Testimony of
Mark Ladov and Nabanita Pal
The Brennan Center for Justice at NYU School of Law[1]
Before the
New York City Council Committee on Community Development
For the hearing on
Systemic Problems in the Ongoing Mortgage Foreclosure Crisis, and its Effect on New York City Neighborhoods
January 30, 2012
Councilman Vann, and members of the Committee on Community Development, thank you for this opportunity to testify in support of the foreclosure prevention resolutions being discussed today. We are here on behalf of the Brennan Center for Justice, a non-partisan public policy institute that works to increase low-income people’s access to legal representation.
We support the Council’s efforts to pass the following resolutions:
- Resolution Number 872-A in support of continued funding for the New York Foreclosure Prevention Services Program.
- Resolution Number 871-A in support of codifying an affirmation rule that ensures the accuracy of documents filed in court in foreclosure actions.
- Resolution Number 998 in support of legislation that requires foreclosing parties to produce a pooling and servicing agreement at the commencement of a foreclosure action.
- Resolution Number 989 in support of legislation that prohibits lenders from concealing mortgage assignments through MERS.
- Resolution Number 990 in support of protecting a homeowner’s right of rescission under the federal Truth in Lending Act.
We would like to limit our testimony today to the Brennan Center’s research documenting the national crisis in foreclosure legal representation, research that supports the need for robust foreclosure prevention counseling and legal services in New York State. Over the past few years, we have gathered data from court systems across the country and found that overwhelmingly, homeowners in foreclosure face complex legal proceedings without an attorney at their side. To ensure that these homeowners have a fair shot at justice – and every possible opportunity to avoid foreclosure – dedicated state funding for foreclosure assistance is critical.
New York’s Foreclosure Prevention Services Program exemplifies the value of this assistance. The Program has assisted more than 80,000 homeowners and saved at least 14,000 homes from foreclosure. The Empire Justice Center estimates this investment saved New Yorkers billions of dollars by preventing families from slipping into homelessness, shoring up property values in struggling communities and preserving our state’s property tax base.[2]
Legal services attorneys and housing counselors funded by this program help homeowners to defend their rights and negotiate more effectively with their lenders. Research shows that skilled counseling makes a significant difference. A 2010 study by the Urban Institute found that homeowners in a federal loan counseling program were 1.7 times more likely to avoid foreclosure than those who were not.[3] Homeowners with a counselor also secured better and more affordable loan modifications from their lenders. The study found that, on average, clients with a housing counselor lowered their monthly payments by $267 more than those who did not have a counselor.[4] Documented errors and abuses in the HAMP modification process further illustrate why homeowners need effective advocates at their side pressing for results from lenders.[5]
When homeowners are represented, their attorneys can make a significant difference in their individual cases – and by doing so, reform the process more broadly, even for homeowners without legal counsel. In Foreclosures: A Crisis in Legal Representation, a national report documenting the importance of legal assistance, the Brennan Center identified several ways in which lawyers assist homeowners:
- Raising claims that protect homeowners from lenders and servicers who broke the law;
- Helping homeowners renegotiate their loans;
- Helping ensure that the legal process is followed properly;
- Helping homeowners obtain protection of the bankruptcy law;
- Helping tenants when a landlord’s property is foreclosed; and
- Giving those affected by foreclosure a voice in policy reform.[6]
In the two years since that report, we have seen continued evidence of the need to protect homeowners’ rights, and the opportunities for abuse that arise when homeowners lack legal counsel. Government oversight agencies, judges, and attorneys general across the country have issued harsh criticism of the practices of lenders and foreclosure law firms. Perhaps most widely publicized was the nationwide “robo-signing” scandal, which revealed that many foreclosure actions have been brought on the basis of false affidavits and misleading legal documentation.[7] The right to adequate counsel is important in every litigation; it is only amplified in foreclosure cases by lenders’ attorneys who often file cases in bulk and pay inadequate attention to the particular facts and needs of each individual case. The infamy surrounding Steven J. Baum, P.C. – New York’s largest foreclosure plaintiffs’ firm, which recently shut down after a string of complaints and controversies including state and federal investigations and a class action suit brought by MFY Legal Services –illustrates the problems that can go unchecked for unrepresented homeowners.[8]
Moreover, as is recognized by the resolutions that are before the Council today, the problems with the foreclosure process are deeply rooted in the risky and predatory practices that led to our nation’s financial crisis. Amid the frenzy to repackage mortgages into securitized assets that could be sold to investors, many mortgages were bought and sold multiple times.[9] The paperwork surrounding those sales is often faulty.[10] Further problems are raised by the use of MERS, an opaque database set up by the mortgage industry to avoid registration requirements and filing fees. As a result, it is not always clear that the party who claims to own a homeowner’s loan really does; in legal parlance, this means that the lender may lack “standing” to bring the foreclosure. We applaud the Council’s efforts to protect these basic legal principles – such as that only a party who actually owns a mortgage and note may bring a foreclosure action to take away a family’s home.
The rules urged by these Resolutions would help protect homeowners’ legal rights. But without a lawyer, a homeowner may not be able to defend those rights adequately. As a New York judge stated in one case:
“It was only because this was one of the rare foreclosure cases where the defendant was represented by counsel that the fact that the Plaintiff did not own the note came to light. The Court can only speculate in how many other cases plaintiffs with no interest in mortgages wrongfully foreclose on them and collect proceeds to which they are not entitled.”[11]
Lenders have also acknowledged the ways in which representation improves the mediation process. One bank representative, Michael Helfer, the General Counsel of Citigroup, testified in Chief Judge Lippman’s hearings to Expand Access to Civil Legal Services in 2010:
“We believe there is an important role for lawyers to assist borrowers in avoiding foreclosure in New York, especially in the context of the mandatory mediation programs that have been instituted in New York…lawyers can help facilitate communication and guide borrowers through the process to work out solutions more quickly and without the need for repeated sessions.”[12]
Helfer noted that Citigroup’s lawyers often have to reschedule mediation sessions because unrepresented homeowners are unaware of the documents they need or the procedure for modifying loans. Lawyers for homeowners not only benefit homeowners, they also ensure the entire mediation process works effectively, Helfer explained: “[I]f we could get lawyers, to a greater extent, to be involved in this mediation or settlement conference process…collectively, the system would work a lot better.”[13]
Finally, we want to emphasize that foreclosure prevention services are a good investment for the State of New York. Every individual homeowner should have a fair shot at saving her home, as a matter of basic justice. But we also can’t forget that this foreclosure crisis is, by all accounts, an enormous barrier to our state and nation’s economic recovery. Financial analysts have suggested that only a program of widespread mortgage modifications, including principal write-downs where appropriate, will stabilize our struggling housing market.[14] Indeed, just last week the Obama Administration announced changes to its struggling Home Affordable Modification Program (HAMP) to, among other things, encourage more effective loan modifications through greater principal reduction.[15] We also need creative solutions, such as “rent to own” opportunities for families who can’t afford a mortgage modification now, to prevent bank-owned properties from sitting vacant – particularly in light of evidence that vacant properties lead to a drop in neighborhood property values and invite crime into already-struggling communities[16].
These and other policy suggestions offer solutions to our foreclosure crisis. But how are we to implement these policies? They must be implemented on a case-by-case basis. And without skilled and experienced lawyers and counselors involved, it is far more likely that families will slide into foreclosure than find an appropriate resolution that can save their home – even though there is undeniable evidence that identifying alternatives to foreclosure is in the best interest of families, communities and the lenders themselves.
In short, New York’s foreclosure prevention services program is an important investment for the state of New York. It saves families the extraordinary financial and emotional costs of losing their home. It saves communities from dropping housing values and rising crime. And it saves our state money at a time of fiscal austerity. Therefore, we wholeheartedly endorse the Council’s efforts to pass these resolutions and to encourage much-needed action by the State legislature.
[1] Mark Ladov is Counsel in the Justice and Democracy Programs of the Brennan Center for Justice. He was previously a staff attorney in the foreclosure prevention program of Queens Legal Services. Nabanita Pal is a Research Associate in the Justice Program of the Brennan Center for Justice. She works with the Access to Justice Project in its efforts to improve the quality and availability of legal services, reform criminal justice policies and protect the rights of non-profit organizations working with low-income communities.
[2] Empire Justice Testimony on Foreclosure Funding and Process: Hearing on Mortgage Foreclosures in New York Before the State Assembly Standing Comm. on Housing, Assembly Standing Comm. on Judiciary, Assembly Standing Comm. on Banks, 2011 Leg. 235th Sess. (Nov. 7, 2011) (statement of Rebecca Case- Grammatico).
[3] Neil Mayer et al., National Foreclosure Mitigation Counseling Program Evaluation: Preliminary Analysis of Program Effects September 2010 Update, The Urban Institute 2 (2010), available at http://www.nw.org/network/nfmcp/documents/2010.12.14FINALModelingReport.pdf
[4] Id. at 3.
[5] Office of the Special Inspector General for the Trouble Asset Relief Program, Quarterly Report to Congress 172–75 (Oct. 26, 2010), available at http://www.sigtarp.gov/reports/congress/2010/October2010_Quarterly_Report_to_Congress.pdf.
[6] Melanca Clark and Maggie Baron, Brennan Center for Justice, Foreclosures: A Crisis in Legal Representation 17–25 (2009), available at http://brennan.3cdn.net/a5bf8a685cd0885f72_s8m6bevkx.pdf.
[7] Federal Housing Finance Agency Office of Inspector General, FHFA Oversight of Fannie Mae’s Default-Related Legal Services 23 (Sept. 30, 2011), available at http://mattweidnerlaw.com/blog/wp-content/uploads/2011/10/FHFAAUDIT.pdf.
[8] Peer Lattman, Foreclosure Firm Steven J. Baum to Close Down, N.Y. Times. (Nov. 21, 2011), http://dealbook.nytimes.com/2011/11/21/foreclosure-firm-steven-j-baum-to-close-down/; Andrew Keshner, Suit Targets Lenders’ Firm Over Foreclosure Filing Requirements, N.Y. L.J., (Aug. 11, 2011), http://www.law.com/jsp/law/LawArticleFriendly.jsp?id=1202510824239.
[9] Thomas J. Miller, Att’y Gen, Iowa, Hearing Before the S. Comm. On Banking, Housing and Urban Affairs, 111th Cong. 3 (Nov. 16, 2010) (transcript available at http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=1feca776–9009–4d40–87d4-bd8f679061b1).
[10]Diane E. Thompson, Nat’l. Consumer Law Cntr., Before the S. Comm. On Banking, Housing and Urban Affairs, 111th Cong. 16 (Nov. 16, 2010) (transcript available at http://www.nclc.org/images/pdf/foreclosure_mortgage/mortgage_servicing/testimony-senate-banking.pdf).
[11] U.S. Bank v. Gonzalez., No. 4137/2009, slip op. at 7 (Sup. Ct. Kings Cnty. June 8, 2010).
[12] Michael Helfer, Gen. Counsel of Citigroup, First Dep’t Civil Legal Servs. Hearing 27, 28 (Sept. 28, 2010) (transcript available at http://www.nycourts.gov/ip/access-civil-legal-services/PDF/1st-Dept-Hearing-Transcript.pdf).
[13] Id. at 29.
[14] Recent data suggests that 1 in 5 borrowers are at risk of foreclosure without an ambitious policy response, including principle write-downs for underwater mortgages. See Laurie Goodman et. al, Amherst Securities Group LP, Housing Crisis: Sizing the Problem, Proposing Solutions 1 (2010).
[15] David Dayen, Treasury Announces New HAMP Changes With Greater Eligibility, More Principal Reduction Incentives (January 27, 2012), http://news.firedoglake.com/2012/01/27/treasury-announces-new-hamp-changes-with-greater-eligibility-more-principal-reduction-incentives/.
[16] Research shows that one foreclosure can cause surrounding properties within 250 feet to decrease in value by 1–2 percent. A home that is within 500 feet of three foreclosure filings sees a three percent decline in property value. Jenny Schetz, Vicki Been and Ingrild Gould Ellen, Neighborhood effects on concentrated mortgage foreclosure, Journal of Housing Economics, Dec. 2008, at 4, 17. Crime rates also increase in neighborhood blocks with vacant, bank-owned properties. One vacant REO can lead to a 2.6 percent increase in crime overall, and a 5.7 percent increase in violent crime. Ingrid Gould Ellen, Johanna Lacoe and Claudia Ayanna Sharygin, Furman Center for Real Estate & Urban Policy, Do Foreclosures Cause Crime?, (2011), available at http://furmancenter.org/files/publications/Ellen_Lacoe_Sharygin_ForeclosuresCrime_June27_1.pdf.