NYC NOW - Big Banks Accused of ‘Systematic Fraud’ in New York Foreclosure Auctions

Episode Date: December 3, 2025

An investigation by WNYC and New York Focus found lenders are using a disputed method of calculating debts in thousands of foreclosures and taking money from hundreds of former homeowners.

Hey, I'm Jene Pierre. This is NYC Now. And today, we start with WNYC's housing reporter David Brandt, out in Flatbush, Brooklyn, talking to a woman named Barbara Small. It's that one over there. That's 308. Small owned a three-story house on Lyndon Boulevard. She and her father had fixed it up. He lived on one floor. They rented out the others.

Then her father died. And she lost a house to foreclosure in 2019 after a tenant stopped paying rent. This is the closest I've been to it since this happened. I don't really come. I got like a pit in my stomach when I go over there and look at it. My father probably rolling over in his grave. Tell me about that. It was mainly his project.

So I got the mortgage. He lived in it and I spent a lot of time here with him. Then he caught Alzheimer's and was forgetting stuff, tenants. They weren't paying him the rent, so it was a struggle. After years of fighting to keep her house, Small's mortgage lenders sold it for $1.3 million in a foreclosure auction. After all was said and done, she got just around $100,000 of that money. But what she didn't know at the time was that the lender and its attorneys had increased

the amount of money she owed in interest by tens of thousands of dollars. Her lawyer says they did it by using a calculation that violate the money. state law. And an investigation by WMYC and New York Focus has found that the practice is widespread in foreclosure cases across the state. We're talking about thousands of cases where people are getting gouged. So we're talking about potentially hundreds of millions of dollars here. So, David, you brought a friend? That's right. I've been teaming up on this story. Chris, you want to introduce yourself? Yeah, hey, I'm Chris Bragg. I'm an investigative reporter at New York Focus. Welcome, Chris. We're happy to have you. And I understand that you guys don't do a lot of bar hopping, but you hang out at foreclosure auctions. Yeah, I've been to a few now. Attorneys who represent homeowners facing foreclosures suggested I go to observe the court process. Definitely a side of the housing market that not many people see. The one in Brooklyn is held on the first floor of the Supreme Court building. Picture a dimly lit hallway, shades of beige and gray.

dozens of investors sitting on old benches talking before the auction and little clicks. Now, you're unfortunately not allowed to record inside the courtroom. But here's how it works. So let's say a homeowner for whatever reason can't afford to keep paying their mortgage. Their lender will foreclose. And then a judge will appoint what's called a referee to oversee the sale of the home. The house gets auctioned and the bank takes what it's owed. And if there's any money left, sometimes there is, sometimes there isn't, the person who's losing in their home is supposed to get that.

And Chris, how many homes are auctioned off in foreclosure each year? Yeah, so just last year, there were more than 600, one or two family homes sold at auctions in New York City. And a lot of those are in predominantly black and brown neighborhoods, places like central Brooklyn, southeast queens. So overall, we're talking about millions of dollars in a lot of dollars. state that's passing through these courthouses in each county within the five boroughs. And in this process, there's long been problems of corruption and incompetence in how foreclosures are handled. Just to give one example, a 2013 audit conducted by the state controller, examined referees handling

of foreclosures in Brooklyn, and found that nine out of ten, in fact, had submitted inaccurate paperwork. Now, you both started looking into another issue with how these auctions are handled. What did you find? Well, it's a lot more subtle than what Chris was just talking about, because it has to do with how banks and their attorneys calculate how much interest a homeowner owes even after the foreclosure sale. Even to lawyers, this is a little confusing because it's involving math, because lawyers are terrible at math. I spoke with an attorney named Mark Anderson. He and his legal partner, Charles Walshine, have represented hundreds of people in foreclosure cases. and they were the first to notice this issue. One of the things that we were seeing when reviewing some of the court documents was that the numbers were a little off.

And at first, you don't really realize why it's off because they don't specify their math. And everyone just believes it. All right, I'm going to explain this calculation. Yeah, please do. What we found is that how this number gets added up has affected thousands of New Yorkers. So before a house is foreclosed on and then sold, a judge has to ask. actually allow it to happen. That means the lawyer for the lender, like a bank, submits this form describing how much the homeowner owes. There's a legalistic term for that. Say it

with me because it's going to come up a few times in this story. All right, you ready? Yeah. Judgment amount. In the case of Barbara Small, who we heard earlier, that judgment amount added up to about $852,000. But this is annoyingly complicated because that doesn't include all the interest. Lenders are allowed to add more interest to account for the period of time between when they ask for that judgment amount and when the judge actually approves it. And that can be a really long time. Sometimes there's a very big gap more than three months. Sometimes it's three years. This is Charles Walshine. He's Anderson's law partner. Don't ask me why. It takes that long. I mean, you can, but that's the phony bologna part. At least that's when they say the

phony bologna parts starts. Because Anderson says that a lot of these lenders and their attorneys don't calculate that additional interest the right way. They're doing it completely wrong to the point of it being illegal. Illegal how? Well, many of these banks, many of their attorneys, they'll take that judgment amount we talked about, and then they'll apply interest to that number. Which is not what you're supposed to do.

Remember, interest has already been applied when that judgment amount was decided. Anderson says you can't charge it again. That, in his view, is artificially inflating how much the homeowner, or in this case the former homeowner, owes the bank. It's interest on interest, which is illegal. He says what they should be doing and what the law requires them to do is only apply that additional interest to the amount left on the homeowner's original loan. Which is a staggeringly lower amount. So, Barbara Small, you're saying this happened. to her, her lender and her lender's attorneys charged her more in interest, then they really should have.

That's what Anderson is arguing. And yes, she was charged using this higher calculation method. And what's the difference in her case between these two calculations that you're describing right now? Well, if the interest had only been charged on what she still owed on her mortgage, she would have gotten about $24,000 more. That's a good chunk of change. Yeah, it is. So you're taking someone who's already down on their luck, obviously. having financial trouble, if your house is being foreclosed on, you are by definition in a bad financial situation. And then what these attorneys are saying is that the lenders and their lawyers are taking even more money from people who are already struggling. Yeah, that's right.

In cases where there's money left over or should be left over, yes. And Anderson has filed lawsuits in federal court accusing lenders and their attorneys of inflating the interest calculations to steal from homeowners. He says it's happening on a systemic level. And he says there are 14 law firms that handle a significant number of foreclosures that are doing it. So, Chris, what does state law say about how these numbers should be calculated? Yeah, state law prohibits charging interest on interest or what's called compound interest on residential loans. So it very explicitly prohibits that for any one or two family home. And actually in a 2015, a panel of Appellate Corps, judges upheld the law. And, you know, the court system's own guidance for doing this is much

clear. The state court system actually has a template that explicitly says interest should be calculated on unpaid mortgage and not the higher judgment amount. All right. Two questions, David. How does something like this happen and how often is it happening? Well, if you think about how hard this was just to explain the difference of one number in this complex calculation amid all these documents. Think about how hard it is to catch, especially if you're someone who's losing their home. It's probably chaotic.

You probably don't even have a lawyer. Even when you show this to lawyers, they have no idea. Even lawyers that do this area of practice. Now to your question about how often this is happening, we wanted to know an answer to that question too. And so we hired a data scraping expert who wrote code and found and pulled a specific type of court filing from thousands of foreclosure.

cases. These are the cases that were handled by the 14 law firms, Anderson says, he found doing this, including the five that he and his firm have targeted in their lawsuits. Court records show that these 14 law firms handle a significant chunk of foreclosure cases in New York. We identified over 7,000 reports that these law firms filed in New York over a 12-year period, and what we found is about 95% of them used a calculation method Anderson says is illegal. How many of those lost out on money like Barbara Small did? We found more than 400 cases of people like Barbara Small, people who should have received more money than they did. But there's another kind of potential victim here in about 6,800 cases we reviewed, where people's income taxes may have been wrongly inflated. Because even if there was no money left over from the sale of your home,

if the bank inflated the amount of money you owed and that you didn't pay back, That's the kind of thing the bank may report to the IRS, and that would show up as money you owed on your income taxes. We're talking about thousands of cases where people are getting gouged. So we're talking about potentially hundreds of millions of dollars here. So not all lenders and their attorneys do this, but some do. Some law firms do this the way court guidelines and the way Anderson says it should be none. There's a lot of inconsistency. So what that means is if you get foreclosed on, how much you owe depends a lot on what law firm your lender hires.

So the lenders and law firms that do do this, what do they say about why they do it this way? So going back to Barbara Small's case, we reached out to the lawyers for the lender, New York Mellon, the loan servicer Shell Point, and the law firm that handled the case, Logs Legal Group, which is also known as Shapiro, DeCaro, and Barak. They all declined to comment on the claims or explain how they calculate interest. We also reached out to the other 13 law firms we reviewed as well, and none have responded to our detailed requests. But in court documents, attorneys for Shapiro and Mellon did argue that judges approved the method and that Small essentially did too when she applied for and received the leftover money. Now, we mentioned that the court system has really clear guidance showing you're not supposed to calculate. interest based on that higher judgment amount, but in a separate case, another law firm

representing lenders pointed to different guidance from the state court system that they say does allow them to calculate interest this way. But if you read it, that isn't entirely clear at all. So the question is, which method is right? What is the correct way to add up how much is owed? Coming up, how does Barbara Small feel about all of those? If it's something that's owed to me that I'm entitled to, then I should get it. And we talk to the person appointed by the court to oversee the sale of her house.

If they're doing something that does not comply with the law or the rule, then that's obviously inappropriate. And if there are cases where that happen, then it should be revised. All right, time for a podcast recap. Podcast recap. Podcast recap. All right, so let's run down a list of things that we know so far. So lenders and their attorneys, they're using these higher figures to charge people more interest when they lose their homes to foreclosure.

And this attorney you spoke to Mark Anderson, he says it's illegal. In fact, he's filed lawsuits against lenders and their attorneys in federal court. You guys have found that this is how. Happening in thousands of foreclosures. In Barbara Small's case, she's out of like $24,000, and I know she could use that money. She definitely can. If it's something that's owed to me that I'm entitled to, then I should get it. She described going through a lot before she lost the house.

A tenant stopped paying rent for over a year. She says she hired an attorney to help her work out a loan modification. And then that attorney ran off with the money. He's since been disbarred. and her dad was very sick. And the bank wasn't really working with me. He was trying to get a modification on it, modified the loan, and the bank wasn't cooperating.

Now, when you go to her old address, this pre-war brick house she had is totally gone. It's been replaced by this very tall, very narrow apartment building. We're looking at what? One, two, three, four, five, six, seven families? It was a three-family house. I checked the rents on the place, on Street Easy, I saw that two-bedroom apartments were going for over $3,300 a month earlier this year.

That's expensive. The building that's there today is way more valuable than what was there before, and the money that small got after she lost the place. It was mostly my legacy. My dad tried to help me create a legacy for myself and my kids, and, you know, and I have nothing really to give them, you know, like to pass on. Does it make you angry that this happened? Of course it does. Of course it does. Because. They weren't willing to help me. They weren't willing to help me, but yet, they're holding on to money that I'm supposed to get. Now, we've mentioned that there are these people called referees who oversee foreclosure cases.

But one thing we haven't talked about in detail is the role they play in vetting the numbers that lenders provide. That's their job. They're appointed by judges to make sure our foreclosure is handled fairly and properly. But the court records we've looked through suggest they don't give them. the paperwork they get from banks that much scrutiny. So I called up the referee who handled the foreclosure on Barbara Smalls' house. His name is Jeffrey Dinawitz. Do you remember this case?

I may remember it. When I say that, I do remember a case in Brooklyn. I keep copies of everything. So I can tell you all the numbers. I can even tell you how we calculate the amount owed. You might recognize Dinowitz's name because he's also an elected official. He's represented a part of the Bronx and the state assembly for over 30 years. Wait, so you're telling me a member of the state legislature is processing and signing off on foreclosures.

How common is this? Yeah, it's actually pretty common. Going all the way back to the days of Tammany Hall, there's been a big problem with patronage in New York City. And that patronage system today really does survive within our judicial. system. That's something I've been reporting on for years. All right, Chris, break it down for us. In much of New York City, state Supreme Court judges are essentially selected by county Democratic Party political machines. And after those judges went election, it's pretty

common for them to then grant appointments to lawyers who are connected to the same political machine. A referee appointments can be kind of a side hustle for politically connected attorneys to make some easy money by overseeing these foreclosure auctions. And that's true even sometimes when they wield a lot of power. In the case of Jeff Hedinowitz, he's an influential member of the Bronx Democratic Party, and he actually helps run the annual judicial convention where judges are selected. He also happens to be the former head of the Assembly Judiciary Committee, which basically oversees New York's court system. How do you get the appointments for referee? These are POT. It's called POT 36 appointments. You get your name on a list.

and people get appointed. How do you personally get them? Do you know specific judges will do it? No. I don't, I, I, I, some of the judges know me, obviously, but I've never once asked any judge to appoint me. So do you do the calculations as a referee, or did, especially in this case, did the lender's attorneys, did they give you the forms and you sign off on it?

or do you actually do the calculations? I never, never rely on the numbers given by the plaintiff. In a foreclosure case, the lender, like the bank, is the plaintiff. Because they're an interested party. And while I'm sure in almost all cases, people are honest, but you never know. I don't know. So I do the calculations myself. But he said he was not aware that there could be a problem with the numbers these

banks' attorneys are starting from in the first place. Right. So a referee could be making sure that two. plus two equals four. But if one of those numbers isn't supposed to be two, you're not going to catch that if you don't know. Exactly. Did Office of Court Administration ever, like, give guidance to you when you became a referee or in the past years being like, this is how this should be calculated? Look for this problem or look for this type of calculation. That's incorrect. No, the first time I did this, another lawyer basically showed me how to do it.

I mean, how else do you learn to do things? Somebody shows you. Now, I want to be clear, Dinawitz did not weigh in on whether these calculations are being done wrong. But he said if the banks and their attorneys are using the wrong number, that needs to be corrected and that people like small need to get their money back. If they're doing something that does not comply with the law or the rule, then that's obviously inappropriate.

And if there are cases where that happened, then it should be revised. I mean, people are struggling enough as it is without having to, you know, get less than they're entitled to from the any surplus that may be available. I mean, there should be uniformity, obviously, and how these things have done. What do you think that might look like? Well, I think it ought to be made clear to everybody, so there's no ambiguity. and certainly, certainly a defendant in such a case who's obviously going through a hard time in the first place should not be further disadvantaged by losing more money than they might. Chris, who would be responsible for making sure there is uniformity in how these calculations are made?

Well, you would think it would be the state court system, the agency that oversees the court system. that's called the Office of Court Administration, which is responsible for overseeing judges and referees in New York. And as we mentioned before, the state's own guidance says that you're supposed to use the smaller number here, the amount that the homeowner still owes on their loan. Now, in court filings, the banks and their attorneys have disputed that. They actually say that the court's guidance does allow them to use the larger number, the judgment amount, to calculate interest. But, again, the Office of Court Administration, which oversees the system, could clear this up pretty quickly an issue and explicit rule as to which type of calculation method should be used. We have reached out to the court spokesperson Al Baker to ask what the court's stances on this issue. And he has cited the ongoing litigation that Mark Anderson filed to say that he can't comment.

So, David, what could be the fallout if Anderson is successful in this lawsuit? It could be huge. It could really change the way interest is calculated in all future foreclosure cases statewide, and it could possibly give former homeowners a chance to challenge their debts from past foreclosures. In our complaint, we're alleging that on top of, you know, just actual damages, we're charging them with a number of different allegations, which include deceptive acts by an attorney, which is a criminal statute. and the people that are damaged by that, they're actually entitled to triple the amount that they were damaged. So in that scenario, if Barbara Small was owed $24,000, she would be owed $72,000. But then on top of that, we charge them under RICO statutes because the money that the bank

received was wired out to someone else, which is a violation of wire fraud. And then there's also a situation where, you know, there's the Fair Debt Collection Practices Act where they're misrepresenting the character of a debt. And so there's just untold number of violations here. And for reasons unexplained, they've been able to get away with it. And, you know, the only thing that I can think of is that they just found that no one cared. Again, the lenders and their law firms are fighting this. They say what they're doing is legal and sanctioned by the state court system.

But for people like small, they just want some accountability here for what they say happened. So what's it like on top of all this, you find out there's more money out there for you? It's like a light at the end of a tunnel. I've been through so much. I've been through a lot. And maybe this is God's way saying, you know, let me help you a little bit because you've been through so much. You know, that's how I feel. David Brand, Chris Bragg, thanks so much for sharing the story with us.

Thanks a lot, Jenae. Thanks so much, Jene. And thank you for listening to NYC now from WNYC. I'm Jenae Pierre. Enjoy the rest of your day.