The Mortgage Foreclosure Crisis
DIRECTOR OF NON DEPOSITORY INSTITUTIONS AND CONSUMER PROTECTION
NEW YORK STATE BANKING DEPARTMENT
THE MORTGAGE FORECLOSURE CRISIS
ASSEMBLY STANDING COMMITTEES ON JUDICIARY, HOUSING AND BANKS
November 17, 2010
Good Morning Assemblypersons Weinstein, Lopez and Towns. On behalf of the New York State Banking Department, I appreciate this opportunity to speak with you today on the mortgage foreclosure process. I am the director of non-depository institutions and consumer protection at the Banking Department.
For the last three and a half years, helping homeowners avoid foreclosures has been one of the Department’s and my top priorities. Beginning with Superintendent Neiman’s leadership of the HALT (“Halt Abusive Lending Transactions”) task force created by the Governor and working with HALT partners like New York Homes and Community Renewal, Department of State and the Consumer Protection Board, we have addressed the foreclosure crisis on a number of fronts. We have worked with the Governor and legislature to pass landmark legislation to prevent future foreclosure crises and help borrowers at risk of foreclosure. We have sponsored foreclosure prevention forums bringing borrowers and lenders together to find alternatives to foreclosure. We’ve stepped up efforts to combat and prosecute mortgage fraud. We’ve funded not-for-profit foreclosure counselors through settlement funds from predatory lending cases. And, as a result of the Governor’s lending reform legislation signed into law in December 2009, we are collecting pre-foreclosure and foreclosure information from lenders and servicers to track foreclosures in the State and target foreclosure prevention and counseling services to borrowers at risk of foreclosure. As a result, we are collaborating with 15 not-for-profit agencies across the State covering 48 counties so that they can reach out to at-risk homeowners and let them know free help is available.
Today I’d like to direct my testimony to the following four areas:
- The Department’s efforts to regulate mortgage loan servicers, particularly in the area of loss mitigation;
- The Department’s efforts to address irregularities in the foreclosure process;
- The need for continued funding for non-profit housing and legal services programs, and;
- The Assembly’s proposed legislation (A.11465) to ensure that foreclosing parties have the necessary standing to bring foreclosure actions.
Regulation of Mortgage Loan Servicers
Until recently, mortgage loan servicers were largely unregulated. The Banking Department historically licensed mortgage lenders and brokers, but not mortgage loan servicers. Yet the foreclosure crisis and disappointing results with loan modifications thrust the servicing industry, and loss mitigation practices in particular, into the spotlight. In order to bring accountability to mortgage loan servicing, New York’s 2008 Mortgage Lending Reform Act required mortgage loan servicers doing business in New York to register with the Banking Department and comply with regulations adopted by the Superintendent or Banking Board. As a result, mortgage servicing has been a focal point for the Banking Department for the past 24 months.
In July 2009, the Department adopted Part 418 of the Superintendent’s Regulations which established standards and procedures for the registration of mortgage loan servicers in New York. In 2010, the Department supplemented Part 418 by issuing “conduct of business” regulations that address the business practices of mortgage loan servicers and establish additional consumer protections for homeowners. Part 419 of the Superintendent’s Regulations went into effect October 1, 2010. These new regulations can be found on the Department’s website at http://www.banking.state.ny.us/legal/ar419tx.htm.
With these business conduct rules for mortgage servicers, combined with our existing oversight of mortgage bankers, brokers and loan originators, the Banking Department is covering a mortgage throughout its life. From the moment a mortgage is signed in New York State to the time it comes to its end, these loans must now be handled at every step of the process by individuals and companies that are accountable to the Banking Department and homeowners.
Although the rules cover many of the day-to-day aspects of mortgage loan servicing such as how payments should be credited, what fees are permissible and the servicer’s obligation for providing payoff statements and payment histories, the heart of the rules address the servicer’s responsibilities with respect to loss mitigation. 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. We believe our rules are the most comprehensive in the country.
The new regulations are applicable to all servicers handling New York-based mortgages. Highlights include the following:
- The rules establish a general “duty of fair dealing.” Servicers must act in good faith with borrowers on loan transactions and provide them with clear, accurate communications on their accounts;
- Servicers must pursue appropriate loss mitigation efforts with homeowners, such as loan modifications or short sales, to avoid preventable foreclosures;
- Servicers must have adequate staffing, written procedures for handling consumer inquiries and complaints, and methods for making sure that homeowners are not required to submit multiple copies of required documents;
- Servicers are also expected to avoid a foreclosure action if a homeowner is being considered for, or currently in, a trial or permanent modification;
- Requests for a loan modification or other loss mitigation option must be acknowledged in 10 days;
- Decisions must be made within 30 days of receiving all required documentation
- Approvals must provide “clear and understandable written information explaining the material terms, costs and risks of the option offered”
- Denials must state with “specificity” the reasons for the denial, contact information for a person who can reconsider the denial and any other foreclosure prevention alternatives;
- Servicers must have an escalation process and designated escalation contacts for borrowers and non-profits
- Servicers must have policies and procedures to ensure that the foreclosure counsel are familiar with a borrower’s status in loss mitigation and must comply with the requirements of CPLR 3408 (i.e. authorized to resolve the case, negotiate in good faith and bring the required documents).
Many of these requirements are similar to the guidelines for servicers provided by the federal Home Affordable Modification Program (HAMP). Yet while HAMP is voluntary, our regulations have the force of law and can be enforced by the Department, the State Attorney General and federal regulators. Even foreclosure courts can look to the rules as a measure of appropriate servicer conduct.
Investigating Irregularities in the Mortgage Foreclosure Process
At a time when we need to be doing everything that we can to avoid preventable foreclosures and keep families in their homes, the Banking Department is greatly concerned about reports that some servicers are not doing the bare minimum of following existing laws and properly verifying foreclosure documents. As a result, the Department has called on New York regulated mortgage loan servicers to expeditiously address concerns that have arisen about faulty affidavits in foreclosure proceedings.
In letters sent to more than 20 mortgage servicers registered to do business in New York State, the Department required that these companies conduct internal reviews of their foreclosure practices and suspend foreclosure actions until a thorough analysis has been completed.
The servicers were also asked to respond to the Banking Department on the following issues:
- the steps the servicer is taking or has taken to review the foreclosure process in New York;
- the results of the review, including a description of the process for verifying affidavits;
- the corrective action, if any, the servicer has taken or intends to take in response to the review;
- the measures taken to ensure that affidavits filed in New York foreclosure actions are executed in compliance with New York law; and
- the status of pending foreclosure actions in New York and measures taken to suspend such actions pending review.
The Department also joined 50 state attorneys general and 39 banking and mortgage regulators as part of a multi-state group that is investigating the foreclosure practices of mortgages servicers throughout the country and serves on the Executive Committee of the Multi-State Group. The Department serves on the Executive Committee of the Multi-State Mortgage Committee (MMC) of state banking regulators, which coordinates multistate regulatory efforts of large mortgage companies supervised by State mortgage regulators. We are working with the MMC to coordinate examinations of the largest State mortgage loan servicers.
Maintaining Adequate Funding for Non-Profit Housing Counseling and Legal Services is a Necessity not a Luxury
Non-profit housing counselors and legal services attorneys provide a lifeline for borrowers at risk of foreclosure. They help borrowers navigate the labyrinth of loss mitigation and help borrowers realistically assess their options and plan for alternatives when staying in their home is not an option. They are our eyes and ears on the ground and can help identify the problems faced by borrowers and workable solutions. According to an independent evaluation of the National Foreclosure Mitigation Counseling Program administered by the Urban Institute, homeowners who received non-profit counseling were 60 percent more likely to avoid losing their home to foreclosure than homeowners who do not seek counseling and were more likely to receive a loan modification. Clients who worked with a non-profit counselor were more likely to receive a loan modification and on average, saved $454 more on their monthly mortgage payments per month than homeowners who received modifications but did not work with a counselor.
Indeed, many of the legislative initiatives adopted by New York depend for their success on the active participation of non-profit housing counselors and legal services attorneys. Housing counselors and legal services attorneys attend and counsel homeowners in the mandatory settlement conferences. The 90-day pre-foreclosure notices and required foreclosure notices that accompany a summons and complaint direct borrowers to local non-profits in their areas. Legislation to combat fraudulent mortgage rescue scams likewise refers borrowers to the free professional services provided by the non-profit community groups. And, this past February, as a result of legislation adopted in 2009, lenders and mortgage loan servicers have to file information with the Banking Department about each loan sent a 90-day pre-foreclosure notice within three days of mailing the notice in order to help target resources and foreclosure prevention services to those in need. As a result of that legislation, the Banking Department is sharing information with 15 non-profit housing counseling groups statewide so that they can proactively reach out to at risk homeowners.
New York has generously funded the foreclosure housing counselors and legal services programs through a $25 million appropriation in 2008 and a similar appropriation in 2009. Even the Banking Department played a role in funding foreclosure prevention services by awarding $ 2 million from predatory lending settlements to more than 20 non-profit organizations throughout the state.
Yet these sources of funding are due to expire by the end of 2011. We simply cannot afford to let this funding lapse. Without adequately funded housing counselors and legal services programs, we risk an even worse crisis – one that devastates not just families who face displacement from their homes but entire communities which bear the financial and social costs of foreclosures.
Statutory Changes to Ensure Proper Standing in Foreclosure Proceedings
Requiring that a plaintiff have standing to bring a legal action is not merely a procedural technicality. It is a fundamental principle of our legal system that in order to invoke the jurisdiction of the courts, a party have an enforceable legal right and have suffered an injury in fact. In the case of foreclosures, standing ensures that the party who forecloses actually has the right to do so. In New York, a foreclosing plaintiff must hold the mortgage and note or be the valid assignee of the mortgage and note. A growing number of New York judges who have scrutinized the foreclosure cases before them have concluded that in many instances the foreclosure actions have been instituted without all necessary documentation of ownership and assignments in place. Yet, some New York appellate courts have created an insurmountable hurdle for defendant homeowners by ruling that standing is waived if not raised in the responsive pleading. From the homeowner’s perspective, documentation of ownership and assignments is not transparent. With securitization of mortgages and frequent transfer of servicing rights, it’s often impossible for homeowners to know who actually owns their loan or whether an alleged assignment is valid. Moreover, many homeowners, lacking counsel and overwhelmed by the prospect of losing their home, simply do not have the wherewithal or legal sophistication to raise standing defenses at the outset of a foreclosure action.
Making clear that that foreclosing plaintiffs must plead and prove the proper ownership and/or assignment interests in the mortgage and note at the time the foreclosure action is commenced will help align actual judicial practice with basic legal principles of standing. Prohibiting standing defenses to be waived if not raised in a responsive pleading or pre-answer motion to dismiss will also protect homeowners and safeguard the integrity of the foreclosure process. And, the proposed legislation will close the door on questionable assignments. By requiring any person who claims delegated authority to bring a foreclosure action to attach proof of the assignment and “delegation of authority from the owner and holder of the subject mortgage and note to institute a mortgage foreclosure action on behalf of such owner and holder,” the legislation makes clear that where standing is based on a delegation of authority, there must be a valid assignment of both the mortgage and note made prior to the commencement of the foreclosure action by an entity with the authority to make the assignment.
ConclusionThe Banking Department is committed to doing what it takes to keeping homeowners in their homes and preventing avoidable foreclosures. Our efforts have been directed at bringing accountability to the mortgage industry and improving the quality and transparency of the mortgage process from origination through servicing, including the foreclosure process. Under Governor Paterson’s leadership and with the state legislature, New York has enacted some of the most creative measures to stem foreclosure and address mortgage related abuses. However, challenges clearly remain. On behalf of the Banking Department, I look forward to working with you to meet those challenges.