Big Banks Pocket Millions in Brooklyn Foreclosures as Referees and Courts Shrug

Allegations that New York’s foreclosure referees and big banks have short-changed homeowners signal a much wider reckoning about transparency, accountability, and equity in America’s property markets.

Barbara Small’s last ride to Downtown Brooklyn’s Supreme Court in November was haunted more by resignation than hope. The Flatbush home she and her father had bought in 2005—envisioned as a ticket to intergenerational security—had fallen victim to the city’s relentless physics: blunted incomes, a recalcitrant tenant, and a mortgage ultimately owned by investors. At auction, the three-story walkup fetched a brisk $1.3 million. But after layers of claims and calculations, Small pocketed just $100,000—a sum she reckons is a paltry relic of her American dream.

Small’s ordeal is far from unique in New York City, where more than 5,000 foreclosure auctions each year quietly dispose of distressed property. The latest twist: lawsuits and investigative reporting suggest that the city’s biggest mortgage holders—including entities like Bank of New York Mellon—have deployed accounting sleights that may breach state law and siphon tens of millions of dollars from vulnerable ex-homeowners.

The legal details are arcane but consequential. Lenders’ attorneys, it is alleged, have routinely calculated interest and court costs not just on the outstanding loan, but on an inflated base that includes attorney fees and other charges, in explicit contravention of the New York State Unified Court System’s own guidance. Compounding the confusion, court-appointed referees—one being State Assemblymember Jeffrey Dinowitz—have for years rubber-stamped these calculations, quickening the exodus of wealth from stressed homeowners to institutional creditors.

For New Yorkers, the implications are as bruising as they are widespread. The state’s elaborate protections for homeowners in foreclosure—lengthy legal proceedings, mandatory settlement conferences, strict interest tabulations—are designed to soften economic blows. Yet, if lenders have indeed gamed the system with impunity, not only are these promises reduced to ash, but thousands of families have been deprived of significant equity at their moment of greatest vulnerability.

A study by Gothamist and New York Focus estimates that the suspect practice has affected thousands of foreclosure cases citywide, cumulatively costing New York families millions. Far from being isolated abuses, the patterns revealed in these court records point to a form of “systematic fraud and theft,” as argued in lawsuits filed by homeowners’ attorneys like Mark Anderson. Some houses, auctioned under these disputed calculations, have yielded significantly higher payouts for creditor-institutions, while devastated families count their remaining dollars.

The injury runs deeper than isolated losses. Homeownership forms the backbone of African-American and immigrant household net worth in New York—a fragile buffer against generational poverty. In Flatbush, like in many neighborhoods hit hardest by the 2008 financial crisis, a disproportionate share of foreclosed families belong to communities who were already buffeted by predatory lending and patchy workplace protections. The present-day accounting controversy only compounds those historical wrongs.

Economic ripple effects also loom. Every dollar subtracted from a family’s meagre auction residuals is a dollar not spent in local shops, invested in New York’s urban fabric, or propagated down the generational chain. Baseless legal costs drain city resources; they can also undermine public trust in the foreclosure process, long a bedrock of property-market stability and municipal finance. Prosecutors and regulators—at both the city and state level—now face a Hobson’s choice: risk litigation gridlock, or overhaul the system outright.

The political costs threaten to be equally corrosive. The spectre of assemblymembers moonlighting as foreclosure referees—Jeffrey Dinowitz’s dual roles being merely the most conspicuous—raises uneasy questions about conflicts of interest and the adequacy of judicial training. For an electorate already weary of corruption and opacity, such optics are unlikely to engender confidence.

National tides and global reverberations

New York’s predicament bodes ill for other U.S. cities where home repossessions remain stubbornly high. California and Florida, both hotbeds of foreclosure activity, have waged their own battles over the arithmetic of default and auction settlements. Yet nowhere does the collision between high finance, state bureaucracy, and urban inequality register as powerfully as in New York City, the country’s property capital. Internationally, these disputes echo complaints from London to Toronto, where legalistic chicanery can tip the scales against ordinary owners.

Yet, countervailing forces remain faintly promising. New York’s court system, slow as ever, now faces mounting calls—not least from public-interest attorneys and advocacy groups—for a forensic reckoning. Several state judges have signalled (albeit quietly) that more rigorous oversight and standard-setting are overdue. Structural reforms—such as requiring public hearings for foreclosure referees, or imposing strict interest-calculation audits—may soon be debated in Albany.

We reckon that the inertia of financial institutions and court bureaucracy will not be easily dislodged. Lenders have already signalled they view the challenged accounting practice as lawful, and their legal firepower is formidable. The New York state court system, for all its byzantine protocols, has tended more toward delayed incrementalism than sweeping change. Still, as homeowners coalesce around legal challenges, and as the investigative spotlight intensifies, some degree of reform now seems all but inevitable.

The fate of New York’s many dispossessed homeowners—Ms Small’s among them—exposes a grim arithmetic: when institutions conflate efficiency with opacity and profit with procedural shortcuts, ordinary citizens are left picking up the tab for a system that promises “due process” but often delivers something rather less. Equity, as ever, is not a mere line item; it must be transparently calculated, scrupulously guarded, and justly distributed.

In the city where property is both lifeblood and battleground, restoring accountability to the foreclosure process will test whether New York can still deliver on its promise of fairness in an unforgiving market. The answer, when it comes, will reverberate beyond the five boroughs. ■