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December/1/2010

The Forclosure Crisis

By Scott T. Dillon
Tully Rinckey, PLLC
sdillon@188Law4Life.com

From the December 2010 Newsletter)

Recent admissions by national mortgage lenders regarding insufficiencies in their residential foreclosure procedures have resulted in great scrutiny of foreclosure litigation.  With mounting pressure from all government branches, some lenders have voluntarily halted foreclosure actions in order to examine procedures.  Several lenders have temporarily stopped the entire litigation process, while others stopped only the foreclosure sale, allowing litigation to continue up to the point of the Sheriff’s auction.

Bank of America suspended foreclosures in all 50 states, while JPMorgan Chase and GMAC Mortgage suspended foreclosures in the 23 states which require a court order as a prerequisite to a foreclosure sale.  Litton Loan Services and PNC Financial Services announced that although they were reviewing their policies, they would not be halting their foreclosure proceedings.  Bank of America, however, has already announced that it has completed its internal investigation and resumed foreclosing on homes.

In response to the admitted widespread deficiencies, state attorney generals launched independent and joint investigations.  The Federal Housing Administration, the Office of the Comptroller of Currency and the Justice Department are all reviewing the deficiencies.  The Senate Banking Committee has scheduled hearings in November to address the issues.  The Obama administration has rejected Congressional calls for a national moratorium on foreclosures, citing its concern of the effect on the fragile housing market.

In New York, the difficulties generally stem from C.P.L.R. 3215(f).  Foreclosure plaintiffs often seek appointment of a referee for the purpose of computing the amount owed by the homeowner as part of the judgment of foreclosure and sale on default.  Plaintiff, to establish proof of the amount owed, must submit an “affidavit of merit” pursuant to C.P.L.R. 3215(f).   The affidavit must be executed by a representative of the plaintiff, who possesses actual first-hand knowledge of the relevant information underlying the claim and who has personally reviewed records.

Due to the overwhelming volume of foreclosures commenced this year, it’s apparently an endemic problem in the mortgage industry to produce a representative with first-hand knowledge of a particular loan.  Recent depositions of mortgage lenders revealed that a small number of individuals (“robo-signers”) were signing more than 10,000 affidavits a month.  Such volume simply could not permit robo-signers to review the accuracy of each particular loan before execution of the affidavit.  Therefore, the proffered affidavits do not satisfy the requirements of C.P.L.R. 3215(f).

In New York, more than 60,000 homes are currently in foreclosure and approximately 130,000 homeowners have received pre-foreclosure notices this year.  Attorney General Cuomo has launched his own investigation and asked lenders to stop foreclosure proceedings, stating that he “will not allow New Yorkers to lose their home to mortgage goliaths” who are “committing a fraud upon our courts.”  Similarly, the Office of Court Administration recently announced a new filing requirement for plaintiffs’ counsel in order to “assure the integrity of the foreclosure process.”  Counsel is now required to submit an affidavit (regardless of whether its a new case, pending case, or case where judgment has been entered) certifying that the attorney has taken reasonable steps, including inquiry to clients and careful review of papers filed in the action, to assure that the case is free of deficiencies. 

Prior to this crisis, New York Supreme Courts had already been denying foreclosure where validity of affidavits of merit could not reasonably be relied upon.  For example, the court denied an application when the affidavit had been signed by a purported representative of Deutsche Bank, but at other times the same employee had claimed to be a vice president of Indy Mac.  Deutsche Bank National v. Auguste, NY Slip Op 31991(u)(2008).   In Indy Mac Bank F.S.B. v. Horoski, NY Slip Op 52333(u)(2009), the court went so far as to cancel the mortgage debt of the homeowner entirely where the conduct of the lender was “harsh, repugnant, shocking and repulsive.”  The lender had claimed in its affidavit that it was owed $527,000, but subsequent testimony revealed that the amount due was actually less than $300,000.  The decision is under appeal.
 
Questions of lenders’ standing to commence a foreclosure action are also problematic.  Confusion as to who owns the loan can result from multiple assignments and numerous sales of sub-prime mortgages and debt.  As a result, the wrong party may be commencing the foreclosure action.  It has long been the law in New York, however, that a party may not seek foreclosure of a mortgage unless both the mortgage and the underlying indebtedness have been validly assigned and that any assignment of the mortgage without the debt is a nullity.  Kluge v. Fugazy, 145 AD 2d 537 (2nd Dept. 1988).  For example, in Countrywide Home Loans v. Taylor, 2007 NY Slip Op 27383(2007), the court dismissed a foreclosure action where it found discrepancies in the assignment of the loan; the action was filed before the date plaintiff had actually taken ownership of the mortgage.

A major overhaul of lenders’ foreclosure policies should be expected to address their numerous deficiencies in seeking foreclosure of homes.  Homeowners, however, have numerous affirmative defenses and may increasingly retain counsel to challenge the foreclosure as they become aware of lender problems.  Although this will not reduce the numbers of foreclosures in the long run (the underlying default will still remain), it should considerably delay the already overloaded foreclosure process.  The fallout of this new foreclosure crisis is only now being felt at trial courts.  Its impact, however, should have significant ramifications on the real estate market and in the bankruptcy courts in the coming year, once the foreclosure sales begin to move forward again.

Scott T. Dillon is the lead attorney in the Bankruptcy department at Tully Rinckey PLLC,
with offices in Albany, New York and Washington, D.C. He can be reached at 1-888-Law-4-Life or sdillon@1888Law4Life.com.






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