Judicial Reports: Subprimal Therapy

By Leah Nelson
lnelson@judicialstudies.com
Posted 05-28-08

The governor has charged New York's courts with fixing the foreclosure crisis. Never mind the lack of money, time, transparency, or judicial authority to get the job done.

In mid-May Chief Administrative Judge Ann Pfau told the State Senate Banking Committee that the judiciary did not have the resources to comply with a gubernatorial call to help resolve the spike in residential foreclosures.

"I have no choice but to point out that required expedited court conferences in every residential foreclosure in all 62 counties would impose a significant burden on the court system that we are not equipped to handle on short notice," Judge Pfau told lawmakers.

Yet as clearly articulated as Pfau’s reality check was, it barely told half the story of how daunting any foreclosure reforms will prove. Intimidated borrowers, necessarily long response times, labyrinthine financing schemes, and a ban on judicial advocacy all exacerbate the crushing lack of resources suffered by both defendants and the court system.

Plus, when all is said and done, it’s tough to adjudicate away a market crisis, whatever its cause.

The governor’s proposal would mandate expedited settlement conferences for all borrowers and lenders, to be held within 60 days after the borrower’s answer to the foreclosure notice is due. It would also give judges permission to assign counsel to borrowers representing themselves.

But interviews with key members of the bench and bar reveal that systemic barriers make implementation of such notions an almost herculean task.


Only about 10 percent of borrowers (who are the defendants in foreclosure actions) answer lenders’ summonses. The rest default, leaving the process to go on without them.

And experienced observers doubt that many of the unresponsive 90-percent will be easily enticed into court.

Supreme Court Justice Carolyn Demarest of Brooklyn’s Civil Term, who has been studying the foreclosure process for years (see sidebar), is concerned that for various reasons, including negligence on the part of lenders, many defendants don’t receive proper notice of foreclosure at the start.

Paul Lewis, Pfau’s aide, says that the Office of Court Administration is considering ways of improving the notice system. But that may not go to the root of the problem.

“A lot of the [foreclosures] you’re seeing now are from people who bought more house than they could afford,” says Lewis. “Sometimes, they’re so far over their heads, they’re just walking away from their properties. Sometimes they’re intimidated. . . . For some people, maybe it’s more than just their mortgage; they’re hearing from a lot of places, and maybe they don’t even open their mail. They hope if they ignore it, it will go away.”

Says Brooklyn Civil Term Justice Herbert Kramer, who for years has worked with Demarest on reforming the foreclosure process, “My anticipation is, if you get 50 percent of people in the room, you’re doing well.”


Under current law, residential foreclosure actions in New York don’t come to the courts’ attention until months after they are filed.

Foreclosure begins when the lender files a summons and complaint against the borrower with the County Clerk. Lenders have 120 days to serve notice on borrowers, who have up to 30 days to respond.

If the borrower doesn’t answer — and the vast majority doesn’t — the lender claims default and files an ex parte motion for an order to foreclose. Only then, almost five months after the process has begun does the court learn anything of it.

That’s three months longer than the 60-day period specified in the Governor’s bill and too late to make any difference to borrowers who have failed to answer complaints within the specified timeframe.

According to RealtyTrac, which chronicles the foreclosure market, some 57,000 foreclosures were filed in New York during 2007. That marked a 55 percent jump from 2005 — and the pace is accelerating.

Most residential foreclosure defendants represent themselves. The Governor’s bill says that judges can assign counsel, and the State’s 2008-09 budget allocates $25 million in new funds to contribute towards professional help for such pro se defendants.

Some additional federal money is expected, but many observers doubt that this would be enough to pay all the legal resources defendants will need. And, even if enough lawyers could be found, the nuances of relevant law require extensive training.

The same could be said of the bench.

Abraham Gerges, Administrative Judge of Brooklyn’s Civil Term, scoffs at the project’s feasibility under the status quo. “If you look at the Rockefeller years, they created more judges to handle the backlog,” he says. “I’m certainly not finding any fault in the program; I’m just saying you need to make the resources. If you don’t have the resources, then you’re really hurting the public because they think you can help them and you can’t.”


It’s not only borrowers who don’t come to court. The Governor’s bill specifies that whoever shows up to represent the plaintiff at settlement conferences “shall be fully authorized to dispose of the case.”

But as the financial market has recently learned, the securitization process that allowed so many subprime borrowers to finance homes — and led to the current influx of foreclosures — has made figuring out who owns what extraordinarily challenging.

Traditionally, mortgage loans were serviced by the commercial banks that made them. But investment banks, which packaged much of the subprime debt that is now at issue, outsourced such work to specialized agencies.

Service agents only have the power to collect on good loans and foreclose on bad ones; they can’t unilaterally alter lenders’ terms. This means that even if they come to settlement conferences, their ability to deal may be negligible. So even though each foreclosure costs lenders an estimated $60,000, finding representatives with the power to modify loans can be close to impossible.

“You’ve got trustees and all kinds of layers of authority . . . the [mortgage] vehicles are made so that these things are very difficult to change,” said Bruce Bergman, a member of Berkman, Honech, Peterson and Peddy in Garden City and the author of New York Mortgage Foreclosures, a 3,000-page tome that lawyers and judges use to guide proceedings.

Moreover, “Not all of what’s going on is a result of anything but economics and business — not oppression, which I think a lot of people think is underlying this. . . . Insofar as economic conditions are what make rescuing foreclosures difficult, it is not an arena where either legislation or the courts will bring about changes, when it is not a matter of procedure but of economics,” Bergman says.

Even if jurists could transform the underlying market, such an effort would threaten their role as impartial arbiter.

The Governor’s bill instructs the court to advise pro se defendants of “the nature of the action and his or her rights and responsibilities as a defendant” — which is well and good in theory, but in practice, could easily bring judges perilously close to compromising their role as impartial arbiters.

“Judges can’t be advocates, and it’s much more difficult for us if there’s no legal representation, because most of these people don’t even know their rights,” says Gerges.

Demarest agrees. “This is an area that requires a lot of monitoring, and you want to put mechanisms into place,” she says. “You just go wading through it and as you see these things arise you become concerned. [But] you have to be careful that you don’t become an advocate here.”


Posted by Dirk on May 28, 2008 03:57 PM to Judicial Reports