Title: The ‘Systematic Fraud’ Behind New York’s Foreclosure Process

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David Furst: It's The Brian Lehrer Show. I'm David Furst, in for Brian today. Thanks for being with us. Good morning. Right now, we're going to dive into the results of an investigation from the WNYC and Gothamist newsroom with consequential results for New Yorkers who have lost their homes due to foreclosure. WNYC and Gothamist housing reporter, David Brand, and NY Focus Albany bureau chief, Chris Bragg, investigated claims of systemic fraud and theft in New York's foreclosure auctions committed by big banks and 14 law firms representing them in court.

In the process, they found that these firms used a disputed method to tabulate interest on properties that may be in violation of state law. This calculation process benefited mortgage investors but deprived New Yorkers of millions of dollars in additional money at foreclosure auctions.

While investigating how these calculations went unscrutinized, they uncovered a system of patronage within New York's judicial system, especially regarding appointments of court referees tasked with overseeing foreclosure auctions. These discoveries led New York State Senator Zellnor Myrie to introduce new legislation imposing consistent standards on foreclosure auction sales. David Brand and Chris Bragg join us now with more on their reporting. David and Chris, thanks for being here.

David: Thanks for having us.

Chris: Thanks for having us.

David Furst: David, this investigation gets deep in the weeds of foreclosure law, so I'm looking for a helping hand here. To help us understand, can you start with the woman whose case prompted this investigation? Introduce us to Barbara Small and tell us how she lost her home in Flatbush.

David: Sure. Barbara Small is a retired postal service worker. About 20 years ago, she and her father bought a three-family home in Flatbush. It was an investment. He was living out his retirement there. They had a tenant who was renting two units in the building. Her father then got sick. He had Alzheimer's. The tenant stopped paying. She says she wasn't really aware of that because her father said everything was under control. It turns out she was in some serious financial distress, so the financial institution that controlled her loan filed for foreclosure. She tried to fight it, to stop it. She wasn't able to.

She eventually lost the property. It was sold at a mortgage foreclosure auction in Brooklyn's Supreme Court. There was some money left over following the sale because it sold for more than the debt and all of the related interest and fees that were still on there, but the allegations here are that there should have been more money left over for her, tens of thousands of dollars more. She has an attorney who filed a lawsuit against the various financial institutions involved in the transaction and trying to get that money back, and we wanted to find out just how often that might be happening.

David Furst: David, you spent some time on-site at these foreclosure auctions. What is it like? What can you tell us about the court process?

David: It's a weird real estate world that few people really see, and it's taking place every single day in one of the Supreme Court houses in New York City, one of the five, and then all across the state as well. Groups of investors will hit these auctions that take place inside courtrooms and other parts of the state. It could be outside on the courthouse steps. Homes will come up for auction. They'll bid, or maybe they won't bid. It'll get reverted back to the lender, the financial institution that has a loan, and they can last just seconds. You go up there--

It's not for outsiders. I've seen people who have gone to their first and have tried to bid on a property, maybe it's a friend or a family member's property, and by the time they get up to the bar to try to bid, bidding's closed. It's a very insular world, and millions of dollars of real estate are being transferred every single day in New York City.

David Furst: About how many homes are foreclosed upon each year in New York City?

David: We got some data from the real estate company, PropertyShark, and they kind of send people to all of these foreclosure auctions. They're a service that investors use, or potential speculators who want to buy homes use. They sent me back data showing that there was more than 600 one and two-family homes sold at foreclosure auction in New York City alone last year.

David Furst: I want to get back to Barbara, David. How much did Barbara receive from the foreclosure auction, and how was this number calculated?

David: Ultimately, the difference was more than $200,000, but there were creditors, other attorneys, and other fees that she owed, and so she said she made off with about $100,000 after all was said and done. Because of the problem that we were looking at here, it could have been about $24,000 more than she got.

David Furst: Now, according to your reporting, court records showed that the bank that issued the foreclosure, that they used the judgment amount to calculate the interest Barbara owed. Judgment amount. Can you explain this legal term for us?

David: This is the crux of it. All of this, it's such a complicated system, the mortgage-backed security system and how loans are packaged and sold off to investors. There's the initial lender, and then there's major financial institutions serving as trustee. Then the money passes through to investors, and then there's the loan servicer, and then there's the attorneys that are representing all of these financial institutions. Basically, to take it back to basics, before a home can actually be foreclosed on and sold and taken away from a homeowner and sold, a judge has to actually approve that.

The financial institutions that have the loan have these attorneys who will calculate how much is owed in the unpaid balance of the mortgage, the interest that is accumulated up to a certain date, and other fees. They will call that a proposed judgment amount, which they'll submit to the court and needs to be approved by a judge in an order, like, yes, this is the judgment amount, and this is the judgment of foreclosure and sale. From the time of filing that motion to a judge actually signing off on the motion can take months or, in some cases, years.

I was looking back in Barbara Small's case, it was about 18 months. During those 18 months, interest is still accumulating, and that issue here is what amount of money should that interest be accumulating on? We found the attorneys working on behalf of these financial institutions are doing is calculating interest during that period before a judge actually makes an order on the proposed judgment amount.

That what's the crux of some lawsuits that an attorney has filed on behalf of former homeowners is that they should be calculating interest on just the unpaid principal because the judge hasn't actually issued an order yet, and because of state law that says you can't charge compound interest on residential loans, and explicitly one and two-family residential loans. Those are two very different numbers. The judgment amount is much higher than the unpaid principal alone. The result are these large discrepancies between how much people are getting charged and how much they would be charged if the institution had used a different calculation method.

David Furst: David, I feel like I need an attorney with me just listening to you.

David: Yes, I know. This is some complicated stuff, trying to break it down. I hope that made sense. Basically, the result is interest is being calculated on a higher number in many cases, and we found, Chris really led the charge on this, more than 7,000 cases we identified. Then other times, often in the same courthouse in New York, maybe in Brooklyn Supreme Courthouse, two mortgage foreclosure cases, two different ways of calculating interest that homeowners owe. What it comes down to is how much they end up owing could depend on the financial institution and the attorneys, and fortune, basically, bad fortune or good fortune.

David Furst: Chris, I want to hear more from you on this. Why have Barbara's lawyers asserted that this method of calculating interest is illegal?

Chris: There's something in state law basically saying that you're not allowed to charge what's called compound interest, interest on interest on a loan given to a one or two-family home. I think that's the main law that's being cited. Then there's also a document that was issued by the Office of Court Administration, which oversees the state court system. That document says that you are supposed to calculate interest based on the principal balance, which is the lender-friendly kind of method. There's definitely some evidence that principal balance should be used, but obviously, as we found over and over again, it's not being used.

David Furst: We are speaking with WNYC and Gothamist housing reporter, David Brand, and Chris Bragg, the Albany bureau chief at the news site, New York Focus. We're talking about their investigation into how interest rates are calculated during foreclosure proceedings and how that may have deprived people who were already losing their homes of thousands of extra dollars. We have a caller right now who wants to join this discussion. Adam in Manhattan, welcome to The Brian Lehrer Show.

Adam: Good morning, gentlemen. I have been attending these foreclosure sales just about every day for the past 22 years. I've won over 1,000 of these auctions, intimately involved in every aspect of the process. I am astounded. I am so impressed by the caliber of the research done by these reporters, who I assume did not have any background in this before. You did a spectacular job, and you hit on a real pernicious problem, and you explained it beautifully, and you were on point and correct.

However, what you uncovered is actually only the tip of the iceberg. In addition to judicial foreclosure, which is what your piece focused on, which means foreclosure actions that, as you noted before, have to go through the court and receive the imprimatur of the judge before they are sold. There is a parallel procedure in New York State, which is applicable only for cooperative apartments, co-ops, which is called nonjudicial foreclosure. In those types of sales, there is no oversight whatsoever. There is no judge, there is no referee, there is no court process at all.

In order to sell the property, all the lender has to do, or the creditor has to do, is send literally two notices to the debtor, say you're in default, and then immediately they can go to the courthouse steps and sell the property. There's no oversight at all. It is there that the real corruption takes place. Most of the firms who do this, do it straight, do it honestly, but there are a couple of known among those of us who bid at these sales, bad actors, really cheating, scoundrel law firms who act on behalf of creditors and steal not just monies from inflated interest, but the entirety, the entirety of the surplus money that would otherwise go to the debtor after the sale.

This is unreported, but well known within the industry that I am in, of people who bid on these properties, and because state law allows these sales to occur non-judicially, there is no oversight. There is no judge. There are just unscrupulous lawyers who literally steal the entirety of the surplus money from people who are losing their homes or often nominal sums. These are people who are often either elderly, sick, indigent, dead, estates, and these lawyers take advantage of them and take the entirety of the surplus. That really needs [crosstalk]

David Furst: Adam, thank you very much for your call and for joining this discussion. David Brand?

David: Adam, we got to talk off the line because this is great insight, it sounds like you have, and thank you for what you said about our investigation. What you're talking about right now is something that we became aware of as part of our investigation and have started looking into because I was pretty surprised to find out that these are happening without-- If you think there's confusion and problems in the process that's going on in courts, that this can be happening for co-ops and condos in law firms' offices. I thank you for raising that, and I would love to talk with you sometime later today or in the coming days.

David Furst: Chris, this investigation goes beyond Barbara, the woman that we've been talking about earlier. Her lawyers are calling this systemic fraud and theft. Can you take us into the data that you examined, and did you find this to be a systemic problem?

Chris: From Barbara's lawyer, we knew maybe about, I don't know, 15 or 20 examples of this issue, and we really wanted to determine how widespread it was. We hired a data scraping expert who is an expert in writing code, knows how to do things vastly beyond my capabilities, certainly as a journalist and most journalists, and it produced some pretty incredible results. This person came up with over 10,000 reports of sale from foreclosure auctions.

We eventually honed in on about 7,400 of those involving 14 law firms that routinely represent a large number of foreclosure cases, and we found ultimately that they use judgment amount to calculate interest over 95% of the time. It was some pretty astonishing results. Then we had to go through each of the 7,400 cases one by one to fact-check each one, which was a ton of work. Even so, that 7,400 number might be just the tip of the iceberg because there's all these paper court records in the system that we had no way of data scraping. There could be an even bigger number than what we're talking about.

David: I want to just shout out our colleague, Niamh McAuliffe, who helped us and did a lot of that data analysis work. Without that work, going one by one through all of these reports, we wouldn't have the numbers that we have here. This is hard data.

David Furst: All right. I want to play a clip of Senator Zellnor Myrie. As a result of your investigation, State Senator Zellnor Myrie has introduced legislation to impose consistent standards on foreclosure auction sales. First of all, Chris, what would this legislation do?

Chris: It would basically standardize the process. Currently, as David mentioned, there's two conflicting methods that go on within the court system. Which one is used is basically random, depending on which law firm happens to be representing the lender, and so the person who was foreclosed upon gets more or less money based on essentially arbitrary random factors. What Myrie's bill would do is make it so there's a consistent form that all referees have to use to calculate interest. It would also clarify that principal balance and not judgment amount should be used as the basis for that calculation.

David Furst: David Brand, you spoke with Senator Myrie yesterday. Let's listen to a bit of that conversation.

Senator Zellnor Myrie: The unfortunate reality is that the opportunity of ownership, the opportunity to put down roots, is something that many Black and brown New Yorkers have aspired to, have acquired, many immigrant New Yorkers have aspired to, have acquired, and they were the first in line to be targeted by predatory lending once they saw the opportunity. Like the neighborhood that I grew up in and that I have the honor of representing now, times changed, the land became more valuable, there were more real estate opportunities.

Instead of doing that in conjunction with the community, what we saw in the foreclosure context, and as your story pointed out, in many instances illegally, it was a targeting of those homeowners to get them out and make money off of their pain. This is something that we really have a duty to address.

David Furst: David, Senator Myrie is connecting the dots between this investigation and some of the biggest housing issues, not just in New York, but across the country. As a housing reporter, you're very familiar with a lot of these issues that he's raising. How do you understand where your investigation fits into the broader picture of New York City's housing crisis today?

David: What Myrie is talking about there a lot is looking back at the subprime mortgage lending crisis of 2008, where thousands of people were losing their homes to foreclosure, and a lot of them had mortgages they couldn't afford at, he said, predatory lending at very high interest rates that they couldn't handle or floating interest rates that they couldn't keep up with. The preponderance of homes that were lost to foreclosure were owned by people of color, especially Black homeowners in Southeast Queens, Central Brooklyn. You look now, almost 20 years into the future, the areas of the city that are seeing the most foreclosures, again, are those very same neighborhoods, Southeast Queens, Central Brooklyn, parts of the Bronx.

In fact, the Center for New York City Neighborhoods, it's a network of nonprofit homeowner advocacy groups and attorneys, just came out with a report that we reported on last week, that new foreclosure filings have almost doubled in the first six months of this year compared to the last six months of 2024. Not only are we seeing foreclosure filings and homes lost to foreclosure in those same parts of the city where the mortgage crisis hit the hardest, we are now seeing even more foreclosure filings, which is an indication that something's wrong here. A lot of people can't afford their mortgages.

David Furst: I want to finish with a short clip of Barbara Smalls, who we've been talking about. You and Barbara visited the location where her house was. What sits there now?

David: I mentioned it was a 3-story pre-war brick home previously. It is now a 7-story, 18-unit apartment building, sticks out like a sore thumb on this block of brick homes, but it's worth so much more than it was 20 years ago, and definitely so much more than it sold for at auction and what she received from that sale.

David Furst: Here's a clip of Barbara Smalls from that moment when you visited the location.

Barbara Small: It was supposed to be my legacy. My dad tried to help me create a legacy for myself and my kids, and I have nothing really to give them, to pass on.

David Furst: David and Chris, hearing this clip of Barbara, how do you think about the impact of what you both uncovered in your investigation? You want to take that one, Chris?

Chris: Yes. These are real people that lost roughly between, in some cases, hundreds of dollars. In some cases, we found I think the highest was $115,000. There's people that would have gotten more money. There are people potentially that also might have paid higher income taxes because of this issue. These are people already facing a very serious financial crisis in losing a home, and it's a double whammy if, in fact, they were cheated out of even more money.

David Furst: On top of what they're already dealing with.

David: Right, and I think Chris makes a great point. What we've talked about here, it's arcane, a lot of math, even you said I need an attorney to understand. That's definitely the case here. I think the top line here, the thing that we have to take away from all of this, is that maybe this is illegal, maybe it's not. That's not for us to say, but the fact is there's two different calculation methods going on across New York right now. Sometimes it can benefit the homeowner, but many more times often, we found it's benefiting the investors in the mortgage, the financial institutions that control that mortgage. Not only are people losing their homes, they may also be losing out on tens of thousands of dollars in addition to that.

David Furst: We're going to have to leave it there for now. I'm sure there's going to be much more to come from you on these topics. WNYC and Gothamist's housing reporter, David Brand, and Chris Bragg, Albany bureau chief for NY Focus. Thank you both for joining us.

David: Thanks a lot.

Chris: Thank you.

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