Now that Chief Judge Jonathan Lippman has changed the foreclosure rules in New York State, his effort to eliminate robo-signing has greatly raised the stakes for the banks' attorneys. But what will the practical impacts be? To find out, I spoke with attorneys on both sides of the issue.
The short answer: Cases brought by the big banks will feel the biggest impact, at least in the next several months. But the effect will be minimal for lawyers whose foreclosure practice is representing creditors who held onto the note and mortgage, rather than securitize them. (Of course, that category, which is now just a niche, used to be the whole universe. But that seems like eons ago.)
In addition to the new rule's effects, it's worth noting a new New York law that says when homeowners win a foreclosure case, the banks have to pay their attorneys' fees. That will certainly lead to more contested foreclosures because homeowners will find it easier to get an attorney to represent them. How those new cases will play out, however, will be depend on the new rule Judge Lippman (pictured) issued.
Sounds Unremarkable but Is Really Revolutionary
This rule requires attorneys working for banks in all current 78,000 foreclosure cases and in any future cases to affirm, under penalty of perjury, that they have spoken to their bank clients and checked that the banks properly reviewed and prepared their part of the documents -- no robo-signing allowed. It also mandates that the attorneys have reviewed the filings and conducted "other diligent inquiry" to make sure the banks' claims are true.
The first part, requiring the very unremarkable action of actually speaking to your client, is actually revolutionary in the mass foreclosure arena, where entities like Lender Processing Services (LPS) and Prommis Solutions manage the attorneys and where client contact is rare. In fact, attorneys doing this work are discouraged from contacting the banks, leading one frustrated judge to order a bank to tell its LPS attorneys that they could speak to it.
The second part of the rule, which requires "other diligent inquiry," prevents "robo-conversations" where the attorney could just ask a designated bank representative preset questions, which the banks normally answer with the same integrity as that displayed in the robo-signed documents.
Linda Tirelli, a consumer bankruptcy lawyer, praised Judge Lippman's rule:
I am very proud that New York is taking the lead in recognizing that the integrity of our court system must be maintained. Property rights are held in high regard in our country and not to be fooled with. Holding attorneys responsible for what they submit as officers of the court is one step in the right direction towards sanitizing the foreclosure "business" currently overwrought with fraud and to restoring the nobility of our profession.
Rule or no rule, I'm not sure many will agree that the "nobility of the profession" can ever be restored. Nonetheless, everyone I spoke with agrees on one consequence of the new rule: Delay.
Since every foreclosure in New York is on hold until the new affirmations are filed, how long might the delay be?
"We Were Surprised"
I tried to find out by asking the attorneys at whom the rule is targeted: those who do high-volume foreclosures for the big banks, which are the foreclosures implicated in the robo-signing scandal. Although I called five such firms, almost none would talk to me about the rule, which I take to mean they aren't happy about it but don't want their unhappiness to reach the Judge Lippman through the media.
One attorney, Steven J. Baum, president of the law firm that bears his name and that is having its own document troubles, was the only such attorney willing to go on record. And even then, he was willing to address only how the rule came to be, rather than its merits: "We were surprised," says Baum, "that traditional rule-making practices were not followed in that public comment and an opportunity to be heard before a rule is issued is the usual course of action."
I had an easier time discussing the rule's impact with Mark Starkman of Jacobowitz & Gubits, who represents both debtors and creditors in foreclosure:
"It's not as significant as it seems. Attorneys in New York State already have obligations to assure the documents that they present to the courts are valid. We've always had this obligation. One of the problems that's been raised on a national scale is this robo-signing, and this will fix that."
But his sanguine response probably reflects his client base and current practice habits:
"I don't expect it to affect my practice. The creditors I represent are individuals, small banks and community banks who routinely hold the loans instead of securitizing them. I always review the original documents. We're very very careful.
The only impact is that I have to go back and file these affirmations in 50 to 100 foreclosures I have pending, and unless I can distinctly recall reviewing the documents, I may have to re-review them at additional cost to my clients. Nonetheless, I don't expect this new requirement to significantly slow down my existing cases."
Attorneys who do foreclosure defense had a different take. For example, Michael Posner, partner at Shaked & Posner explains:
"In 90% of our cases, because of how the mortgages were securitized and sold and assigned, it's not really clear who has the right to foreclose. One would hope that by holding the attorneys to a standard of actually reading what they're filing and verifying that it's correct would clear up some of the problems. In the near term, a lot of cases will be on hold, I imagine for several months. But it's kind of a double-edged sword, because if they start doing the foreclosures properly, it will speed up the foreclosure process."
More Withdrawals Likely?
Craig D. Robins, a Long Island, N.Y., bankruptcy and foreclosure defense attorney, see things similarly:
"I think it will have a big impact initially, and then perhaps dwindle down somewhat over time. Initially, the attorneys for lenders will be concerned that they didn't do their due diligence as required by this rule, so they'll be super-careful. Over time, however, I think that the banks' attorneys will implement systems with their clients that will make it easier for them to fulfill their due diligence requirements.
We see right-to-foreclose issues all the time. I think the attorneys for the banks know when there's a problem, and just hope the homeowners or their attorneys don't notice. For the first time, in the last six months or so, I've had banks withdraw foreclosures, apparently because they realized they have issues proving the right to foreclose. With the new standard, I expect there will be many more of those withdrawals."
Robins was confident that the New York rule would play a significant part in ending the robo-signing era. Not only does he think "this will be the first of many rules or laws across the states to stop fraudulent foreclosure proceedings" but also "because of the attorneys general, the FBI, all the investigations going on, I think the people in the foreclosure firms are going to tread more carefully going forward." Indeed, the New York Daily News reports that even without the rule, some 4,450 New York City foreclosures were already on hold because of problematic paperwork. Naked Capitalism, a website that's been on top of the foreclosure fraud story, notes that some of the problems uncovered by the News weren't mere technicalities, and it extrapolates to suggest that 163,000 pending foreclosures nationally have similar issues.
It'll be interesting to see if these attorneys' basic prediction is true: that the vast majority of New York foreclosures are put on hold for months, or even withdrawn, as banks and their foreclosure attorneys sort out the documents, and then foreclosures resume at a greatly accelerated pace as defense attorneys lose the currently potent (in New York at least) robo-signed document defense. Of course, if the banks and their attorneys, by spending a few months to set things up correctly, are able to file flawless foreclosure documents and take homes swiftly, the big question will be: Why didn't they do it in the first place?
That's a question we may get answered since myriad lawsuits are sure to come. Bank of America has already been sued over foreclosure paperwork problems, for example.
How Long to Clean Up This Complicated Mess?
Restarting foreclosures on some securitized mortgages may be much harder and take longer, because at least some -- no one yet knows how many -- don't have good chains of title because the mortgages weren't put into the trusts issuing the securities properly. While Gretchen Morgenson at The New York Times reports that the banks should be able to solve the evidentiary gaps, it's far more involved than simply locating, re-executing and redistributing documents. (Indeed, some of the biggest consequences of that mess will play out between the banks and the investors rather than between the banks and the homeowners, as Naked Capitalism explains.) Even in the "easy" cases, simply trying for do-overs, where the banks try to take back problem papers and give sound ones to the courts, isn't always going to work.
Sounds to me like the overwhelming number of New York foreclosures aren't moving forward for several months at a minimum, and easy fixes may escape the banks nationally. Just how damaging will all this be for the banks? I don't know, but I'd wish they'd come clean about it.