By Scott Van Voorhis
A seemingly innocuous rule aimed at curbing robo-signing has backfired, clogging New York state courts with unresolved foreclosure cases and ultimately punishing homeowners stuck in limbo, real estate attorneys contend.
Since 2012, bank and mortgage company attorneys have been forced by the courts to sign an “affirmation” that all elements of a foreclosure filing are accurate. But the result has been a logistical nightmare, adding mountains of paperwork and leading to a backlog of tens of thousands of foreclosure cases, critics contend. It now takes nearly three years for banks to foreclose on a home in New York state, roughly three times the national average and the longest in the country, according to RealtyTrac.
While some prominent members of the state’s judiciary are starting to recognize the problems posed by the affirmation requirement, changing it may not be so easy. Modifying or doing away with the affirmation might create the impression that it would then become easier for banks to foreclose, frustrated real estate attorneys say.
“When they first put out the affirmation, some of the attorneys in our firm said this isn’t going to work, it’s too broad,” said Allison Schoenthal, a partner at Hogan Lovells US LLP, which does extensive real estate work. “The courts are getting jammed up.”
High Hopes Dashed
There was little fretting, at least publicly, when New York state’s Office of Court Administration rolled out the affirmation rule in the fall of 2010. In a press release, New York State Chief Judge Jonathan Lippman lauded the new filing requirement, saying it would ensure that documents judges rely on “will be thoroughly examined, accurate and error-free.” But what sounded simple on paper has become a nightmare for real estate attorneys representing banks in foreclosures.
First, the penalties could be career-ending if a flaw is found in the paperwork – a potential charge of perjury and the prospect of losing one’s license to practice law. And the attorneys involved have to certify they have personally reviewed all key documents in all new and pending cases and that they have spoken directly to the bank or lender they are working for. They also have to vouch for all notarizations as well.
Instead of rushing forward to sign affirmations, lawyers for lenders have been bogged down trying to meticulously meet all the conditions, Schoenthal notes. It can take countless hours of document reviews and phone calls to satisfy the requirements, heaping thousands of additional costs onto the books of the lender or bank trying to foreclose. “It creates layers of paperwork,” Schoenthal said.
A Growing Logjam
The affirmation requirement added the final straw to a court system that was already buckling under a flood of foreclosure filings and an earlier round of requirements also aimed at protecting homeowners.
Before a foreclosure auction can be scheduled, lenders have to agree to hold a series of meetings with homeowners to try and work out a loan modification or other settlement. The meetings themselves have to be spaced out every few months, meaning the entire process takes as long as 18 months. That was already difficult, but now banks and their attorneys have to file their affirmations before those meetings can take place.
The result is not surprising – the number of foreclosure cases in New York state courts spiked to 74,520 in 2011. Meanwhile, dispositions dropped by almost a third from 2010, to 19,205, while new filings plunged nearly two-thirds to 16,156, according to the New York State Unified Court System.
When homeowners who are delinquent, but not formally in foreclosure, are counted, the number of soured mortgages across New York State rises to 345,000, according to a recent report by the Neighborhood Economic Development Advocacy Project.
All told, it now takes more than 1,000 days to for a bank or other financial institution to move a foreclosure through the court system, from filing to auction, notes Joshua Stein, chairman of the education committee of the Mortgage Bankers Association of New York. That’s up from 666 days in 2010 and compared to 348 days across the rest of the country, RealtyTrac has reported. “When you pile it all one and add it all up, you have a foreclosure process that just doesn’t work,” Stein said.
Delays Prove Costly
The backlog is unfair to both the financial institutions involved and the homeowners, Schoenthal contends. The long delays can rack up thousands of dollars, if not tens of thousands, in costs for the banks involved. Along with the loss of mortgage payments on the home, banks also automatically start picking up the tab on taxes once a homeowner defaults.
As the foreclosure process drags on, the property is likely to steadily deteriorate, with the homeowner unlikely to be to motivated to maintain it. The lender must then pick up the tab for potentially thousands in repairs in order to make the house saleable again. The neighborhood also takes a hit, as the home facing foreclosure enters a steadily decline, dragging down the value of other homes.
But the foreclosure logjam is also unfair to struggling homeowners. The court-mandated workout sessions with the banks can’t begin until the affirmation is filed. As the process drags on, the unpaid mortgage payments and interest pile up, creating an even deeper hole to dig out of. The longer the homeowner remains in default, the harder it becomes to work out a loan modification, Schoenthal said.
Affirmation Requirement Draws Critics
In an encouraging sign, some members of the judiciary are starting to at least acknowledge the logistical problems the affirmation requirement has created.
In testimony before Congress in March, Judge Arthur Schack of the New York State Supreme Court, raised serious questions about the affirmation requirement and its impact on an already overtaxed court system. He argued that bank lawyers are skittish about filing the affirmations under penalty of perjury and being “sanctioned by the courts for filing false statements.”
The criticism is all the more telling given that Schack was a early and strong critics of the way banks and mortgage companies have handled foreclosures.
“This laudatory requirement, as a practical requirement, slowed up the foreclosure process … This logjam is something else our courts have to deal with, despite our limited resources.”
Yet despite the growing concern that the affirmation requirement has only made the foreclosure mess worse, real estate lawyers and bankers face an uphill battle trying to convince New York court administrators or legislators to scrap or modify it.
Some suspect the logjam was not totally unforeseen, and that it serves as a mechanism to seriously slow down bank efforts to foreclose on homeowners in default, Stein said. The required workout sessions with homeowners, for example, are of limited value other than dragging out the process for months. Stein sees a similar motivation behind the affirmation requirement.
However, critics of the affirmation requirement have little political leverage in the current economic requirement. Legislators are unlikely to back any proposal, such as amending or repealing the affirmation requirement, which could be perceived as speeding up foreclosures and helping evict families from their homes.
Judges and court administrators are not immune to these pressures, either, but the real victims, in the end, are average homeowners across the state faced with a real estate market that can’t seem to quite get back on its feet. The backlog of foreclosures distorts property values and exerts a strong downward pull on the market.
While politically unpalatable, the best way to help fix the real estate market is to bite the bullet and let banks clear foreclosures off their books.
“Nobody wants to be seen as making it easier to foreclose because that is how you get bad publicity because you are taking people’s houses away, but that is exactly what needs to happen,” Stein said. “As long as you have this foreclosure overhang, you are not going to have a healthy housing market.”■