This article was published in partnership with New York Focus, an independent investigative news site covering New York state and city politics.sign up for newsletter here.
While some homeowners facing foreclosure stand to receive relief under legislation passed by the state legislature and are now seeking signatures or vetoes at Gov. Kathy Hochol’s desk. , she didn’t say which one.
The action is aimed at a February 2021 ruling by New York State’s Supreme Court, the New York State Court of Appeals. The ruling reopened hundreds of foreclosure lawsuits that homeowners believed had been won because lenders failed to meet critical deadlines.
In this case, known as Freedom Mortgage Corporation v. Engel, the appeals court nevertheless ruled that the lender could proceed with the foreclosure and even reinstate the dormant case.
The bill, which passed the state Senate by a 52-10 vote on Tuesday following its approval in Congress, not only reverses that decision, but also overrules another bill related to foreclosure from lower state courts.
Hochul staff met with mortgage industry representatives to hear their reasons for opposing the bill, the New York Focus and THE CITY learned.
Ho-chul’s spokesperson did not immediately answer questions about whether she had met with supporters.
Real estate and banking industry players including JPMorgan Chase, Capital One and Keybank have been lobbying against the bill since last year.
Engel’s decision could save billions of dollars for mortgage lenders and put thousands of homeowners across the state at risk of foreclosure. Some of these homeowners had already won their cases when Engel’s ruling was handed down, but the ruling allowed lenders to reinstate their cases or appeal to higher courts. .
Following the ruling, lenders have moved to reopen hundreds of lawsuits across the state that previously settled in favor of homeowners — and continue to do so, say foreclosure attorneys in New York City. told Focus.
“Since Engel fell, we’ve been in damage control mode,” said Julie Howe, an attorney with the New York Legal Assistance Group’s Foreclosure Prevention Project. A lot of people, including my clients who thought they could, are worried about losing their homes.”
Jacob Inwald, director of foreclosure prevention at Legal Services NYC, told the New York Focus that “nearly all” cases were reopened after Engel’s ruling was traced back to the 2008 financial crisis.
“There have been a huge number of lawsuits, known as ‘shadow dockets’, where plaintiffs initiated litigation but did not file the required documents,” Inwald said. they.
“Multiple bites of a seized apple”
The Engel decision reversed the lower court’s interpretation of New York state law.
Individual homes packaged into large portfolios for investors, although six years is generally sufficient to sue or notify the borrower that the lender has decided not to foreclose. Because loans can go unnoticed, lenders fail to let their terms expire or to notify borrowers.
“It’s more common than we’d like,” admits Adam Swanson, a partner at law firm McCarter & English, who represents lenders in mortgage disputes.
Prior to the decision, the six-year limit ran until the lender notified the borrower of its decision to stop the foreclosure.
However, in the Engel decision, the Court of Appeals ruled that once a lender ends a lawsuit, the clock will automatically stop without notice to the borrower, allowing the lender to sue foreclosure again on the same loan. I found It doesn’t matter if it’s been more than 6 years.
“If Engel is allowed to run, lenders will be bitten by the apple of a foreclosure over and over again,” said Congressman Helen Weinstein (D. – Brooklyn) said in a statement to the New York Focus.
After the Court of Appeals ruled in the Engel case in February 2021, legislators moved swiftly to overturn it. A bill to reverse much of that effect was introduced in his state Senate in March 2021, and another bill was introduced in Congress in May 2021. The two bills are his 2022 he has been adjusted to one version.
Arguments for “Sky is Falling”
This bill would restore the status quo before Engel and, in some ways, would further expand legal protections for homeowners.
A representative of the New York mortgage lending industry said its sponsors and supporters understood the bill could actually make it harder for homeowners to work with lenders to avoid foreclosures. Foreclosure defense attorneys, meanwhile, accuse lenders of overstating the impact of the bill because they care about earnings.
Lenders now have the ability to reset the six-year clock by unilaterally deciding to end the foreclosure and starting a new lawsuit. The bill says that even if a lender drops a lawsuit seeking foreclosure, it won’t reset the clock. New York law generally prohibits a plaintiff who has voluntarily dismissed a lawsuit from filing a second lawsuit on the same allegations.
Instead, to reset the clock, lenders were able to reach agreements with borrowers to adjust the terms of their mortgages to prevent foreclosure. This is an operation known as a “Modify Loan”. Instead of agreeing to stop the clock, the borrower can request changes such as a lower interest rate or a longer repayment term with fewer monthly installments.
But mortgage industry representatives say the proposed fix isn’t so simple. They told the New York Focus and THE CITY that they believe the bill could prevent lenders from foreclosing on modified mortgages.
According to my reading of the bill, the deadline will prevent a lender from foreclosing a modified loan if the borrower defaults more than six years after the lender first sought the foreclosure. .
“Lenders are hesitant to offer loan modifications because they know they may not be able to recoup their investment in the event of a subsequent default,” said Natalie Grigg, partner at Woods Oviat Glatman. I think I will,” he said. foreclosure lawsuit.
Weinstein said it was a “misunderstanding” of the bill.
If the homeowner defaults on the modified mortgage, it “creates a new cause of action under the modified contract,” allowing another foreclosure action, members of Congress said in a statement. “The original default date is irrelevant at all,” she added.
Mortgage industry representatives also say these additional steps lawyers must take to stop foreclosure lawsuits will make lenders less likely to negotiate settlements and instead seek foreclosures. increase.
“It will be very difficult for the industry to enforce what is called ‘loss mitigation,’ loan modifications, and there will be no incentive to agree,” said Swanson.
The industry argument “may be correct,” said Howe, a foreclosure attorney. But she points to a lender’s obligation under New York law to negotiate in good faith with the borrower to reach a settlement that prevents foreclosure, and by preventing the lender from effectively reopening the lawsuit, they can We hope to encourage you to reach a deal.
Lender representatives also warn that additional legal liability in the foreclosure process will result in higher legal costs, which will be passed on to homeowners in the form of higher mortgage rates.
“Lenders may withdraw and additional legal costs need to be considered, so interest rates may be higher in New York,” Swanson said.
In her statement, Weinstein said opponents of the bill had exaggerated its effects.
“While some in the banking industry have opposed the bill by raising the ‘the sky is falling’ argument for future mortgage lending in New York, the bill is basically what Engel did. Take us to the position of the law the day before it was done. We’ve been supporting the New York mortgage industry for years,” she said.
meeting on monday
On Monday, representatives of the mortgage industry met with Hochul staff to make claims against the law, Grigg and Swanson told the New York Focus.
“I was able to make a call with some of the governor’s office assistants who I found very helpful,” Grigg said Monday. Hochul’s staff did not indicate whether Hochul would sign or reject the bill, but Grigg said he felt the meeting was “very important to them”.
A spokesperson for Hochul did not respond to questions from New York Focus and The City about the governor’s position on the bill, or to topics discussed at a meeting with mortgage industry representatives on Monday.