New York's newly enacted foreclosure law suggests servicers should closely reexamine older distressed mortgages they have in the state as it may lead the courts to dismiss certain cases against borrowers.
In the final week of 2022, Gov. Kathy Hochul signed the Foreclosure Abuse Prevention Act, a
The law became effective immediately, leaving a question mark hanging over certain older liens and heightening concerns about how to proceed with future cases.
"There are some number of active foreclosures pending today that are retroactively now deemed to be time-barred," said Brian McGrath, partner at Hinshaw & Culbertson and a critic of the legislation. "Either those cases will have to be dismissed by the courts under this law, or the plaintiffs, in those actions, will have to argue that the retroactivity portion of this law is unconstitutional based on due process grounds."
On initiation of foreclosure proceedings in the state, servicers have a six-year statute of limitations requiring the action to be completed in New York. Previously, in the event of a servicer-introduced deacceleration, or "affirmative act" that discontinued the course of foreclosure, the clock could be reset, allowing for future legal action against the loan if it fell into subsequent distress.
The new legislation aims to eliminate the loophole and restrict legal action against liens six years after the borrower defaults and the mortgage company accelerates the debt, calling all obligations due and payable. This could potentially affect tens of thousands of borrowers with foreclosure actions prior to 2017.
One of the legislators sponsoring the bill, Sen. James Sanders Jr., has a mortgage that entered foreclosure in 2009, according to the
Because the bill is being applied retroactively, cases where a servicer had operated on the assumption that the statute of limitations had been reset may now be in a state of limbo.
"This law potentially retroactively changes the viability of those second or third filed actions they brought on those loans that went into foreclosure and the foreclosure actions that never made it to the finish line," McGrath said. "Those cases are potential lien-loss cases for these servicers, and to the extent that they are not lien-loss cases, the servicers and their investors will have to look at whether those cases are ones worth challenging through courts."
Legislators also added wording in the bill designed to limit how often a foreclosure could be brought forth within the six-year period if a prior case had been dismissed without prejudice and stipulated any subsequent legal action could only be brought by the original plaintiff, potentially affecting servicers who had taken over transferred loans.
The new law appears set to change how the mortgage industry approaches future decisions, both from a servicing and lending perspective in the New York market. For now, its effect appears limited to the Empire State.
Although New York servicers contacted for this story declined to comment on whether the law would affect their foreclosure operations, attorneys had some thoughts on the subject.
"These legal challenges may not be quickly resolved, so industry participants should move expeditiously to maintain their ability to enforce New York mortgage loans in light of the new law," Mayer Brown wrote in a statement on its website.
For servicers, the law will require diligence and even more "aggressive" action when working on cases, according to McGrath
"I think certainly going forward, servicers need to be incredibly mindful of the clock in New York to start and complete a foreclosure action because the ability to restart an action is narrower," the Hinshaw & Culbertson attorney said.
The new law is also set to alter the industry approach to mortgage underwriting and loan-pricing "because those two things are intricately tied with how originators assess the possibility of defaults," McGrath added.
A mortgage-banking trade group had previously raised concerns in meetings with the governor prior to the bill's passage about how it might affect the industry's costs and the ability to meet regulatory requirements for their finances.
"Many of our members have raised concerns [about] the impact because if they're a smaller business in New York, they're not going to be able to withstand major actions under this new law," said Christina Wiley, executive director of the New York Mortgage Bankers Association. "It could impact their capital and liquidity."
Signing of the bill, though, may not have completely decided the matter of how much flexibility servicers have to extend the statute of limitations. Portions of the legislation, particularly regarding its impact on prior initiated cases, could be challenged in court, according to McGrath.
"In this case, by saying retroactively the clock calculation has been changed, you haven't afforded those parties the ability to adjust to that changed statute-of-limitations calculation. So I think it is a very strong constitutional argument, that at least the retroactivity portion of this law, does not pass constitutional muster," the Hinshaw & Culbertson attorney said.
