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Financial Reality Revisited: New York Creates New Foreclosure Courts to Clear Backlog « naked capitalism

Financial Reality Revisited: New York Creates New Foreclosure Courts to Clear Backlog « naked capitalism

The article mentions the fact that a New York court requirement implemented in October 2010, that required lawyers filing for foreclosures to certify that they had taken reasonable steps to verify the accuracy of the information in the filing. That in turn lowered the bar for sanctioning lawyers who failed bogus information or documents signed by parties with no personal knowledge. That led to a near-halt of new foreclosure actions, which speaks volumes as to the accuracy of prior filings. If the problems were mere “paperwork,” you might have seen a hiatus as banks implemented new procedures, but this points to far more basic problems with the banks’ ability to prove they have the right to foreclose on loans they service.

My skepticism relates to the banks’ intent. The assumption is that they want to foreclose and that the various complaints about foreclosure delays reflect their frustration. But this is like Bre’er Rabbit complaining about being thrown in the briar patch. Banks make money on attenuated foreclosures. Georgetown law professor Adam Levitin has written about how servicers put borrowers in a fee sweatbox. If nothing else, they continue to earn servicing fees even when a borrower is hopelessly delinquent, as well as late fees, which they finally recoup when the home is sold. So I’m not confident the banks are going to enter into these talks with an eye to modifying mortgages. As both Adam Levitin and attorney and securitization expert Tom Adams have said, servicers are not set up to do mods. It’s like a new loan underwriting and they don’t have the staff or the fee structures for that to make sense.

Nevertheless, there is one area where this effort could make a big difference, and that is in short sales. I’ve heard complaints from different states that banks won’t even respond to a short sale proposal. In LA, owners have to advertise “no short sale,” otherwise brokers won’t bring buyers to a viewing. This format will make it awfully difficult for a bank to reject a short sale offer that is in line with current market prices. So this new system will probably yield some benefit but I don’t expect it to be the remedy that its sponsors hope it will be.