Another Important Foreclosure Case gives Lenders More Flexibility

August 18, 2021 at 9:47 am Leave a comment

A recent decision provides more clarity to New York’s Byzantine foreclosure process. For those of us who believe that the goal of foreclosure should be to ensure that the rights of homeowners are protected while at the same time ensuring that lenders can get access to homes that borrowers can no longer afford to be in, this is a good thing.

When you enter into a mortgage loan with a member, the member is agreeing to pay back the note in monthly installments.  If a member misses a payment, you can actually sue and demand payment for the past due installment, which would be a ludicrous waste of time.  Instead, a payment default is a violation of the repayment contract and the lender has the option of demanding that the member pay the full amount due on the mortgage note. New York has a six year statute of limitations for mortgage foreclosure actions. The six year time period starts when a bank or credit union makes an unequivocal demand on a delinquent homeowner to pay the entire amount due on a mortgage note. Since New York has one of the most intricate and time consuming foreclosure processes in the country, it is not uncommon for foreclosures to take several years to complete and there has been an explosion in litigation in which delinquent homeowners argue that the six years statute of limitations has expired.

As a result, a key issue is how and when a lender can stop the foreclosure clock from running out by withdrawing a demand for full payment of a delinquent mortgage loan. Earlier this year the Court of Appeals decided Freedom Mortgage Corporation v. Engel in which it clarified the circumstances under which lenders could deaccelerate a mortgage note on which a bank had made a demand for full payment. In making its ruling, the court made clear that lenders simply had to put borrowers on notice that they no longer were obligated to immediately pay the entire amount due on their mortgage.

Seems clear enough, but what happens when a homeowner can show that a bank or credit union’s decision to stop demanding full payment of the note was primarily motivated by a desire to simply keep the six years statute of limitations from running out? For example, in Milone v. US Bank a homeowner defaulted on a mortgage note on October 1, 2008 and a demand of full payment for the entire amount due was made in December of 2008. Fast forward to October 21, 2014 when the homeowner received a letter that the mortgage note was being deaccelerated and that its demand for immediate payment of the entire debt was withdrawn.  Instead, our homeowner simply had to start making the monthly installment of payments. 

But in March of 2015 the homeowner sued the bank claiming that it was entitled to have the mortgage note discharged because the six year statute of limitations had expired. The court agreed. It effectively ruled that a decision to halt a foreclosure action did not stop the six year statute of limitations when a financial institution’s primary motivation is not to cease demanding full payment of the debt but to simply stop the foreclosure clock.

Here is the good news.  In a recent decision, 53rd Street LLC v. U.S. Bank, the Court of Appeals for the Second Circuit flatly rejected this logic. So long as a lender unequivocally deaccelerates the amount due on a mortgage note, it has the option of commencing a subsequent foreclosure action, even if the subsequent foreclosure action is filed six years after the initial demand for full payment of the note.

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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