The Past Is The Present? New York Legislature Passes Retroactive Foreclosure Bill

• Published date: 18 May 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Debt Capital Markets, Charges, Mortgages, Indemnities, Financial Services, Corporate and Company Law, Trials & Appeals & Compensation
• Law Firm: Mayer Brown
• Author: Ms Krista Cooley, Thomas V. Panoff and Francis L. Doorley

It is not the easiest time to be in the mortgage business. Mortgage investors and servicers continue to deal with the fallout from the COVID-19 pandemic and its effects on borrowers. Rising interest rates could drain the plentiful supply of refinance business from prior years and deter hopeful homebuyers from seeking new financing. Now, the New York legislature has added another layer of complexity by passing a bill that would significantly impact the residential mortgage foreclosure process in New York. The New York legislation has been approved by both houses of the New York legislature and, if enacted, would significantly constrain lenders', servicers' and investors' ability to efficiently prosecute foreclosure actions and would potentially jeopardize their ability to recover their mortgage debt.

Go, and Then Stop? Accelerating and 'De-accelerating' a Loan

For many Americans, obtaining a mortgage loan allows them to achieve their goal of home ownership and make what is likely to be the single biggest purchase of their lifetime. Of course, a mortgage loan is not a free lunch: the borrower must agree to make their loan payments in a timely fashion and uphold all of the borrower's other covenants, like paying taxes or maintaining required insurance on the property. And if the borrower does not make payments as agreed, then the lender usually has the authority under the mortgage and/or promissory note to declare the borrower in default.

Nearly all residential mortgage loan agreements provide the lender with authority to accelerate the balance of the mortgage loan if the borrower defaults. The ability to accelerate the loan is a powerful tool in the lender's kit: an acceleration provision allows the lender to declare all unpaid amounts on the loan due and payable immediately if the borrower defaults. In New York, it also allows the lender to bring a lawsuit to foreclose and sell the property securing the loan to satisfy the mortgage debt, instead of forcing the lender to enforce only the borrower's past-due monthly payments in a separate action for missed payments. Acceleration also has one more significant consequence: it starts the clock on New York's six-year statute of limitations for the lender to bring an action to foreclose and recover the balance of the loan through a foreclosure sale.

While a lender's decision to accelerate a loan is not one to be taken lightly, it is also not necessarily permanent. A lender may subsequently revoke its decision to accelerate the loan. The ability to 'de-accelerate' a loan can be beneficial for both the lender and the borrower'for example, a borrower and lender might be able to agree on a loss mitigation option during the pendency of the foreclosure case, and the lender can then 'de-accelerate' the loan, giving the borrower another chance to resolve the delinquency and stay in their home.

Exactly how a lender may 'de-accelerate' a loan in New York has largely been left to courts to decide. In 2021, the New York Court of Appeals (New York's highest court) held that a lender's decision to voluntarily...