, he has pledged to go after mortgage servicers that are not cooperative.
The new rules go far beyond laying out mere timelines. Mortgage servicers must also hire adequate staff to deal with modification requests, while also proving they have written procedures for handling consumer requests.
“The rules are an attempt to address widespread complaints about servicer unresponsiveness, lost documents and failures to engage in appropriate loan modifications for borrowers who have the desire to stay in their homes and ability to make reduced monthly payments,” Jane Azia, the department’s consumer protection chief, told New York lawmakers at a November hearing. “We believe our rules are the most comprehensive in the country.”
Some of the most sweeping foreclosure policy moves in New York have come not from regulators, but from judges and state lawmakers.
Suffolk County Supreme Court Justice Jeffrey A. Spinner made headlines last year when he cancelled the mortgage of a Long Island couple, wiping out, with the stroke of a pen, six figures in debt. Spinner based his decision on what he declared to be the “shocking and repulsive” acts by the mortgage servicer in dealing with the couple’s efforts to get their loan modified.
However, Spinner is not destined to have the last word on the case, as a state appeals court overturned the decision. There was no existing law or statute to back up Spinner’s decision, nor was the servicer given fair warning that such a penalty was being considered, the Appellate Division of the New York Supreme Court ruled.
While mortgage modifications are nice, there is no legal requirement that lenders modify loans, Stein contends. If a homeowner has stopped making mortgage payments, the lender has every right to take back the home.
“That was a pretty extreme example,” Stein noted. “The judge decided to punish the lender by invalidating the mortgage. That is completely nuts.”
For their part, New York lawmakers have also hit the foreclosure warpath. The Legislature passed a bill earlier this year enabling homeowners who successfully contest foreclosures to recoup legal fees from their lenders. That has sparked fears that the new law might become a vehicle for lawyers intent on bringing class action suits against various financial institutions.
“There is definitely going to be situations where lawyers will take on these cases on some sort of a contingency scenario,” Mermelstein said. “I’m sure there are going to be class action law suits. If there’s a way to make money, I’m sure attorneys will find it.”
But Stein contends the problem is not the law, which could help in cases where homeowners were actually wronged, but the way it is likely to be applied in the courts. Judge Spinner’s controversial decision is but one example of the punitive approach that New York courts are taking towards lenders. Stein fears the new law will simply become another way to bash banks and mortgage servicers already struggling with a flood of properties in default.
“My problem with the courts is that they are being too cavalier with the lenders,” Stein said. “The lenders will have to pay the attorney’s fees for the privilege of being screwed.”
Scott Van Voorhis is a freelance writer.