The New York State Legislature is expected to pass a bill that mortgage lenders and servicers believe will make it almost impossible for them to enact successful foreclosure proceedings.
The New York Foreclosure Abuse Prevention Act passed the state assembly last week; the state senate is expected to pass it this week. Indications are that Gov. Kathy Hochul will sign the bill into law.
According to language in the bill, an appeals court decision in the Freedom Mortgage Corp. vs. Engel case prompted legislators to act because the ruling had given mortgage lenders and their servicers the ability to “unilaterally manipulate, arrest, stop, and restart the limitations period at will,” to the detriment of New York homeowners.
As a result, lawmakers said, courts throughout the state have been bombarded with a flurry of motions made by lenders to reopen foreclosure cases that had been dismissed years ago on statute of limitations grounds.
The court’s decision in the Engel case allowed for lenders to voluntarily pause the state’s six-year statute of limitations countdown on foreclosures, and to reserve the right to restart the action again as long as it's done within six years.
The result, according to law makers, was that foreclosure actions were no longer time-barred and countless homeowners were trapped “in a state of judicial purgatory with the fate of their homes suspended in incertitude.”
Opponents of the bill say it will severely limit mortgage holders' right to reach the merits of a foreclosure claim and encourages borrowers to delay foreclosure proceedings, and to refuse loss mitigation and debt restructuring efforts.
The bill, they say, also penalizes lenders for any procedural errors that, in some cases, could result in a defendant receiving a free house in a windfall.
Attorney Brian McGrath, a partner at Hinshaw & Culbertson, said the impact of the legislation extends beyond the state of New York because most lenders across the country have a significant portion of their portfolios in the state.
McGrath said he understands that proponents of the bill believe it will keep people in their homes and prevent predatory lending, but said that is not the case. “This bill does nothing to prevent that. It will work against consumers,” he said.
McGrath does predict several bad outcomes from its passage.
Lenders, he said, will stop originating loans in New York because it’s too difficult to foreclose, but if they do continue to do business in the state he expects them to revise income thresholds upward. "The people who will feel that the most are low-income borrowers and first-time homeowners,” he said.
He also believes lenders will no longer try to work with borrowers who are behind on their payments by offering debt forgiveness, pushing the loan out, or lowering monthly costs in an attempt to avoid filing or following through on a foreclosure.
“This legislation puts the lender on a hard six-year clock they can’t reset,” he said.
Lastly, McGrath said that since the law will be retroactive to foreclosures already in progress, he expects legal action arguing that lenders rights to due process guaranteed by the 14th Amendment to the U.S. Constitution were violated.
“You can’t just pull the rug out in midstream or mid-litigation,” McGrath said. “There’s going to be a fight.”
