I normally don’t like criticizing a financial analyst who has worked hard to unearth some important data, but Keith Jurow has made the mistake of suggesting that a high level of mortgage delinquencies in the New York City means that the housing market may similarly not be as healthy as it appears to be in the rest of the US.
The problem is that Jurow has failed to consider two distinctive features of the foreclosure process in New York. The first is that it is a judicial foreclosure state. A house cannot be taken from an owner without court approval. Second is that during the robosiging crisis, New York courts implemented a requirement to make sure that lawyers representing banks and mortgage servicers were submitting valid documents to the court. The effect of that procedural change was to slow the initiation and processing of foreclosures to a near halt. This confirmed what critics, including your humble blogger, had been saying for some time. In the years running up to the crisis, mortgage originators and packagers stopped adhering to the very strict procedures stipulated for conveying mortgages to securitization trust. For American lawyers, this would seem to be no biggie, since contractual screw ups happen all the time. You write a waiver, or negotiate some sort of fix with the other side (which might entail paying money if one party screwed up particularly badly) and life goes on.
But for a whole host of reasons, mortgage securitization contracts, which govern how the mortgage securitizations are formed and then managed, are rigid, or in the words of Adam Levitin, “immutable”. If you didn’t get the mortgage into the securitization trust by a time certain, you couldn’t get it in later. That meant among other things that the servicer representing the trust would not have the right to foreclose because the trust didn’t have the mortgage. And exposing that trillions of dollars of mortgage securitizations might be empty bags, or had never been formed due to contract formation failure was something no one in any position of authority wanted exposed, since the consequences for banks and investors would be cataclysmic.
So the first fix was mass scale document fabrication and forgeries, to make it appear that the mortgages had all gotten to the trusts on a timely basis. That blew up in 2010 in the so-called robosigning scandal. It turned out that the media focus on the symptom, the creation of fake affidavits, rather than the cause, a widespread breakdown in mortgage securitization procedures, turned out to be a key win for the banks.
New York courts imposed the stringent new procedures for documents presented in foreclosures in October 2010. By 2011, the business press was whinging about how long it was taking to foreclose. As we wrote then:
An article at the New York Times, “Backlog of Cases Gives a Reprieve on Foreclosures,” is more than a little frustrating in that it takes some high level factoids about the mortgage mess and fails to draw the right inferences from them…:
In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm….
The convention in writing is to list the most important cause first. Thus by giving “the foreclosure system is bogged down by the volume of cases” pride of place implies that the “foreclosure system” being overloaded is the biggest cause.
But this level of abstraction is misleading. There is no “foreclosure system”; that turn of phase implies a single overarching set of procedures. As the mere mention of judicial versus non-judicial states indicates, each state has its own laws and case history as to what is proper practice. Referring to a “system” when there is none is also likely to lead many readers to think in term of the system that is involved in the foreclosure process, the judicial system, and to incorrectly infer that courts being overloaded is a major culprit. The vagueness of the expression, in other words, has the effect of directing attention away from the fact that it is the banks’ own machinery that is the most gunked up…
But after the robosigning scandal broke, banks halted or very much slowed foreclosures to get their procedures in order. Remember, a basic requirement of evidence is that affidavits are used to stand in the place of testimony, and the person providing the testimony has to have personal knowledge of the matter. Thus dispatching with robosigners, who didn’t even read what they were signing, much the less have any direct knowledge, meant at a bare minimum rebuilding substantial sections of what had been a highly streamlined process. That takes time and also means longer ongoing throughput time.
But even that charitable assumes that the banks’ depiction of the robosigning mess was to be taken at face value, that it was a mere “paperwork” problem. Adam Levitin reminded us last week that the real implications of the scandal were ignored by the media:
We’ve already seen pretty shocking evidence of documentation fraud in foreclosures. Remember that the robosigning scandal was the by-product of depositions that aimed to show backdating of assignments to trusts. The shame of the robosigning press coverage was that it focused on some shmucks signing 10,000 assignments in a month–which didn’t necessarily produce any harm itself, just carpal tunnel syndrome–and overlooked the really quite serious criminal problem of the backdating of assignments. The depositions showed pretty clearly that there was backdating–the notarizations were by notaries who didn’t have their commissions until a couple of years subsequent or were done on Christmas Day, etc.
What are the implications? Well, foreclosures that depended on fraudulent procedures are far less likely to be put forward in judicial foreclosure states (ones where the proceeding takes place through the court system), particularly ones where at least some of the judges are paying attention.
Thus what the article depicts as “backlog” (remember, LPS is including “severe defaults”, meaning deliquencies that have not yet resulted in foreclosure) is far more likely to be the result of foreclosures that either will not be initiated or have been abandoned. In other words, the samples all include a mix of foreclosures that are moving forward to resolution which should be parsed out and analyzed separately to see what the real time to foreclosure is, versus ones that the banks have dropped and/or are not initiating (and I don’t mean dropped by virtue of being contested, I mean left in limbo by the bank)…
And it is not accident that the apparent longest time to foreclose is in New York. Judges here have become particularly bloody minded about adhering to the law; the notorious curmudgeon Judge Schack now has plenty of company, with other judges issuing rulings that have gotten attention nationally (I particularly enjoyed the MERS smackdown that basically said, “I don’t really care if you have 62 million mortgages, rules are rules”). The article points out some of the procedures New York has implemented:
And many foreclosure lawyers seem unable to meet a requirement, made last October by the New York Chief Judge Jonathan Lippman, to affirm the accuracy of their documentation.
“The affirmation has had a pretty chilling effect,” said Ann Pfau, New York’s chief administrative judge. “The attorneys for the banks tell us they can’t get through to the right people at their clients who can verify the information.”
This is a stunning admission. Note that the New York procedure did not impose a new legal standard per se; lawyers are supposed to verify the accuracy of filings that as a matter of course. But it increased the consequence of casual violations.
Yves here. If you read the post below, Jurow talks about pre-foreclosure notices being sent repeatedly. That’s consistent with the picture above. Moreover, his post points out that a notice of default is valid for “only” three years; it then has to be refiled. So properties that have had to have notices of default filed more than once might not have multiple pre-foreclosure notices counted properly. Jurow says the authorities have the number of repeat pre-foreclosure notices on the same property as 40%. I would bet it’s higher by counting “repeats” on the same notice of default.
Now why would servicers behave this way and keep quiet about the problem? In an securitization, there were requirements for geographic diversification, so mortgages from New York would not account for much of the original value of any deal. But most of these zombie mortgages are likely in trusts sold before the crisis. In those, you’ll have only a very small portion of the original deal left, due to mortgage exiting the trust via normal sale processes (moving, death, divorce, trading up), refinances, and foreclosure sales where state law and post-crisis decisions were bank-friendly.
So the tail-ends in these trusts will be the small number of mortgages that are still in them and paying on time, the occasional home sale or refi leading to a mortgage payoff, and then the zombie mortgages. On those, the servicer charges late fees which have priority in payment, so it gets to bleed what little is left in the trust by not foreclosing.
Put more simply: New York’s crackdown on foreclosure abuses led it years ago to be the most difficult state in the US for cutting corners. And that quickly led to a big backlog of delinquent mortgages not going to foreclosure. That means you can’t generalize from New York to what is happening in any other state.
By Keith Jurow, a real estate analyst and former author of Minyanville’s Housing Market Report. His new report – Capital Preservation Real Estate Report – launched in 2013. Originally published at KCS Blog
With the Mortgage Bankers Association’s (MBA) monthly report continuing to show a decline in the delinquency rate, pundits are more convinced than ever that the mortgage crisis is over.
Since I have written extensively about the growing delinquency problem in the New York City metro for more than six years, let me explain my skepticism and how the truth has been hidden from the public.
In 2009, the New York State legislature passed a statute compelling all mortgage servicers to send out a pre-foreclosure notice to all delinquent owner-occupants in the state. The notice warned them that they were in danger of foreclosure and explained how they could get help. Servicers were required to regularly send statistics back to the state’s Department of Financial Services for all notices sent out. The department published two reports in 2010 with a compilation of these numbers. That was the last time these statistics were officially reported. I strongly suspect that the numbers were a little too scary.
Undeterred, I was able to obtain the unpublished figures from the person in charge of compiling the pre-foreclosure notice filing statistics at the department. For six years, I have received quarterly updates from him and have published several articles using them. The actual numbers are mind-boggling and hard to believe. I speak to my contact regularly about them and I am convinced that they are complete and extremely accurate.
The latest update shows cumulative figures through the first quarter of 2017. It covers only the five counties of New York City as well as Nassau and Suffolk Counties on Long Island. Totals for the entire state are also included. Here is a brief summary of what the data reveals.
Since February 2010, mortgage servicers have sent out a cumulative total of 1,034,876 pre-foreclosure notices to delinquent owner-occupants in New York City and Long Island. That’s right – more than one million. This does not include delinquent investor-owners because that was not required under the 2009 law. Approximately 85% of these notices were for delinquent first liens and the remainder were for second liens.
Numerous phone conversations with my contact have made it clear that roughly 40% were second or third notices sent to the same property. These are not duplicate notices. The servicers have been sending repeat notices to owners who have not taken action to cure their delinquency for more than a year and have not yet been foreclosed.
This is confirmed by related figures published monthly in the Long Island Real Estate Report. For the last 18 months, nearly half of the formal notices of default filed in Suffolk County have been repeat notices. Why? In New York State, a default notice (known as a lis pendens) is only good for three years after which it expires. Hence lenders have had to file a new default notice for borrowers who have been delinquent for more than three years.
The Suffolk County statistics reveal how terrible the serious delinquency situation has become in the New York metro area. Although 297,000 cumulative pre-foreclosure notices have been sent to deadbeat borrowers in Suffolk County, less than 1,000 formal default notices have been filed each month on these properties since late 2009.
How is that possible? The answer is simple. Mortgage servicers have been compelled by statute to send out pre-foreclosure notices to all delinquent owner-occupants, but it is entirely up to the discretion of the mortgage servicer whether or not they file a formal default notice on the delinquent property to begin foreclosure proceedings. For almost seven years, the servicers have chosen not to foreclose.
Some of you may argue that these shocking pre-foreclosure notice numbers don’t reveal very much because many of these delinquencies must have been either (1) brought current by the borrower or (2) foreclosed by the servicing bank. That is a reasonable objection. But you would be wrong.
As for foreclosures, I have reliable figures from Property Shark that an average of only 1,548 properties were foreclosed annually in New York City between 2012 and 2016. From its 2015 State of New York City’s Housing and Neighborhoods Report, we learn from the well-respected Furman Center for Real Estate at New York University that an average of only 300 properties were foreclosed and re-possessed each year by the lenders annually from 2011 to 2014. This was in a city where more than 531,000 pre-foreclosure notices have been sent to deadbeats since early 2010. The Furman Center report also showed that an annual average of only 12,800 formal default notices were filed on delinquent NYC properties between 2011 and 2015.
What about the idea that many of these delinquent property owners have probably brought their loans current after receiving a pre-foreclosure notice? Remember what I explained earlier – roughly 40% of these pre-foreclosure notices are second or third notices sent to borrowers because they have not paid the arrears owed.
Furthermore, I published an article last November with figures from Fitch Ratings showing that 53% of all delinquent non-agency securitized loans in the entire state of New York had not made a payment for more than five years as of August 2016. New York City alone had roughly 225,000 of these non-agency loans outstanding. As of February 2016, 37% of them were seriously delinquent. That is the worst delinquency rate for any major metro in the nation. This percentage has climbed steadily for the last five years. The notion that many delinquent owners in the NYC metro have cured their delinquency just will not hold up.
Conclusion: Even if my analysis is rock solid, a legitimate question remains. Does it have implications for the delinquency situation of any other major metros? This is important.
No other metro in the nation has delinquency statistics as comprehensive and reliable as those for NYC. I would go so far as to assert that we are really in the dark when it comes to any of the other two dozen metros where the housing collapse was focused.
I would like to suggest two premises for you to think carefully about. One is that the delinquency statistics you read from the MBA’s monthly delinquency report are inaccurate, incomplete and quite useless. To rely on them in order to assess the state of mortgage markets is not a good idea.
My other premise is that the delinquency rate for most of the other major metros which had major housing collapses is much higher than you think. All data firms that claim to have solid delinquency figures are totally dependent on the numbers they obtain from mortgage servicers who are their clients. I have learned from seven years of digging deep for reliable data that numbers from the servicers are notoriously inaccurate, incomplete and often just made up.
If you dismiss these premises out of hand, you risk having your real estate portfolios decimated when the housing crash resumes.