Under Water: Brooklyn Residents Battle JP Morgan to Keep Their Homes

Home Brooklyn Life Under Water: Brooklyn Residents Battle JP Morgan to Keep Their Homes

By Stephen Witt

Hundreds of Brooklyn residents are facing eviction for unpaid water bills. The city is acting aggressively to recover the delinquent debts, and has transferred servicing contracts to a collection agency run by JPMorgan Chase. Now affected residents are facing thousands of dollars of additional fees and interest charges and the prospect of losing their homes.

“Most of the homeowners we see who are affected by this are seniors and people with disabilities,” says Meghan Faux, a lawyer with South Brooklyn Legal Services, a non-profit agency that advocates for low-income Brooklyn homeowners. “Most of them own their homes outright.”

City water and sewage rates have increased 60% in the last five years, and the Department of Environmental Protection has begun moving aggressively to chase down bad debts. The prospect of eviction for non-payment of water bills is a new one in New York, following a 2007 City Council ruling that authorized the sale of such debts to collection agencies.

Previously, water bills could only be tacked on to unpaid property tax liens. Now unpaid water bills can lead to foreclosure after just one year. While it remains unclear if any homeowners have been evicted for non-payment of their water bills, Xspand has moved aggressively in the past on unpaid property tax bills, and the company’s website lists a number of New York residential properties for auction.

Environmental Protection Commissioner Cas Holloway says the water lien legislation is necessary to prevent future rate increases.

“I’m sure that you agree with the proposition that people who can afford to pay their water bills should pay,” Holloway said in testimony before the City Council earlier this year. “Every dollar we can’t collect because those who can afford to pay won’t, is another dollar that we’ll have to make up through future rate increases.”

Holloway said the legislation helped the city recoup a total of $185 million in 2008 and 2009, the equivalent of an additional 7.9% in rate increases. He added the legislation had reduced the city’s backlog of unpaid water bills to around $58 million as of May 2010.

Locations of homes on the water lien 10 day notice list. (Courtesy of NEDAP)
Locations of homes on the water lien 10 day notice list. (Courtesy of NEDAP)

When a water bill goes unpaid, the city has the power to institute a lien on property until the debt is resolved. Once a year these liens are then collateralized and placed into a trust, then sold to institutional investors through the municipal bond market, where the city receives about 85 cents on the dollar for the unpaid value of the liens. Then the city contracts collection agencies to service the debt.

The majority of foreclosures are brought by a servicer named Xspand, a wholly owned subsidiary of banking giant JPMorgan Chase. The subsidiary has come under fire from homeowners and legal advocates for their aggressive tactics. In testimony before the City Council, a number of homeowners have complained of Xspand’s aggressive collection tactics, including phone calls, threatening letters, and inflexibility regarding payment plans.

After foreclosure, delinquent homeowners face jacked-up interest rates and thousands of dollars in attorney’s fees. Interest on an unpaid water bill from the city runs 8 per cent annually; from Xspand it’s 18 per cent. And foreclosure-related attorney’s fees often exceed the principal on the bill itself.

“Very quickly the liens double and triple after they’re sold,” says Faux. “So it goes from a couple thousand dollars to ten thousand dollars within a year.”

Creditor’s notices obtained from homeowners confirm Faux’s statement. A typical case is that of John Cooper Smith, a 69-year old veteran who has owned his home in the Cambria Heights neighborhood of Queens for nearly 40 years. A delinquent bill sent to Smith shows around $2,100 in unpaid principal, with an additional $3,325 in fees added by Xspand.

“I was never notified that my lien was being sold,” Smith wrote in a letter to the City Council in September. “Nor was I given any opportunity to pay off outstanding taxes to avoid foreclosure.”

Or take the case of Flerida Serrano, an 81-year old homeowner from the Bronx. Serrano speaks no English and lives above a small grocery on the top floor of a dilapidated two-story property in Mott Haven, which she’s owned since 1977. She lives off $590 per month in Social Security payments, relying on income from her grocery tenants to pay off property taxes and utilities. When her previous tenant left her with a $15,000 unpaid water bill in 2008, she approached the city to work out a payment plan. But, due to a bureaucratic mix-up, the bill remained in arrears, and in 2009 the lien on her house was sold.

Xspand immediately brought foreclosure proceedings against her and started tacking on interest and fees to her bill. In less than eight months the amount she owed doubled, from $15,000 to $30,000, mostly attributable to a single line item on Xspand’s bill: “Fees.” Serrano, with help from her English-speaking daughter Orpha Rivera, approached the servicer to work out a payment plan. Xspand said the minimum they could accept was $600/month, and refused to negotiate.

“They were very nasty about it,” says Rivera. “They were charging $18 a day in interest alone, and Chase is the one who has the account. They’re run by a tycoon! They don’t need to make money by taking houses from poor people.”

Eventually, with the help of an attorney from the non-profit Legal Aid Society, Serrano was able to work out a payment plan with the city, but only after taking out a mortgage on her home.

Despite repeated attempts, neither Xspand nor its parent company JPMorgan would return phone calls regarding the water lien sales.

Over 9,000 homes were listed on the city’s most recent lien sale list, which was published in May of this year. An analysis of the list conducted by the non-profit Neighborhood Economic Development Advocacy Project showed that the vast majority of affected properties were in black and Latino neighborhoods in the Bronx, Brooklyn and Queens. The values of the unpaid bills are typically only a small fraction of the total worth of the affected property, making the threat of foreclosure seem unusually severe.

Brooklyn City Councilman Al Vann represents the Bedford-Stuyvesant neighborhood, and his constituency of elderly, low-income homeowners are among the hardest hit. He says that some of the handsome brownstones in this neighborhood have remained in families for generations, and that many homeowners threatened with water lien foreclosure have no mortgage obligations.

“While I believe that homeowners should pay their water bills, we must be mindful of how the policies we enact affect fixed and low-income homeowners in New York City,” Vann says.

Vann wants to change the sale process. The original 2007 legislation authorizing water lien sales sunsets in December, and he’d like to see additional protections for low-income, elderly, and disabled homeowners written in to the new bill. Additionally, he’s proposed extending the delinquency window before a sale occurs from one year to three, matching the city’s collection schedule for unpaid property taxes.

But officials from the Department of Environmental Protection want to keep the schedule as it is, saying the threat of foreclosure is the most effective tactic for recouping lost debts.

“The primary benefit of the lien is not the income itself,” says Farrell Sklerov, a spokesman for the city’s Department of Environmental Protection. “It creates an incentive to pay.” He said the city earned over $200 million dollars from property owners threatened with lien sales, and that 90 per cent of people on the list settle their accounts before the sale occurs.

Sklerov said he could not comment on the city’s decision to use Xspand as a servicer.

Commissioner Holloway wants to extend the legislation to cover single-family homes as well. Currently, liens may only be sold on two-family homes or commercial property; delinquent single-family homeowners have their water shut off instead. Holloway says that’s too costly, and that lien sale program allows the city to keep rates down for citizens who pay their bills on time.

But while the city is chasing down unpaid debts from citizens, it’s racking up debts of its own. Financial statements obtained from the NYC Water Board show that the city has added close to $8 billion in debt over the past five years, and annual interest payments have grown by more than $200 million. The costs are passed on to homeowners in the form of double digit rate hikes, one every year for the past five years.

City officials say the spending is necessary to comply with federally-mandated improvements, primarily provisions of the Clean Water Act.

Adding to the debt service costs is a bet the city took against interest rates, in the form of complex financial derivatives. Filings show the city took on $401 million worth of synthetic interest rate swaps in 2007. Originally intended to reduce the city’s borrowing costs, the swaps almost immediately started to lose money when interest rates plummeted during the global financial crisis. Calculations show the city now pays an estimated additional $7 million a year to service the swaps.

The money the city owes on the swaps is small compared to the total size of the city’s water budget. Then again, the money the city collects from lien sales is small as well. City records show that lien sales generated around $14 million in revenue in 2009, less than 1% of the department’s total costs.

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