Why the banks can’t (shouldn’t) pull a Columbo.

Firstly! Sorry for the delay, two of my close friends got married out of town in a lovely Indian marriage ceremony which happened to span three lovely days. But now back to the important stuff! So! The banks turn around, you’ve finished your trial payment plan, you’re waiting for your permanent modification, and then the banks turn around and say “Wait!” If you have a second mortgage, guess what, you’re going to have to get a subordination agreement from the second mortgage holder before you’re granted your permanent mod. Why? Because according to a potential interpretation of the Uniform Commercial Code of New York State, changing a mortgage to the extent that many modifications do may lead to that mortgage being treated as a brand new contract. Which in turn, pushes that mortgage to the back of the priority line. So on paper, a subordination agreement of the second mortgage seems like a sensible requirement. BUT WAIT! The fact is, to demand a homeowner secure a subordination agreement from a second mortgage holder is unreasonable, in fact, I would dare say not in good faith (which is required by CPLR 3408).  Why is it unreasonable? Because who in their right minds would ever sign a subordination of their interest in a property? There is nothing for the second-mortgage holder to gain from signing such an agreement and potentially something to lose. It’s essentially like me going up to a man on the street and telling him that there’s a slight chance he will inherit a good sum of money, but to keep things fair, asking him to sign an agreement that would strip him of this theoretical inheritance. 

This is a ridiculous proposition! And for banks to require homeowners to jump through this hoop before they get their final modification is essentially like asking them to walk on water. 

Current issues facing foreclosure defense in New York

So, by this time I hope I’ve offered a small smattering of an overview concerning foreclosure defense practice in New York State. Now to start to tackle some real issues concerning what the average attorney is facing these days.
A trend amongst banks that my firm has had to face recently is the issue of subordination agreements on second mortgages. Allow me to set the scene: You are a homeowner who has fallen behind on your mortgage payments for one reason or another. Despite economic hardships, you still have a decent enough salary to pay your mortgage at a reasonably modified rate and you have gone through the modification negotiation process. You are now being offered a trial period plan, or TPP, in which if you successfully make three monthly mortgage payments at your modified rate, in full and on time, your rate will be made permanent and your mortgage will be considered… OFFICIALLY MODIFIED!!!!

This fine man has been offered a permanent modification for his flying balloon house!

But wait… after you have successfully made all your trial payments… you get a caveat from the banks… saying, guess what, there is indeed one more step. I know we told you that all you had to do was to make your trial payments, but it turns out, you have a second mortgage on your house, and we’re not going to give you this here fancy modification until you get a subordination agreement for that second mortgage!

So, from the top, what is a subordination agreement? (At this time, I would like to make a quick aside. This blog is indeed meant to be didactic. I will try to explain any terms used in my writing that I guess are not common knowledge for the average homeowner. Once again, if I ever miss anything, please feel free to write me and enquire.)

So, subordination agreements! Basically, in New York State, the first mortgage to be recorded against a property like a residential house is first in time to be repaid if the house is sold. But of course, some people have second mortgages. Those are recorded second in time and are accordingly given second priority when it comes to being paid off. A subordination agreement is basically an agreement by the second mortgage holder that it will remain second in priority even if the first mortgage is modified. Is this subordination agreement necessary? Eh! That’s kind of a question for another day. It brings up questions of contract law, modified contract terms, etc.

The real question is, is it proper for a bank to require a homeowner being offered a modification, who has successfully completed their trial payments by the way, to have to secure a second mortgage subordination agreement before receiving their modification?

The banks pull, what I like to call, a Columbo.

 

Now that that the scene has been set, tomorrow let’s try to solve this conundrum.

 

What the heck are these mandatory settlement conferences anyway?

A few times I have mentioned mandatory settlement conferences and you’re probably wondering what exactly those entail. So let’s begin and the beginning. The Supreme Court of the State of New York and all lowers courts are governed by the Civil Practice Laws and Rules, or CPLR. The CPLR is the collection of rules that dictate how the courts system works, when deadlines are, how to file motions, how to answer motions, what rights are guaranteed to the average citizen of New York State, etc. It’s basically the bible of New York civil practice and knowing the CPLR backwards and front is a huge asset and advantage for any attorney. Sidenote: to all you young attorneys out there, if you want to impress your boss, spend an hour a day paging through and trying to memorize bits of the CPLR, it’ll pay off.

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    Not far off from how I actually view the CPLR.

Amid the sub-prime crisis and the ensuing foreclosure crisis, the New York State legislature realized it had to do something to keep its citizens from being booted out of their homes for defaulting on their mortgages.

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Accordingly, CPLR 3408 was enacted, which entails that before a bank or servicer can go forward with a foreclosure action on a residential property, a representative from the bank must attend mandatory settlement conferences with the borrower, or the borrower’s attorney.

Now, what the heck is supposed to happen at these conferences? Well, in sum, the judiciary is basically telling the banks “I know you had a contract (the mortgage agreement) and I know you claim that the homeowner broke that contract, but before you’re allowed to go to court and actually try to prove that, you have to consider whether or not the homeowner’s mortgage can be reasonably modified so that it can be affordable and then reinstated.”

Now, this is a novel concept. The State and the courts are basically saying that before you can seek relief from the court, you have to try to work things out. This is unique! This type of thing does not happen in other parts of the law. If I signed a contract with you to purchase 10,000 apples, you delivered them, then I stiffed you on the bill, you could just bring suit against me and it would get assigned directly to a judge. You would not be mandated to go to a settlement conference with me to see if I could afford to buy the apples under better circumstances.

In my opinion, CPLR 3408 is a terrific slice of state law that shows that our legislators are in touch with reality. They saw that an exception had to be made to protect its citizens so they took steps to ensure that people had a chance to keep their homes.

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So! Back to the conferences.

The conferences appear before a court-attorney referee. A referee is an attorney who has been hired by the court to preside over the conferences. They can direct the parties to produce or review documents, adjourn the conferences, or if the conferences have come to an impasse, remove the case from the settlement conference part and hand it over to a judge with a written recommendation regarding the status of the case.

If a case is handed over, it can be either a good thing or a bad thing for the homeowner. It may have been handed over because the homeowner cannot show enough income to justify a modification of their loan, that would be a bad thing because it basically means that a foreclosure action is likely to succeed. On the other hand, it may have been handed over because the referee thinks the bank has been negotiating in bad faith, which are grounds for a variety of relief for the homeowner.

Tomorrow, I explain what the heck happens at these conferences and share some stories of my first-hand experience in said conferences.

HAMP with teeth.

Hello there once again! A quick note about this blog. The plan is to build on one post after the other, so if you ever find yourself wondering what a term means or if the language seems too technical, I implore you to read earlier posts for some explanation. If there is really something that seems impenetrable, feel free to write me directly or in the comment section.

But first! A small look into where I spend the majority of my workday when I’m not in the office. Kings County Supreme Court, located at 360 Adams Street, is a beast of a place. A huge, massive building that extends across a full city block, it is a great example of Brutalist architecture. Although maybe not, as all the examples of Brutalist architecture I’ve ever seen have been a bit more innovative. Regardless, its design is gloriously spartan, except for the subtle golden flourishes that outline a few of the windows on the building’s facade. Within its walls are literally hundreds of bustling attorneys; professionals of all ages (well, between the ages of 26 and maybe up to 92 by my calculations) jockeying for position in court rooms, answering calendar calls, juggling multiple appearances, talking to each other about legal matters, talking about mundane topics, sports teams, electronics, movies, the news, politics, the weather, vacation, work conditions, etc. Some laugh with each other, some are all business, some fight, and sadly, some are seemingly committed to be absolutely obnoxious, combative, unprofessional jerks. But alas! It seems like there are those types in most industries, and at least I can take some comfort in the fact that the man turning red with rage as he yells at me and I stare back at him is at least sane enough to have gotten through law school, passed the bar, and secured employment.

A quick aside, and I have to say I can’t take credit for this, I learned this from my boss and its a terrific tactic. If anyone is ever screaming at you or trying to provoke you in a professional setting, the perfect thing to do is to stare directly back at them, smile, nod, and occasionally say “okay.” This will eternally frustrate the attorney who is deciding to attempt to badger you into some relief you’re not willing to give and eventually he will stop flapping his lips and his look of anger will even out to general dejection.

SO! HAMP with teeth, or rather, HAMP that banks can be forced to follow, not merely nudged in the direction of. I cannot comment on how it is in other states, obviously not as good as New York as, as I said in the last post, a California judge recently derided HAMP for not being able to be enforced/create consequences for the lenders. However, there is a trend in New York State  among judges and even court-attorney referees (the ringmasters of the mandatory settlement conferences) whereby the banks, even non-HAMP participants, are being expected to adhere to the standards of HAMP for their evaluation of a borrower’s financial documents.

This trend has huge significance as mortgage settlement conferences are mandated to be  done in “good faith.” And if “good faith” in mandatory settlement conferences becomes defined by HAMP standards, then HAMP has been given a mighty set of chompers. The best example of this trend being adopted by the courts can be found in the recent decision in Kings County by the Honorable Judge Kramer in the case of Flagstar Bank v. Walker (the full decision can be found at http://scholar.google.com/scholar_case?case=755268232775966676&q=flagstar+v.+walker&hl=en&as_sdt=4,33)

In Flagstar, Judge Kramer explicitly stated that good faith is defined by the absence of bad faith, and in looking for an actual measure of good faith, HAMP provisions for evaluations are the best guidepost. This decision gives foreclosure defense attorneys a huge tactical opportunity. By tying good faith to HAMP, a defense attorney has an obvious motion for bad faith available to her with any plaintiff that claims it does not participate in HAMP. Essentially the court is saying, “Oh, you don’t participate in HAMP? Well guess what, we all participate in good faith in these parts, so get evaluating under HAMP guidelines.”

As I said before, any questions, feel free to write me. Next time, I tackle the new law CPLR 3408 and what it means for foreclosure defense attorneys.

HAMP: To participate or Not participate.

The question that arises many times during a foreclosure defense case is whether or not the servicer of the underlying mortgage or the original investor (the bank that entered into the mortgage agreement originally) is a participant in HAMP. Technically, HAMP participation only extends to HAMP participants. A list of HAMP participants can be found here http://www.loansafe.org/forum/making-home-affordable/15506-lenders-participating-making-home-affordable.html, although I implore you to take it with a grain of salt, as this list is seemingly from 2009.

A HAMP participant is usually a bank that has taken some manner of federal bailout money in order to stay afloat. In a kind of demand for recompense, the federal government compels the banks to evaluate homeowners who are late on their mortgages through the favorable HAMP guidelines. For some effective imagery, just imagine a bunch of gnarled ex-convicts who got let out of prison early and given a house and a car, with the caveat that those same ex-cons volunteer at soup kitchens and give back to their community.

Not to say that banks are convicts. One thing I should make clear towards the beginning of this blog is that the banks, while occasionally the bad guys, are certainly not always the bad guys, and quite often are some pretty darn good guys.

Moving on, so we have an idea now of who is a HAMP participant. However, it it gets very tricky as to what being a HAMP participant compels the bank to do. Technically, HAMP has no punishments or consequences for non-participation. HAMP is merely a set of guidelines that HAMP participants are expected to follow. However, I’ve been before adversaries representing Plaintiffs in which the servicer and the investor were HAMP particpants and have been told flatly that “This homeowner is being evaluated by in-house standards, not HAMP.”

Still other times, I’ve had clients who took out mortgages with small-town banks and the attorneys for the Plaintiff inform me that in-house guidelines are the only guidelines they have, as they are not HAMP participants.

So we are left with a conundrum: a federal program of guidelines that is suggest for some but not technically compulsory, and that technically does not apply and arguably wasn’t intended to apply to a load of different, smaller, local banks. The apparent lack of power behind HAMP led to a Californian Judge, the Honorable  Richard E. Spann, to remark in a recent court decision that “HAMP has no teeth!”

This is true in part, but in New York State, is also false in part. Tomorrow I will demonstrate how New York Supreme Court is indeed attempting to give HAMP some teeth.

Welcome to the New York Foreclosure Defense Blog, basics

Hello! Welcome to the New York Foreclosure Defense Blog. This blog will examine issues, trends, and judicial and legislative opinions having to do with New York Foreclosure Defense Law. Foreclosure Law is a field that has changed drastically in the last few years, and from my experience, there are many new and challenging questions that foreclosure defense attorneys, mortgage servicers, bank attorneys, homeowners, and judges have to deal concerning this dynamic field of law.

There are many questions to be asked and issues to be examined. I know of at least one issue affecting mortgage servicers and mortgage modification-eligible homeowners that seems to only able to be solved by a new law or modification to the Uniform Commercial Code or the Civil Practice Rules and Law of the State of New York. For now though, I would like to give readers a short introduction to foreclosure defense and a foundation of knowledge upon which to build.

Since the advent of the mortgage crisis, the federal government has enacted many programs with the goal of protecting homeowners who were facing foreclosure. The most obvious of these is the Home Affordable Modification Program, or HAMP. HAMP sets for a number of guidelines by which HAMP-participant banks are compelled to follow. These guidelines are used when evaluating a homeowner’s finances, outstanding mortgage, income, and debt among other factors. The ultimate goal is for the homeowner to be offered a modification to their original mortgage rate that would allow them to keep their homes and payoff the remaining mortgage.

HAMP does not force banks to offer a modification, but merely sets forth guideline for evaluation which HAMP participants should follow. The usual modification offered through HAMP is a 2% interest rate for forty years with the possibility of principle-abeyance depending on the circumstances. If the monthly mortgage rate of 2% over forty years is less than 31% of a homeowners monthly gross income, then the homeowner is deemed to be able to afford his or her home. From there, the homeowner enters into a Trial Period Plan or TPP. During the TPP, the homeowner must pay the modified mortgage rate on time and in full for three consectuvie months. Following the successful completion of a TPP, the modification offered can be made permanent.

That’s all for now. Next time, we tackle what it means to be a HAMP participant or a non-participant, and what, means for enforcement there are for banks who do not follow HAMP guidelines.