New Yorkers Paul and Angelica Kashman, declared in default on their mortgage in July 2010 and foreclosed on by Wells Fargo & Co. in February 2011, say they aren't deadbeats.
"We always knew that when we get into a court of law and show that we have all the information and backup, the truth will come out," said Paul Kashman, 37, a manager in the hospitality industry. The couple, stuck in limbo by legal bureaucracy, says they were mistakenly pushed into foreclosure, and are eager now to save their home, using court mediation.
Their case is among 72,000 pending in the New York system, accounting for a quarter of the civil caseload, and highlighting the strength and weakness of the state foreclosure process. While borrowers have protections unavailable in many other states, it takes more than 1,000 days for banks to repossess a home, stalling a housing recovery by keeping pressure on values for years to come as a constant drip of distressed properties enter the sales market.
The New York area was one of only two in the country to post year-over-year home price declines in the latest Case- Shiller 20-city index. Homebuyers also could lose, with the Federal Housing Finance Agency considering a fee increase to compensate Fannie Mae and Freddie Mac for doing business in New York and four other states with slow, costly foreclosures.
"New York suffers from what appears to be altruism, in that it postpones foreclosures as long as possible — the problem is that altruism can be expensive," said Anthony B. Sanders, an economics professor at George Mason University in Fairfax, Virginia. "It slows down the housing market and it results in lenders being almost unwilling to lend. New buyers will pay the price for this."
New York's pending foreclosures are more than a quarter of its civil caseload, according to a 2012 report from the state's chief administrator of the courts. New York requires lenders and borrowers to come to the bargaining table to work out modified payments or other foreclosure alternatives before a case can move to litigation. The average age of a case in the settlement program was 15 months old and the courts oversaw an estimated 77,000 settlement conferences in 2012.
It's one of five judicial foreclosure states, including New Jersey, Connecticut, Florida and Illinois, in which home repossessions require court review that the FHFA is targeting. The agency has said it's seeking to compensate Fannie Mae and Freddie Mac by bringing their pricing of risk more in line with how private lenders operate. The FHFA last year had the two government-controlled companies almost double the annual fees they charge for guaranteeing mortgage bonds, with increases averaging 0.2 percentage point.
It's considering imposing one-time upfront fees in the five states of between 0.15 percent and 0.3 percent of the loan amount. The average cost per day to carry foreclosures in New York is 112 percent of the national average, according to an analysis by the agency.
"If those states were to adjust their laws and requirements sufficiently to move their foreclosure timelines and costs more in line with the national average, the state- level, risk-based fees imposed under the planned approach would be lowered or eliminated," Edward J. DeMarco, the agency's acting director, wrote in a September notice on the proposal. "Unusual costs associated with practices outside of the norm in the rest of the country should be borne by the citizens of that particular state," he wrote.
The agency, which will announce its decision as soon as April, is pressuring states to speed up the process by removing safeguards for homeowners, New York's state bank regulator said in a Nov. 26 letter to DeMarco opposing the plan.
"The proposal would create the perverse incentive that states should either give up the fight against mortgage fraud and roll back consumer protections or face the consequences of higher mortgage rates for consumers," Benjamin Lawsky, superintendent of the New York Department of Financial Services, wrote in the letter. "The proposal would also shift the cost of the failures of lenders and servicers onto New York State borrowers."
For the Kashmans, who live with their two children in the two-bedroom brick row home in Brooklyn's Dyker Heights neighborhood that they bought for $368,000 in 2003, the clogged foreclosure system has allowed them to stay in their home, even as it delayed resolution of their case.
They defaulted in 2010 after cutting their monthly payments to Wells Fargo based on a modification agreement they said they signed and returned. The bank later said it never received the documents, so considered the lowered payments a default. The bank for years prevented the case from entering mediation, adding it to the backlog of thousands of inactive lawsuits across the state, according to Aaron Jacobs-Smith, a staff attorney at MFY Legal Services Inc. who represents the Kashmans.
Wells Fargo offered a permanent modification to the Kashmans on Jan. 17, the Kashmans said. The couple, who said they haven't decided whether to accept, recently began meeting with bank representatives as part of a pilot program in Brooklyn's Kings County that allows willing homeowners to begin settlement talks in stalled lawsuits.
Outside of the court's oversight, the Kashmans' negotiations with Wells Fargo have been a bureaucratic carousel, requiring them to continually resend documents they had previously faxed, according to Jacobs-Smith. While the couple said they successfully completed three trial payment plans, the mortgage servicer didn't convert any of them into permanent modifications.
They've been considering filing a request for judicial intervention by paying a $95 fee to reanimate the case that has languished since it was filed in early 2011, Jacobs-Smith said.
Tom Goyda, a spokesman for San Francisco-based Wells Fargo, said the bank didn't advance the Kashmans' case while it was working through modification options for them.
"The important thing is still that we were able to identify an option that should allow the Kashmans to stay in the home and end the foreclosure process," Goyda said in an e-mail.
The Kashmans are part of New York's so-called shadow- docket, which includes about 6,000 inactive filings in Brooklyn and Queens alone. Plaintiff attorneys stopped pushing their cases forward into the formal court docket after an October 2010 rule required them to personally vouch for the accuracy of their mortgage servicer clients' documentation.
State attorneys general across the U.S. had just began investigating allegations that mortgage servicers hired workers to sign thousands of foreclosure documents they didn't verify or even read. They reached a $25 billion settlement in February with the top five banks over the practice known as robosigning.
Foreclosures, which slowed after the investigations, are picking back up in judicial states such as New York and New Jersey. While foreclosure starts declined 11 percent in December from a year earlier in the U.S., they jumped 35 percent in New York, which had the fourth biggest percentage increase behind New Jersey, Pennsylvania and Kentucky, according to data provider RealtyTrac.
While the courts are taking action to clear the backlog, speed isn't the only priority, said Judge Judy Harris Kluger, chief of policy and planning for the New York State courts.
"I like efficiency as much as everybody else but it is not going to drive everything we do," Kluger said. "Just because it's efficient doesn't mean it's fair or right."
In New York, court-appointed referees preside over settlement conferences, setting deadlines for providing and evaluating modification applications and documents and following up to see both sides meet them. While more homeowners should receive loan workouts, many are unemployed or too far behind on payments to qualify, she said.
Since April, about 60 percent of the 5,553 cases that completed mediation moved into litigation. Borrowers received modifications in 653 of the cases, and about 400 borrowers were approved for short sales, where the borrower sells a property for less than is owed, or another foreclosure alternative, Kluger said.
Litigation can add a few more years to the process, said Schuyler Kraus, a partner in the New York office of Hinshaw & Culbertson who represents mortgage servicers in contested foreclosures.
"The courts are backlogged," Kraus said. "There are a lot of parties who have a lot of different motivations and needs and it's just ended up as a morass."
While litigation is time consuming, it's often where homeowners find the best resolution, said Bruce Richardson, a Manhattan-based foreclosure defense attorney. A Brooklyn man Richardson represents remains in his house six years after going into foreclosure and two years after the bank acquired it, he said. Richardson is now battling to overturn the sheriff sale in the appellate division.
"The byproduct of an aggressive and zealous defense is that the homeowner gets to stay in the home much longer than they otherwise could have and actually gets to keep his home," Richardson said.
In New York it took 1,089 days on average to foreclose in the fourth quarter, the longest of any state and more than five times the pace in hard-hit Arizona, a non-judicial state that has worked through much of its backlog, according to data from RealtyTrac.
While the housing bust was deeper in Arizona than New York, distressed inventory is drying up there as investors purchase foreclosed properties and convert them into rentals. New York state single-family home prices, which are 10 percent below their peak, increased 6.9 percent in November from a year earlier, CoreLogic said. Arizona values, 40 percent below peak, jumped 21 percent, compared with a 7.4 percent rise nationally, the Irvine, California-based company said.
Speed isn't the best way to judge the effectiveness of a state's foreclosure process, said Diane Thompson, attorney with the National Consumer Law Center based in Boston.
"It's also a question of what kind of system of justice we want in this country," Thompson said. "It's much faster to execute everybody that the police thought was guilty of a crime. It's faster, more efficient and would probably reduce the overall level of crime. But as a society we don't think that's an appropriate exercise of judicial authority."
Lenders in Arizona can auction a borrower's home as soon as 91 days after filing a notice of trustee sale. Borrowers often have little time or leverage to challenge lenders who improperly reject them for modifications and may never know whether the lender has standing to seize the home because it doesn't have to prove it owns the loan, Beverly B. Parker, manager of the consumer housing and public benefits unit at Southern Arizona Legal Aid based in Tucson, said.
"Yes, it's a much faster process here," Parker said. "But there has to be a balance. You can't give all the ammunition to one side and assume they'll use it right. They don't."