New York Law Makes it More Difficult to Get Title Insurance on Foreclosed Property

January 22, 2020 at 9:28 am Leave a comment

It has not taken long for a law providing extra protection to individuals facing foreclosure to have a devastating impact on New York’s mortgage market. If you provide mortgages in New York State, you should read this blog, and if you think I am exaggerating, reach out to colleagues in the title insurance industry. For more background on this issue, take a look at this blog.

One of the bills signed by the Governor during the final days of 2019 created a new section 1302-a of the Real Property Actions Law which reads as follows:

“Notwithstanding the provisions of subdivision (e) of rule thirty-two hundred eleven of the civil practice law and rules, any objection or defense based on the plaintiff’s lack of standing in a foreclosure proceeding related to a home loan, as defined in paragraph (a) of subdivision six of section thirteen hundred four of this article, shall not be waived if a defendant fails to raise the objection or defense in a responsive pleading or pre-answer motion to dismiss. A defendant may not raise an objection or defense of lack of standing following a foreclosure sale, however, unless the judgment of foreclosure and sale was issued upon defendant’s default.”

This legislation has two major consequences. First, it raises the very real possibility that New York’s already cumbersome mortgage foreclosure process will become even more complicated and time consuming. This concern pales in comparison; however, to the reality that under this legislation, anyone buying foreclosed property subject to a default judgment or a foreclosure proceeding in which lack was not raised cannot be assured that they have clean title to the property. In other words, the previous owner could, under this law, contest the purchase of his or her home even after the sale is final in most circumstances.

As one of my colleagues pointed out, this is going to be a mess. The title insurers agree, which is why I’ve heard of two prominent title insurance companies that do business in New York which plan to either refuse to grant title insurance in the state, or grant it with an exception accounting for this new loophole. The latter option will be of little benefit for the new homeowner, let alone the mortgage holder.

This is bad news not only for lenders and borrowers, but for the communities in which these properties are located. Although the intent of the legislation was to make sure that homeowners at risk of losing their house don’t lose the right to raise this defense, the legislation has been drafted in such a way that it will actually make it more difficult to interest people in buying foreclosed property, contributing to the blight which disproportionately impacts poorer neighborhoods. In addition, theses title insurance exceptions will, in my opinion, make it impossible to sell these properties to Fannie Mae and Freddie Mac given the uncertainty of title.

Entry filed under: Legal Watch, Mortgage Lending, New York State. Tags: , , , , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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