Letter Urging Foreclosure Moratorium in Puerto Rico

The Honorable Ben Carson
Secretary
U.S. Department of Housing and Urban Development
451 Seventh Avenue, SW, Room 10148
Washington, D.C. 20410-1000

Dana T. Wade
General Deputy Assistant Secretary of Housing
U.S. Department of Housing and Urban Development
451 7th Street S.W.
Washington, D.C. 20410-8000

Re:       Extending the Currently-Existing Moratorium for Foreclosures on FHA-Backed Mortgages

Dear Ms. Wade:

We write on behalf of the New York City Bar Association to address your agency’s efforts to grant relief to Puerto Rican families with FHA-backed mortgages on their homes located in Puerto Rico. Pursuant to your letters dated September 11, 2017 and October 20, 2017, you have granted a temporary moratorium on foreclosures due to the extensive damage caused by Hurricane Maria. However, the current moratorium you have granted is set to expire on March 19, 2018. In light of the devastating damage caused by Hurricane Maria—which has caused ongoing power outages that have created unique difficulties for homeowners attempting to pay off their mortgages—we request that you grant a further extension of this moratorium for an additional twelve months. We understand that Senators Marco Rubio (R-FL), Catherine Cortez Masto (D-NV), Bill Nelson (D-FL), and Robert Menendez (D-NJ) have requested similar relief, and we join in that request.[1]

Your agency has already acknowledged that it has the power to grant similar extensions, and we believe that such relief here would be in alignment with HUD’s mission to “protect consumers” in Puerto Rico who—through no fault of their own—have been impacted by both natural disasters and financial crisis.[2] Moreover, we believe that this relief would prevent needless errors in the foreclosure process, avert potential foreclosure “rescue” scams, and benefit the federal government by preserving FHA Insurance Funds.

The Foreclosure Problem Requires Immediate Assistance

Hurricane Maria Has Substantially Exacerbated the Already-Existing Foreclosure Crisis

Home foreclosures were a significant problem affecting residential properties located in Puerto Rico even before the most recent hurricane hit. As of June 21, 2017, an average of 14 families lost their homes every day due to foreclosures.[3] From 2009 through 2016, local courts oversaw foreclosures on nearly 33,000 homes and, as of this past summer, more than 17,000 such homes were in the process of foreclosure in local courts.[4]

The recent hurricane has only exacerbated the problem. By December 16, 2017, “about one-third of the island’s 425,000 homeowners [we]re behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages.”[5] The data firm Black Knight, Inc. has discovered that “90,000 borrowers became delinquent as a consequence of Hurricane Maria.”[6]

This problem is both severe and unprecedented. Puerto Rico’s thirty-five percent foreclosure and delinquency rate—as of December 2017—is more than double what the national average was during the worst of the housing market collapse in January 2010.

The Originating Puerto Rican Banks Have Substantially Sold Off Their Mortgage Portfolio to Outside Investors

To their credit, the Puerto Rican banks that originated mortgages on the island have made some attempts to avoid foreclosures in recent years. According to the Associated Press, “local banks since 2009 have implemented more than 176,000 alternatives to foreclosure worth $19 billion, including restructurings and refinancing.”[7]

Now, however, it appears that many of the mortgages that these Puerto Rican banks held have been sold to third parties. As of June 2017, banks in Puerto Rico had reportedly “sold more than 70 percent of their mortgage portfolio on the secondary market.”[8] These mortgages appear to have been sold to outsiders who may not be so willing to accept restructurings and refinancing in lieu of foreclosures.[9]

The Outside Investors Who Purchased These Mortgages Have Been Aggressively Foreclosing on Homeowners in Puerto Rico 

According to a New York Times article from October 9, 2017, several outside investors have viewed the island’s recent economic troubles “as an investment opportunity.”[10] In brief, these outside investors have reportedly gone to Puerto Rico “in search of bargains” on “distressed real estate loans.” And as these outside investors have appeared on the scene, the number of foreclosure actions has spiked dramatically.[11] Simply put, outside investors have purchased distressed mortgages secured by Puerto Rico residential property for just pennies on the dollar, and are now seeking to collect the full amounts from their Puerto Rican mortgagor-homeowners. Although the current moratorium on FHA-insured mortgages has temporarily prevented these investors from moving forward with some foreclosures, Hurricane Maria has created a unique situation where homeowners are at an extreme disadvantage relative to those mortgage loan servicers seeking foreclosure, due to both macroeconomic forces and acts of nature that are outside of their control.[12]

Hurricane Maria Has Left Puerto Rican Families Vulnerable to Potentially Illegal and Erroneous Foreclosure Practices by Mortgage Loan Servicers           

In the wake of the most recent housing market collapse in the United States, it was revealed that certain mortgage loan servicers had engaged in illegal and improper behavior to force homeowners out of their homes. Various state and federal agencies conducted investigations into the issue, finding circumstances where mortgage loan servicers “improperly calculated loan balances, misapplied borrower payments, failed to correctly process escrow and insurance payments, and failed to properly investigate and make corrections in response to consumer complaints.”[13] Servicers have further engaged in the practice of “illegally foreclosing upon borrowers’ loans” and “selling loan servicing rights to servicers without fully disclosing or correcting errors in borrowers’ loan files.”[14]

There are currently indications that some of these same practices are happening in Puerto Rico, where there are numerous complaints that servicers have frequent internal miscommunications, misplaced documents, charged improper late fees, and generally given homeowners the run-around when they sought mortgage modifications.[15] Improper documentation appears to be an ongoing problem.  Moreover, some servicers have been accused of engaging in a process called “dual tracking,” whereby the servicers purport to pursue loan modifications (in order to take advantage of certain incentive fees offered by the federal government), while simultaneously pursuing foreclosures.[16] There are also reports of mortgage loan servicers sending foreclosure notices in English rather than Spanish, and placing notices of default in newspapers where they are unlikely to be seen. A review of the Consumer Financial Protection Bureau’s database reveals just a sampling of the numerous complaints that have been generated with respect to alleged mortgage foreclosure irregularities in Puerto Rico.[17]

We raise these issues to highlight the vulnerability of Puerto Rican homeowners at this point in time, not to generally disparage the mortgage loan servicing industry. We also note that, to the extent that any of these issues have historically been caused by error rather than fraud, this only serves to further justify the extension of the foreclosure moratorium.[18] HUD has already noted in the past that “borrowers affected by a disaster will experience difficulty in providing traditional documentation,” let alone the full set of documentation that is needed to contest a foreclosure proceeding.[19] We anticipate that these errors would only be compounded in the case of Puerto Rico, where—as of this writing—more than 400,000 U.S. citizens do not have electricity.[20]

The Expiration of the Moratorium Will Lead to a Surge of Foreclosures

Once the moratorium on foreclosures expires on March 19, 2018, “lawyers and housing counselors expect that [it will] trigger a surge in foreclosures.”[21] This has led to “confusion and panic” among Puerto Rican homeowners residing on the island.[22] Many commentators have reported that the power outages caused by Hurricane Maria, and various other social and economic factors, have created a unique situation where the island is poised to see a dramatic and destabilizing surge in foreclosures when the moratorium is lifted.[23]

A Surge in Foreclosures Would Further Depress the Puerto Rican Economy

It is no secret that, at this moment, the economy of Puerto Rico is deeply troubled, and that Hurricane Maria has severely exacerbated this condition. Families struggle every day; many people who would otherwise make timely mortgage payments are unable to do so, because they are spending a larger portion of their budget on power generators, and other expenses that are necessary to recover from a natural disaster. Many of them have even lost their jobs because of Hurricane Maria’s effects.

In short, these are not normal times. To allow a wave of home foreclosures to happen now would be both cruel and economically destabilizing.

Federal Guidance Could Provide Needed Relief to Struggling Homeowners

Extending the Moratorium on Foreclosures Would Provide Needed Relief to Homeowners and to the Federal Government 

In this letter, we are only requesting that the current moratorium be extended for a limited period of time to protect vulnerable Puerto Rican families from losing their homes during this temporary crisis. It would provide them the breathing room that they need to get back on their feet as the conditions in Puerto Rico improve, and it would help to stabilize their communities and lives during this time of crisis.[24]

Importantly, this relief would also benefit HUD. This is because, as HUD has previously noted, when foreclosures are prevented, it “not only allows families to retain homeownership, it also significantly reduces the financial impact of foreclosure claims against the FHA Insurance Funds.”[25] Therefore, an extension of the foreclosure moratorium would benefit both Puerto Rican homeowners and HUD.[26]

Federal Guidance Could Assist Homeowners to Remain in Their Homes

On August 16, 2004, HUD provided the following guidance to mortgage servicers who had been seeking to foreclose on homeowners who had been affected by natural disasters:

In addition to the moratorium, HUD strongly recommends servicing actions for homeowners whose properties were directly affected by the disaster. This includes such actions as special forbearance, mortgage modification, refinancing, and waiver of late charges. HUD also offers a partial claim program to help address problems of unresolved arrearages. Subsequent to the foreclosure moratorium, lenders are encouraged to consider alternatives to foreclosure such as pre-foreclosure sales and deeds in lieu of foreclosure if the homeowner is not in a position to “cure” the mortgage delinquency. (Emphasis added).

On April 11, 2013, HUD issued even stronger guidance, instructing that servicers must “make every effort to communicate with and assist affected borrowers in rebuilding or repairing damaged properties, minimizing delinquencies and retaining homeownership.”[27] In evaluating affected homeowners, servicers “must review the individual facts and circumstances of each case and take into consideration the adverse impact that property damage, uninsured losses, curtailment of income and extraordinary expenses related to the disaster are having on the ability of the borrower(s) to make on-time mortgage payments.” What’s more, “servicers must provide borrowers with forbearance and other loss mitigation alternatives” in appropriate circumstances, and “should suspend reporting of delinquencies to credit repositories for borrowers” who have fallen behind in their payments.

In light of the aggressive foreclosure practices that have been experienced within Puerto Rico, we request that HUD provide the same guidance that advises servicers that they must seek alternatives to foreclosure in Puerto Rico, must take into account the particular circumstances of Puerto Rican residents affected by the hurricane, and must refrain from reporting delinquencies to credit agencies.

In addition to the guidance outlined above, we further request that HUD provide guidance that mortgage loan servicers make every effort to meet with mortgagors that do not respond to their correspondence, rather than seeking default judgments against them. The hurricane has made communication on the island difficult, with many residents seeking temporary shelter elsewhere.

Finally, we request that HUD provide guidance to investors who purchased Puerto Rican mortgages at significant discounts. For these investors, we urge HUD to make a recommendation—in the strongest language possible—that loss mitigation, including mortgage loan modifications, should be a first priority and that investors should accept every modification they can manage. By purchasing mortgages under the current circumstances, these investors have already accepted that there is some risk of reduced payment. Indeed, that is why they were able to purchase the mortgages at “bargain” prices in the first place.[28]

Conclusion

This foreclosure crisis is a major problem in Puerto Rico. As mentioned previously, the foreclosure rate on the island is already more than double what it was at the worst point of the U.S. housing market collapse, and this appears to be a significant factor behind the current migration from the island. Although an extension of the moratorium is not a complete solution of this matter, it will at least grant some temporary relief to a limited number of homeowners in Puerto Rico who have been impacted by Hurricane Maria. We hope that the requested relief will give homeowners a second chance, and give them the space that they need to navigate the complex—sometimes Kafkaesque—foreclosure process.

We thank you for your cooperation, and look forward to working with you to provide foreclosure relief to Puerto Rican homeowners.

Respectfully submitted,

John S. Kiernan
President, New York City Bar Association

CC:
New York Congressional Delegation
Representative Luis V. Gutierrez
Representative Darren Soto
Representative Joyce Beatty
Representative Norma Torres
Representative Jeb Hensarling
Representative Maxine Waters
Representative Sean Duffy
Representative Emanuel Cleaver
Senator Marco Rubio
Senator Catherine Cortez Masto
Senator Bill Nelson
Senator Robert Menendez
Senator Mike Crapo
Senator Sherrod Brown
Senator Tim Scott
Donald H. Layton, CEO, Freddie Mac
Timothy J. Mayopoulos, CEO, Fannie Mae