When a mortgage borrower stops paying its loan and the lender eventually decides to foreclose, the lender first needs to accelerate the loan. In other words, the lender needs to tell the borrower that the loan is in default and the borrower must repay it all now. If the borrower doesn’t do that, then eventually the lender goes ahead with foreclosure litigation and eventually, if all goes well for the lender, the borrower loses its real property.
In New York that judicial proceeding can take at least one or two years, even if the borrower has no meritorious defenses. During that whole time, the borrower typically makes no loan payments, pays no real estate taxes, and allows the mortgaged property to deteriorate. (New York’s politicians like to blame the lender for that deterioration.)
Sometimes a lender accelerates the loan and then doesn’t pursue foreclosure, instead sitting on its hands and doing nothing. If that continues for six years in New York, or other periods in other states, then the lender loses its right to foreclose. The borrower doesn’t have to repay the loan. Amazingly, this happens with some frequency.
As a result, it can become very important to determine when a lender actually accelerated a loan, and whether the lender ever withdrew and rescinded the acceleration.
New York law allows a lender to accelerate a loan as part of starting a foreclosure litigation. No separate notice of acceleration is required. Starting the foreclosure litigation, with the right language in the complaint, adequately accomplishes the acceleration.
If the lender later withdraws that foreclosure litigation, does that automatically withdraw the acceleration, so the six-year clock stops ticking? The answer is obvious: if commencement of foreclosure litigation accelerated the loan, then voluntary withdrawal of the same litigation obviously decelerated the loan. That voluntary withdrawal implicitly withdrew the original notice of acceleration, which was just an element of the withdrawn foreclosure litigation.
Although that result seems quite obvious, the New York courts didn’t always see it that way. Instead, they sometimes declared that the lender’s withdrawal of its litigation wasn’t enough to decelerate the loan. And then, if the lender did nothing for a few more years, which can and does happen, the courts decided that the six-year statute of limitations had expired because it started when the lender started the foreclosure action, and it never stopped, even though the lender withdrew its foreclosure action.
If a lender claimed it had decelerated the loan by withdrawing the foreclosure action, the courts sometimes demanded more: a formal notice of deceleration or something else to make clear that the lender no longer expected the borrower to immediately repay the loan in full. Sometimes the courts tried to discern the lender’s state of mind, what the lender intended when it withdrew the foreclosure litigation.
This body of law, driven by goal-oriented trial courts bent on protecting borrowers and cheered on by “public interest” lawyers, gave defaulting borrowers a great new line of defense when a lender finally woke up and decided to try again to foreclose. It was a line of defense that could raise complex factual issues. This further delayed foreclosure proceedings while the borrower continued to not pay the loan, not pay real estate taxes, and not maintain the mortgaged property.
The courts’ receptivity to defenses like these helps contribute to the logjam of foreclosure actions in New York courts. It partly explains why these actions take so long.
New York’s highest court, the Court of Appeals, recently cut through this thicket. In a decision friendly to lenders, the court decided that if a lender accelerates a loan by starting a foreclosure action, then a withdrawal of that action automatically decelerates the loan. That proposition may seem obvious. But it wasn’t always obvious to New York’s lower courts. The Court of Appeals has now taken away one tempting technique to derail foreclosures.
The courts will still welcome a wide range of other creative defenses from borrowers who have stopped paying their loans. Therefore, New York foreclosures will probably still take at least one or two years, even if the borrower has no meritorious defenses.