Don’t Expect The New Foreclosure Law To Save Your Home

There’s a new law in NY for those watching the current foreclosure crisis. Will it actually help? I have not read the law yet, but I have read the Governor’s press release summarizing the key points. For those already facing mortgage foreclosure, the law appears to me to take a very conservative and limited approach.

According to the release, the new law will help those in financial trouble by requiring the lender to send a 90 day notice before foreclosing and it will create mandatory settlement conferences. While these are good things, they are hardly a cure for the crisis. Lenders already send default notices, often months before starting foreclosure. The law doesn’t add much on this point. And while settlement conferences are a good idea, no one can force a lender to modify a loan or settle. I have seen instances when a court may strongly suggest that a lender modify the loan, but that occurs when the lender had some risk exposure (i.e. predatory lending). In the normal situation, I expect that lenders may remain as stubborn as ever. I think the servicing agents have a disincentive to settle and the new law will not change that. What concerns me is that the new law may give some homeowners a false sense of security where there really is none. Unless and until a homeowner has a written signed settlement agreement in hand, the law will not stop or freeze foreclosure (the press release does not mention anything about actually stopping foreclosure actions except by way of settlement negotiations, which is something most lawyers already do). And under no circumstance should a homeowner delve into any of this pro se (without an attorney). The lenders have their own counsel who are extremely familiar with the foreclosure process and mortgage laws. Homeowners who think that they can handle the mandatory settlement conference on their own will be taking a risk that they will not be able to fully protect their rights.

The law also requires lenders to allege that they have standing to sue – this arises to address an issue that has arisen in courts throughout the country with some servicing agents and assignees of mortgage lender, where it was perhaps unclear who the real party in interest was in the lawsuit. This is a good law but it does not really help a homeowner save the family home.

The law also tries to stop foreclosure rescue scams, something I have written about before on this blog. Of course this is a good part of the law. It is always distressing to hear from new callers that they had already paid a non-attorney $1500 or more for help and were taken advantage of. It seems to happen all the time based on my many many conversations with homeowners in foreclosure. While this law helps, I think the real solution is for the State Bar to crack down on these individuals for unauthorized practice of law and to issue an injunction prohibiting them from giving legal advice in New York. However, hitting them in the pocketbook with a prohibition against up front fees may have the same desired effect.

I intend to read the actual law but I presume that the press release will contain the most important provisions. Here is the Governor’s press release –

FOR IMMEDIATE RELEASE:
August 5, 2008
GOVERNOR PATERSON SIGNS COMPREHENSIVE REFORMS TO ADDRESS FORECLOSURE CRISIS

Law Will Help Save Thousands of New Yorkers from Losing Their Homes to Foreclosure; Reforms Will Help to Prevent a Similar Crisis in the Future

Governor Paterson Commends Federal Government for Following New York’s Lead and Taking Additional Action

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Governor David A. Paterson today signed into law a critical subprime lending reform bill which directly addresses the mortgage crisis in New York State. The Governor signed the bill in Queens, one of the areas in New York that has been hit hardest by the foreclosure crisis. The new law will immediately help protect people from losing their homes and mandates reforms to help avoid a similar crisis in the future. The bill also takes into consideration the importance of striking the right balance between consumer protection and the availability of affordable credit.

This bill – a Governor’s Program Bill (S.8143-A/A.10817-A) passed by the state Legislature in June – works in two ways: immediately helping to prevent New Yorkers from losing their homes by assisting those who are currently facing foreclosure, and by attacking flaws in New York’s banking regulations to prevent such a crisis from happening again. It also served as a model for recent federal action as well.

“We have still seen thousands of our families lose their homes, and no state has been hit harder by the broader effects of the lending crisis. Wall Street’s woes have helped to drive New York into recession,” said Governor Paterson. “We have the responsibility to protect New York’s families who are facing foreclosure, and we need to reform banking regulations to ensure this does not happen again. This law does both, and spurred the federal government to do the same.”

New York’s Congressional Delegation pushed the issue in Washington, and late last month, President Bush signed the Housing and Economic Recovery Act of 2008 to help at-risk borrowers keep their homes by refinancing their mortgages into safe and more affordable government-insured mortgages. The measure also provides funds for New York State and its localities to purchase and renovate foreclosed properties in our most impacted areas. This initiative will help New York stabilize at-risk communities endangered by abandoned, foreclosed homes.

Data from the New York State Banking Department shows that approximately one in 200 New York homes is in the foreclosure process. Some areas of New York – such as Queens, Brooklyn and Long Island, and in Upstate New York, Monroe and Albany counties – are being disproportionately impacted.

Assist People Currently Facing Foreclosure
The immediate focus of the bill is on existing homeowners facing foreclosure. The bill requires lenders to send a pre-foreclosure notice to borrowers at least 90 days before foreclosure proceedings may be initiated. This will encourage homeowners to seek help prior to the initiation of foreclosure proceedings. The bill would also require lenders to list in the notice government-approved housing counselors serving the borrower’s area.

The bill establishes a mandatory settlement conference for foreclosure proceedings involving homeowners with certain subprime loans. For homeowners who cannot afford an attorney, the court, under certain circumstances, may appoint one.

The bill requires plaintiffs in an action against a homeowner to make an affirmative allegation that they have standing to bring the foreclosure action and have complied with certain applicable laws. Ownership of the mortgage and the note is sometimes uncertain, which has lead to questionable foreclosure practices.

The bill includes provisions to address foreclosure rescue scams intended to take advantage of borrowers when they are most vulnerable. This bill will prohibit upfront fees and require a written contract from so-called “distressed property consultants.”

Avoid Another Crisis In The Future
There are additional elements in the bill that are designed to prevent future crises:

The bill enacts a new provision in the Banking Law to establish strong consumer protections for subprime loans and minimum underwriting standards that protect borrowers.
Ascertaining the borrower’s ability to pay is a basic tenet of prudent lending. The bill establishes an ability to pay standard requiring lenders to make a reasonable and good faith determination of the borrower’s ability to repay the loan, including the principal, interest, taxes, insurance, assessments, points and fees.
The duty of care feature of the bill requires brokers to act in the borrower’s interest by presenting loans most appropriate for the borrower.
All mortgage servicers servicing loans on residential property in New York would be required to register with the Banking Department.
Mortgage fraud would be classified as a crime under the Penal Law, making it easier for prosecutors to pursue cases. As the magnitude of the fraud increases, so would the criminal penalty.

Senate Majority Leader Dean G. Skelos said: “This legislation successfully balances the need to help families who are facing foreclosure of their mortgages and the loss of their homes, with concerns raised by the banking industry about protecting the ability of lenders to provide mortgages to future homeowners. I applaud my colleagues, particularly Senator Frank Padavan and Senator Hugh Farley who worked tirelessly to resolve this complicated issue. I also want to thank Governor Paterson for his leadership in this matter, and for signing this bill into law.”

Assembly Speaker Sheldon Silver said: “By signing this legislation, Governor Paterson and New York State take crucial action to address the national nightmare caused by the unethical practices of the mortgage industry. Through direct financial assistance and counseling and legal services, our state will take the lead in preserving our communities and providing meaningful relief to thousands of New Yorkers struggling to keep their homes. We must remain committed to assisting those affected by subprime lending while preventing further abuses of homeowners.”

Senate Minority Leader Malcolm Smith said: “The subprime lending crisis has affected all New Yorkers in some way or another. We, the Senate Democrats, have held forums throughout the state pairing lenders with homeowners to help save homes. In signing this legislation, Governor Paterson ensures that all New Yorkers will have a second chance at saving their homes. The Governor’s action will provide immediate help by stopping foreclosures and closing loopholes so this will never happen again.”
The foreclosure numbers in New York State are indicative of a serious situation; the second quarter of 2008 was the eighth consecutive quarter in which foreclosure activity in New York has increased. In the second quarter approximately 77 percent of the total foreclosure actions in New York were concentrated in ten counties. Queens and Brooklyn accounted for approximately 29 percent and Long Island accounted for approximately 21 percent.

Approximately 70 percent of foreclosure filings in the second quarter were Lis Pendens, which is the legal term for the initial filing that notifies a barrower that the foreclosure process has been initiated. Lis Pendens often represent the number of borrowers who are at the start of a process that takes an estimated 13 months in New York. Counties hardest hit by Lis Pendens filings are Queens, Brooklyn, Suffolk, Nassau, Monroe, Westchester, Staten Island, Bronx, Dutchess and Albany.

Under Governor Paterson’s leadership New York has brought together the diverse stakeholders and service providers that are needed to develop lasting solutions, including bank regulators, housing finance agencies, community and church groups, and the lending industry. The Governor’s HALT Task Force to Halt Abusive Lending Transactions is the primary umbrella for uniting the work of all state agencies that relate to the mortgage market. In addition to the legislation signed today, New York’s response to the mortgage crisis includes the funding and administration of grant programs for counseling and legal services; outreach and loan modification events that bring homeowners face to face with lenders and servicers; refinancing and mortgage programs such as the introduction of the forty-year fixed rate mortgage through the State of New York Mortgage Agency; neighborhood stabilization initiatives to return foreclosed properties to productive use; and enforcement actions through the creation of a Mortgage Fraud Unit within the Banking Department.

The following statements were provided in support of the subprime lending reform bill:

Senator Hugh Farley, Senate sponsor of the bill, said: “As we face difficult economic times, Governor Paterson’s approval of this legislation is important for all New Yorkers. The bill strengthens mortgage lending rules, helping homeowners and legitimate lenders, and can lead to more stable neighborhoods. It is an excellent example of the good results which come from the Governor and the Legislature working together. Just as I enjoyed working closely with Governor Paterson in developing this law, I know that this type of cooperation will enable us to solve the many problems facing our State.”

Assemblyman Daryl C. Towns, Chair of the Assembly Banking Committee, said: “Subprime lending schemes have wrought havoc in communities throughout New York as hardworking residents have lost or are at risk of losing their homes. By signing this legislation, Governor Paterson takes an important step in addressing the crisis by providing assistance to homeowners affected by unscrupulous lending while putting in place safeguards to prevent against future abuses. Today New York leads the way in tackling this urgent national crisis.”

Senator Frank Padavan said: “This comprehensive new law will provide vital relief and assistance for at-risk homeowners throughout New York to help overcome an impending foreclosure on their home. The enactment of this new law today once again reflects the strong commitment at all levels of state government to provide the legislative initiatives and tools to help halt the rise of home foreclosure in all reaches of our state. I applaud Governor Paterson for working with the State Legislature in advancing this important new law that will help protect and strengthen the dream of homeownership in New York.”
Richard Neiman, New York State Banking Superintendent, said: “This is a broad, comprehensive piece of legislation that both helps existing borrowers facing foreclosure and establishes strong underwriting standards and duties of care going forward to assure that this type of mortgage crisis doesn’t happen again, protecting borrowers, lenders and investors. This legislation, which is one of the strongest in the nation, builds on and complements our existing wide-ranging efforts on multiple fronts – including homeownership counseling, enhanced enforcement, and bringing borrowers and lenders face-to-face in an effort to avoid unnecessary foreclosures.”

Lois Aronstein, AARP NY State Director, said: “This new law will undoubtedly help the tens of thousands of New Yorkers who face losing their home to foreclosure and contains measures to help make sure this crisis does not happen again. The Governor and the Legislature should be commended for their work on this issue and for making sure that one of the most valuable financial assets most people have – their home – is protected now and in the future.”

Sarah Gerecke, CEO of Neighborhood Housing Services of NYC, said: “Neighborhood Housing Services of NYC commends Governor Paterson and the legislature for this important step forward to address abusive lending practices and to provide help to homeowners who desperately need sound advice to save their homes.”

Cathy Mickens, Senior Executive Officer of NHS of Jamaica, said: “As a resident of this community, I see first-hand the devastation caused by foreclosures on people’s lives and on the neighborhoods. NHS of Jamaica is working hard to stop the problem from growing, and the State legislation has strengthened our ability to advocate for homeowners and for homeownership.”