With new foreclosure cases continuing to pour into New Jersey courts, administrators have taken a key step to unclog the legal system.
Lenders filed more than 49,000 new foreclosure cases here in 2013, the fourth highest total in New Jersey history, according to data from the state Administrative Office of the Courts. But even that significant figure lagged far behind last year’s astounding number of foreclosure dismissals — 83,500 cases.
The explanations behind the numbers are simple, but deciphering their ramifications is challenging even for attorneys close to the process. Court officials describe the change as potentially beneficial to all parties involved, but results may vary.
Seven years after the housing bubble began to burst, New Jersey has not gotten clear of the mess. The state has consistently ranked second, behind only Florida, in percentage of homes already in foreclosure or with mortgages listed as more than 90 days delinquent.
Municipal officials, lawyers, and housing counselors have all pointed to a related phenomenon: foreclosure cases never finalized, or judgments never taken to sheriff’s sale, with homes sitting vacant.
That dramatic wave of dismissals became possible once the court system automated its tracking of foreclosure cases, according to Kevin Wolfe, administrator of the civil practice division. The system flags those cases where there has been no action for a year or more, he said.
Notices go out to lawyers on those cases, giving them “30 days to file an appropriate pleading or a certification of exceptional circumstances, such as when a defendant has filed for bankruptcy,” said Kathryn Shabel, an attorney in Wolfe’s division. Without a timely reply from the plaintiff attorneys, the case gets booted, she said.
As the computerized system kicked in, that happened a lot last year, the court officials said.
“We cleaned out all the old deadwood,” Wolfe said. “The oldest of these cases go back to the 1990s, although most are more recent.”
While court personnel have not broken down the reasons for delays, many of the drifting cases were ensnared by changes in financial markets, Wolfe said. At the turn of the century, many institutions began selling mortgage-backed securities, which packaged large number of mortgages and were often divided among multiple investors.
Risky and Fraudulent
The problem was that after the deregulation of financial markets in 2000, many mortgages wrapped into these securities were risky, even fraudulent. Although ratings agencies like Moody’s and Standard & Poor certified them as safe investments, they were doomed from the start. And when the investments went bad, the foreclosures began. But then the paperwork went bad.
New Jersey is among 20 states that require courts to approve all foreclosures, while another four sometimes do. The other 26 states and the District of Columbia usually or always allow lenders to act on their own.
But it wasn’t just the volume of foreclosures that caused problems for New Jersey courts. Little more than 5 percent of defendants contest foreclosures. Here and elsewhere in the nation, though, enough irregularities surfaced in such cases that in December 2010, state Chief Justice Stuart Rabner ordered major lenders to demonstrate that their foreclosure practices are clean.
“It’s important that the judiciary ensures that judges are not rubber-stamping documents of questionable reliability,” he said at the time.
While Rabner’s actions covered all lenders that brought 200 or more foreclosure cases, he took particular aim at six big players: Ally Financial (GMAC), Bank of America, Citigroup, JP Morgan Chase, OneWest Bank, and Wells Fargo.
The big banks had been caught up in the use of false documents and testimony, so-called “robosigning,” in some foreclosure cases. Another issue was that major lenders rely on their private electronic mortgage registry rather than maintaining public records with county clerks. The private system, known by the acronym MERS, often lost track of which bank or investment group actually owns mortgages bundled into various mortgage-backed securities.
Rather than proceed case by case to address Rabner’s concerns, those big banks sought court approval for their internal practices. While they did so, new foreclosure cases slowed to a trickle during 2011 and the first half of 2012.
“Some of those 83,000 dismissals are undoubtedly coming back as new cases,” Wolfe said. “As a trend, what we’re seeing is bank attorneys being much more active” managing cases, he said.
In instances where supporting documentation for the initial foreclosure was questionable, it is often easier for an attorney to pull the case and start over, he said. But court officials have not determined that percentage, he said. Especially with mortgage-backed securities that have been sold and resold, the names of the plaintiffs may have changed, he said.
The automatic dismissals do not reflect cases where lenders and borrowers notify the courts that they have resolved the dispute, such as mortgage modifications or short sales, or decide to end proceedings, according to Shabel.
Last year, the court system reported 12,639 default judgments against homeowners, but another 7,231 “other” resolutions. “Other is much more likely a voluntary dismissal,” Shabel said, though many attorneys do not follow the proper procedure of listing a reason.
Essex County led in all foreclosure categories, with Ocean second in defaults and dismissals. But in a clue as to where mortgage negotiations might be happening in the wake of Hurricane Sandy, Monmouth was a close second for “other” case resolutions.
While it is hard to pin down the positive outcomes for borrowers, the court officials believe the threat of automated dismissal is helping to reduce the uncertainty that often besets people in foreclosure cases.
But one thing the automated dismissal system does not do is notify defendants who do not have attorneys, or municipalities trying to determine who is responsible for upkeep on a property.
Even if a court approves a foreclosure, the homeowner is still responsible for taxes and upkeep until a sheriff’s sale is held for the property, Shabel noted. That could come as a nasty surprise for borrowers who decided not to fight foreclosure and move.
Still, some legal observers, while surprised at the volume of recent dismissals, agreed the system could have positive effects on New Jersey’s foreclosure process.
“If the explosion of foreclosure cases caused that office to be bumped up in priority for technological improvements, it’s helpful to the system,” said Richard Steen, a Princeton attorney known as an expert in conflict resolution.
“I’m really happy to hear about that,” said Linda Fisher, a Seton Hall University law professor known nationally for her research on Newark properties left abandoned by foreclosure.
After learning of the wave of dismissals, Fisher checked court records for 34 Newark houses. Seven of the cases were dismissed late last year for lack of prosecution, though without prejudice, she said by e-mail.
Most show minor activity, but three have been settled, with homeowners allowed to remain in at least two of them. Banks withdrew another two cases while one went to sheriff’s sale. But another six are still open although there has been no action since 2012, according to Fisher.
While optimistic about the effects of the foreclosure dismissals, attorneys did not have a ready explanation for another trend, a drop in participation in New Jersey’s voluntary foreclosure mediation system even as new foreclosure cases surge.
In 2010, state court records showed 4,886 foreclosure mediations started. By 2013, that was down to 1,624. Almost as many mediation cases were ended last year, with or without settlements, as came into the system.
“It might be because the economy is better, or the policy of the mortgage companies has changed, I’m not sure,” Steen said.
There is some support for the idea that some homeowners have more alternatives to ease troubled mortgages. This month, the Federal Housing Finance Agency reported that the number of mortgages refinanced through its Home Affordable Finance Program has passed 3 million since 2009, most in the past two years.
After stumbling, federal officials revised the program to allow more borrowers with underwater mortgages to apply, and to exempt participating lenders from claims based on allegations of misinformation or fraud in the original loans.
The new total is close to a 2011 estimate by Barclays Capital of the number of homeowners eligible to participate under the looser rules, though still below the Obama Administration’s original target of 5 million refinancings.
In all, the FHFA said 89,315 New Jersey mortgages were refinanced through HARP from April 1, 2009 through November 30, 2013. For the first 11 months of last year, the total was 23,145. That FHFA report is available online.
Similarly, a national settlement of mortgage fraud allegations reached between five big banks, the federal government, and most states has yielded some benefits for New Jerseyans.
The Office of Mortgage Settlement, which monitors implementation of the deal, reported that the five big banks claimed to have provided $1.6 billion in various kinds of consumer relief in New Jersey through last June.
But only a minority of that enabled borrowers to keep their homes. Forgiveness on first mortgages accounted for only $323 million, with another $42 million attributed to forgiven presettlement modifications.
The largest single category cited by the banks, almost $735 million, was a courtesy among lenders, extinguishment of second mortgages, allowing legal actions to proceed more easily. Short sales, in which lenders allowed underwater borrowers to sell at current values, comprised more than $420 million of the relief.
The OMS is reviewing the bank reports to determine what should count toward their obligations under the settlement. So far, it has found some successes but some failures in meeting terms of the settlement. Joseph Smith, the former North Carolina banking commissioner who serves as the national monitor, said in December that he hopes corrective action plans will lead to “meaningful improvement in how the (mortgage) servicers treat their customers.”
The latest OMS table of the banks’ claimed relief in New Jersey is linked to an online map.
Meanwhile, as of the third quarter of the past year, 246,782 of New Jersey’s more than 1.8 mortgages had “negative equity,” meaning they worth less than their debt load, according to CoreLogic, an Irvine, Calif., financial and real-estate analysis firm.