Foreclosures & Failure to Prosecute

Once a residential foreclosure matter is released from the Foreclosure Settlement Conference the Plaintiff is expected to file a motion requesting a Court order appointing a Referee to compute the total amount due the Plaintiff on the underlying debt. While you'd expect a the bank and their attorneys to file the motion quickly, more times then not there is an extensive delay. 

Prior to filing a motion the Plaintiff attorney must receive an OCA Affidavit from their client and then sign an OCA Affirmation. If the Plaintiff attorney experiences a delay in receiving that affidavit or if there is an issue with standing or the bank's paperwork that precludes the attorney from signing the OCA Affirmation the attorney is unable to file the motion. 

When a motion isn't filed it remains in the foreclosure part and therefore in that part's inventory. Over the past 18 months or so these parts have received pressure to clean up their inventory. As a result, these parts have started to dismiss cases for failure to prosecute pursuant to CPLR 3215 (if an answer was not filed) or CPLR 3216 (if an answer was filed). Every county differs slightly in their approach. Some hold foreclosure status conferences whereby a Judge or Referee will question a bank attorney on the status of the case and pressure them to move their case along. Other counties (most notably Westchester County) schedule dismissal calendars where Plaintiff attorneys that cannot represent on the record that they have received the OCA Affidavit have their cases dismissed. 

As you can imagine this process drives bank firms crazy and creates numerous additional court appearances. While it may provide some temporary assistance to homeowners 99% of the time the action will eventually be restarted. The only party that really benefits if the Court which can remove their cases from inventory.

Why Banks Don't Deal on Foreclosed Homes

My friend Laurel, who is currently renting a house, was told about a foreclosed home in a neighboring community. She did some investigating on Zillow and found out the home was valued at $240,000 and through a network of friends determined the mortgage owed on the home was $350,000.

Being a determined potential homeowner and strong personality, she reached the bank that held the title prepared to offer them $200,000 in hopes that they would gladly want the asset off their hands. Not only did she receive a strong rebuff from the asset manager, but she was told they were not willing to consider less than $270,000 for it! She was flabbergasted and scratched her head when she came out of the bank.

As she was describing the scenario to myself and another friend over dinner, her main questions were:

"Why wouldn't the bank take my $200,000 and be done with it? Why wouldn't they make a deal?"

I didn't know the answer to these questions until I did a little investigative reporting of my own and spoke to a Foreclosure Legal Expert from Pulvers, Pulvers & Thompson. Here are the 3 major reasons banks don't conduct fire sales with foreclosed homes.

Reason #1: Foreclosed Homes are Assets on the Bank's Balance Sheet. 

The home is listed on their balance sheet at a value they have the property appraised at. Sometimes these appraisals may be outdated and tens of thousands of dollars off. If they dumped these properties onto the market in a big way, they could have lending problems because they would have less assets. However, it is not unreasonable to ask for a 20-30% discount on the appraised value, especially if the home has been sitting vacant for a long period of time.

Reason #2: If Thousands of Foreclosed Homes Hit the Market for Purchase, All Home Prices Would Fall. 

Think of supply and demand. According to Trulia, currently there are 13,744 homes for sale in New York City. Of which 353 (or 3%) are in foreclosure. Think if all 353 were sold tomorrow at a fraction of their value. What do you think would happen to the other 13,391 housing units? You got it! Their value would diminish, having a trickle down effect on your home, even if it is not currently for sale.

Reason #3: Banks are Trickling the Foreclosed Homes onto the Market in Order to Keep Market Prices High. 

It is estimated that only 10-15% of all foreclosed properties are on the market.

When it looks like there are not too many foreclosed properties available in an area, it helps stabilize housing values. When housing values are stabilized, market prices have the opportunity to go up. When market prices go up, the foreclosed values are higher. All of this benefits the seller and the bank when they decide to dispose of the property.

So there you have it. The banks don't deal because it is good for you, me, and them. Buying a foreclosed home is still a good idea. Just don't automatically expect a huge price reduction.



Pulvers, Pulvers & Thompson, LLP has been practicing law for over 70 years and is dedicated to providing high quality legal services to the Greater New York City Area. They assist purchasers and sellers in Residential and Commercial transactions and represent various clients in a wide range of real estate litigation matters. Contact their legal team for a FREE consultation at (212) 471-5129.

5 Fresh Fixes to Protect Your Home's Value in Foreclosure Times

Here's a hard cold fact:

"Since 2008, more than 2 million households  have either lost their homes or going to lose their homes to foreclosure in the coming years." 

And even more bad news:

According to a survey from Yahoo! Real Estate and Harris Interactive, 22% of homeowners are somewhat concerned about the possibility of foreclosure due to their inability to meet their monthly mortgage obligation. 

I have been a homeowner in the same house for the last 20 years. Our neighborhood of 60 homes has had 2 go into foreclosure over the last 12 months. In my small town of 25,000 individuals, there are currently 272 homes for sale of which 75 are in foreclosure! The homes in foreclosure represents 28% of the total homes on the market.  


So, what can a homeowner, like myself, do to protect their value? Here are 5 simple steps any household can take:

1. Invest in curb appeal. Invest in fresh paint and landscaping. Trim the bushes. Weed the gardens. Make certain the lawn is cut every week. Have your friends who are real estate agents come by and give you tips on how your home can look more inviting. When you are ready to sell, the hard work will be completed and in the meantime, you will have a home you are proud to own.
2. Form a neighborhood watch to observe foreclosed properties. Make sure there are no vandals or squatters in those homes. Call the police if you see suspicious activity.  Banks will board up homes that are vandalized and they will consider a fire-sale, just to get that property off their books -- which will greatly impact your own value.
3. Think of your home as a long-term investment. Home ownership helps create inter-generational wealth. It is the one asset that will grow over time. At some point the housing market will come around and you will be in a good position to sell your home at a fair price.
4. Don't panic. Yes, there will continue to be foreclosures for the near term. Now is not the time to sell your home just because there are foreclosures. It is like making a panic run to the bank. If everyone does it, house pricing will continue to destabilize. If you think you may be approaching foreclosure, contact an attorney for advice.
5. If you must sell your home, consider doing the following items to keep your home's selling price high: 

• Throw in some extras.  Furnishings and appliances are always good selling incentives. You can sell your place as "move-in" ready. Deck furniture, art, throw rugs are also good add-ons.
• Offer something new -- if they buy. Installing new granite tops or finishing hardwood floors can be attractive to a buyer because these things will be new or fresh to them.
• Pay the buyer's closing costs. It cuts into your profits, but you should be able to negotiate keeping the selling price high.

Pulvers, Pulvers & Thompson, LLP provides free consultations regarding all matters pertaining to New York Real Estate Law including, but not limited to the following: Residential Closings, Real Estate Litigation, Foreclosures, Real Estate Contracts & Lease Agreement and Private Note Holder Representation. Contact them at 212.471.5129 begin_of_the_skype_highlighting            212.471.5129      end_of_the_skype_highlighting  for a free consultation! 

Mortgage Contingency Clause

As a purchaser in contract it is recommended to have little to no contact with the seller and the seller’s representatives regarding the mortgage application process. Today nearly all residential real estate contracts in New York include a Mortgage Contingency Clause. This Clause provides the buyer the ability to opt out of the sales contract and receive a full refund of their deposit should they apply for a mortgage loan and be denied. The buyer typically has 45 days from the date the contract is signed to invoke this opt-out and the seller may request to see proof of the bank’s denial.

The Mortgage Contingency Clause may seem simple and straight-forward when in reality it takes a few twists and turns. As a purchaser who has likely paid 10% or more down you don’t want to say anything to the seller that may appear to indicate a loan has been approved when it hasn’t been. For this reason any communication with the seller’s representatives regarding your loan and the Mortgage Contingency Clause should be made by your attorney.

Bank of New York v. Silverberg & why it's important

MERS has become somewhat of a mysterious figure in the recent foreclosure boom. Many attorneys that work in the industry remain unsure of what exactly MERS is and who exactly works for MERS. It’s found its way into numerous magazines and newspaper articles and I’m pretty sure my mom has asked me about it a few times.

MERS serves as a common agent for numerous participating banks. It was created in the early 1990's in response to delays at local recording offices. The idea was that if all of the participants used a common agent the agent could track ownership and assignments while saving the participants recording costs and speeding up the transfer process.

While MERS does not lend money or service loans it was involved in the origination of approximately 60% of all United States mortgage loans. MERS participating banks have typically named MERS nominee on a Mortgage while leaving themselves listed as the lender on the Note. A Note is a promise to pay money; a Mortgage attaches that promise to pay to a piece of property. If someone doesn’t pay their Note (aka the promise to pay) they may be at risk of losing their property because the Mortgage clearly states that if the Note is violated the underlying property can be sold.

When MERS serves as nominee on the Mortgage it is generally stated that it has the power to assign the Mortgage. As a result, when one MERS participating bank buys a loan from another MERS participating bank they create an Assignment of Mortgage that assigns the Mortgage from “MERS as nominee for the First Bank” to “the Second Bank”. This was relatively simple and straightforward way of transferring Mortgages back and forth. Silverberg (a currently unpublished Second Department decision issues on June 7, 2011) likely changed everything.

In a typical MERS Assignment of Mortgage it states that the Note is transferred with the Mortgage. The issue, as the Court in Silverberg points out, when a Note is transferred to and accepted by an assignee, the Mortgage naturally follows. In contrast, the transfer of a Mortgage without the transfer of the Note does not actually transfer any incident. Remember….a Note is the promise to pay; the Mortgage simply backs up that promise with a piece of property. MERS (or any person or entity) would have the authority to transfer the Note if possessed or owned the Note or was given authority by the owner. Nowhere is it stated that MERS was given the authority to transfer the Note by the owner and it is rarely proven that MERS actually possess the physical Note. Therefore, in Silverberg the Plaintiff, Bank of New York, stepped in the shoes of MERS and had the power to assign the Mortgage but did not gain ownership of the Note because MERS was unauthorized to transfer ownership. In addition, since MERS did not have the power to commence a foreclosure on behalf of the previous owner Bank of New York did not have standing to bring the action and the defendants Motion to Dismiss the Action was granted.

The simple rule that comes out of this case is one that has been around forever – a foreclosing party must be the holder or assignee of the Mortgage and the Note at the time the action is commenced. The twist that is about to cause a lot of banks a lot of problems is that a typical MERS Assignment of Mortgage does not properly transfer ownership of the Note. Since so many banks have commenced foreclosure based on an Assignment that did not actually give them ownership of the underlying Debt at minimum hundreds (at most thousands) of active New York foreclosures will need to be discontinued and then re-filed after new Assignments are created. At minimum this case will slow down New York Residential Foreclosures 6 months to a year. At maximum it prolong the foreclosure boom another couple of years.

Possible Change in HAMP Modifications - Automatically Going Permanent

As I've explained in previous blog postings, HAMP modifications are government incentivized modifications that work off of a homeowners gross monthly income to determine an affordable monthly payment. After determining what the homeowner can afford the bank weighs the value of the modified loan against the value of a foreclosure of the property. If the modified loan has a greater net present value it is offered in the form of a trial modification. After 3 trial payments are made the homeowner is again reviewed prior to the modification going permanent.

A major issue with HAMP modifications is that after making the 3 monthly trial payments banks drag their feet on completing a permanent modification review or reject the homeowner(s) for the permanent review altogether. Banks had little incentive to determine the net present value of the modification compared to the foreclosure prior to offering a trial plan because the banks had no actual risk. Should the modification pass the net present value test a permanent modification would be offered. Should the bank determine the net present value of the foreclosure was greater than the modification the homeowner would be rejected and the bank would retain the 3 trial payments. It appears things may be changing.

Recently I have seen numerous HAMP trial modifications that automatically go permanent upon the final trial payment. No permanent review is required and all net present value calculations appear to have been conducted prior to the trial modification offer. This will likely lead to an increased number of rejections for homeowners who do not make enough money to pass the net present value test upon the trial modification review, it should lead to a large increase in permanent HAMP modifications. Assuming this is the new practice there will be a few side effects:

(1) Increased Bank Efficiency - Presumably each major bank has hundreds (if not thousands) of workers somehow involved loan modifications. If loan modifications are automatically going permanent the staff responsible for the permanent modification review would likely be directed towards assisting with other aspects of the modification review.

(2) Increase Court Efficiency - Every settlement conference part is bogged down with cases that require 5+ appearances to negotiate. Nearly every case that results in a permanent modification has one or two conferences that serve as a status updates where the appearing attorney simply advises that the permanent review has not yet been completed. If loan mods go permanent automatically it should result in less conferences per file.

(3) More Initial Rejections - Homeowners that don't have enough income or have too much equity in their homeowner to pass the net present value test should find out upon the initial trial review as opposed to making three (or more) trial payments before being rejected.

Prior to last week I had never seen a HAMP mod that automatically went permanent. I've explained in previous posts that in-house mods were my preferred modification mainly because they almost always went permanent upon completion of the trial. Should this be an industry-wide change in HAMP modifications it would be a major step in the right direction towards dealing with our country's foreclosure problems.

How Do I Know If I'm Eligible for a HAMP Modification?

If you are in foreclosure the Court will direct the Bank to first review you for a HAMP (Home Affordable Modification Program) Modification. If you are not in foreclosure a bank that is part of the HAMP program is supposed to review your mortgage for a HAMP modification upon request. Many of the larger banks (Bank of America, Chase, OneWest, etc.) are part of the HAMP program and offer HAMP modifications where possible. Some smaller banks are not part of the HAMP program and while they will consider you for other modifications, they will not review you for a HAMP modification.

In order to be considered for HAMP you must live in the mortgaged premises and have a mortgage below a certain threshold amount (for one family homes the threshold amount is $729,750.00). Your current mortgage payment (including taxes and insurance) must exceed 31% of your pre tax monthly income and you must pass an NPV (Net Present Value Test).


31%

To calculate this percentage, add up all of the monthly income your household earns before taxes are removed. This includes additional income such as pension or Social Security income. Contribution income that live-in relatives give you monthly and 75% of rental income is included as well. A HAMP mod will decrease your monthly mortgage amount to 31% of that number. If your mortgage payment (along with taxes and insurance) are less than the 31% figure then you are likely ineligible for a HAMP modification.


NPV

Assuming your current mortgage amount is greater than the 31% figure, the bank will then run the NPV (Net Present Value) test. Under this test the bank determines whether the value of foreclosing on your property is greater than the value of giving you a modification. This test is extremely complicated and it is normally difficult to predict whether this test will come out in your favor or not.While the banks that take part in this program are forced to consider you for a HAMP modification they are only obligated to give you a modification if the modification benefits them more than a foreclosure.




If everything goes well you will be placed on a 3 month trial plan where you will pay a monthly figure of 31% of your gross monthly income. After the trial plan you will be reviewed for a permanent modification. Keep in mind that many homeowners remain on a trial plan for far longer than 3 months and it is still possible to fail the NPV test after making all 3 trial payments.