Between Christmas and New Year’s of 2022, the governor of New York signed legislation aimed at correcting an alleged potential for “abuse” of the foreclosure process by mortgage lenders. The context for this “abuse” is relatively exotic and unusual. Still, it had spawned a string of New York cases. The legislature’s solution to “abuse” creates a new trap for mortgage lenders as they try to recover their defaulted loans through foreclosure.
The legal problems begin when a mortgage lender accelerates a loan, that is, requires the borrower to repay the entire loan because the borrower defaults on monthly payments or other obligations under the loan documents. Once the lender accelerates the loan, New York law gives the lender six years to begin foreclosure. Amazingly, lenders miss this deadline with some frequency.
Sometimes a lender will expedite the loan as part of foreclosure proceedings. Later, the lender can voluntarily stop the foreclosure. In a recent case in New York, the state’s highest court ruled that in these circumstances, voluntary termination overrides expediting. After this termination, the lender can no longer worry about the six-year period in which foreclosure must be initiated. Instead, the lender can sit back and accelerate again later, beginning a new six-year period.
Lawmakers didn’t like the idea that lenders could start foreclosures, stop their foreclosures, and then wait as long as they wanted to speed up again. This was considered abusive, a cruel way to torment the borrower. This was true even though the loan was in default at all points in the process. The borrower had taken the loan, had the full benefit of the loan proceeds, defaulted on its obligations under the loan documents, and could have ended its ordeal at any time by placing the loan in circulation or selling the mortgaged property.
In response, the state enacted a new law that says once a lender accelerates a loan, nothing the lender says or does unilaterally can cancel or reverse the acceleration. Once accelerated, the lender has just six years to initiate foreclosure. The voluntary termination of a foreclosure does not restart the clock.
It doesn’t seem terribly onerous to require a mortgage lender to successfully initiate a foreclosure action within six years of accelerating a loan, no matter what. On the other hand, the New York foreclosure process is extraordinarily complex and slow. Every foreclosure involves a judge and a series of motions and requests that the courts often process at a snail’s pace. Lenders are in no hurry to endure and pay for this process if they can avoid or postpone it. Most lenders don’t really want foreclosure—they just want to be paid back—so they’re optimistically trying to work with borrowers to give them more time. This sometimes includes the voluntary termination of foreclosure proceedings.
In the bizarre case where a lender has accelerated a loan but years go by without a foreclosure, the new law could effectively force the lender to file a lawsuit instead of continuing to cooperate with the borrower. Of course, a lender could probably solve the problem by entering into a bilateral agreement with the borrower to extend the period, but the courts might not like that. Lenders fear being too cute and creative. The new law should ensure that lenders don’t wait six years before starting their foreclosure actions. Defaulting borrowers should not be tormented with uncertainty for more than six years.
To backtrack a bit, the legal developments detailed in this article take place against a backdrop where mortgage loans in New York can remain in default without resolution for the better part of a decade. Something is wrong with this picture. If New York foreclosures are moving so slowly, why would a sane mortgage lender accept a New York mortgage?
According to news reports, a supporter of the new law, State Senator James Sanders, lives in a house that has been under foreclosure for 10 years. How can that be? And does he have a conflict of interest?