A few days ago, I posted an article discussing the future of bankruptcy filings in general around the Country. However, it appears that there is a more immediate force at work for Chapter 13 filings in New York State: the robo-signing foreclosure mess. While it was clear when the “scandal” broke that some homeowners would choose to defend foreclosures by forcing the lender to produce the original note, I assumed that for cases in which no such defense was raised, it would be business as usual in the foreclosure process. However, the New York courts are now requiring special affidavits from the foreclosure attorney in every action essentially attesting to the “quality” of the underlying paperwork. This has brought the foreclosure process to a standstill. While some actions are being started, only a handlful are being finished. In fact, in a 10 day period that I reviewed, only two new foreclosure sales were posted in Erie County.
The freeze on foreclosures can already be seen in local Chapter 13 filings. For March, there have been only about 75 Chapter 13 filings in the Buffalo Division. In March 2010, there were 153 Chapter 13 filings. This dramatic drop can only be explained by the foreclosure situation. My sources indicate that this situation will not improve for at least 6 month, and the foreclosure numbers will not get back to “normal” for 12-18 months. So we should expect the Chapter 13 numbers to stay down — way down — for a while.
Is this good news for homeowners? Absolutely not. The best time for a homeowner to file Chapter 13 is when the foreclosure action is just starting. At that point, the homeowner is only a few months behind, and the Chapter 13 plan payment will likely be affordable. If the foreclosure action is stalled for 2 years, the Chapter 13 payment will be much higher — probably far too high for most people. The reprieve will be temporary, and the homeowner will have few options. I think it unlikely that the banks will be looking to modify loans that have been stalled in the foreclosure process for two years.
The robo-signing problem has been overstated. Yes, there is a lot of lost paperwork out there, but let’s face it: very few homeowners are being asked to pay for a mortgage they did not actually sign. I fear this legal defense will do more harm than good in the long run for people who are behind on their mortgages.