As waves of borrowers advance in post-forbearance loss mitigation in 2022, Empire State service providers face particularly complex government policies in a politically charged, uncertain environment.
A recently announced raid by New York attorney general Letitia James is likely to result in strict enforcement of idiosyncratic rules aimed at mitigation; and foreclosure activities that were banned by mid-January could see remarkable growth. Omicron's recent surge in the state's largest metropolitan area further complicates things as it could lead state lawmakers to extend the foreclosure ban.
"With much of the state's foreclosure activity originating in the New York City area, the rate of increase will depend largely on the city's economic recovery," said Rick Sharga, executive vice president of RealtyTrac, a subsidiary of Attom Data Solutions E-mail.
So while relatively strong home equity levels and moratoriums have made the net number of zombie properties in the state's unusual foreclosure pipeline more manageable than it was before the pandemic, shrinking from 2,226 homes to closer to 2,000, that backlog could increase even more significantly next year. The tolerance granted for hardship ends.
"Some people will have a negative equity position after factoring in missed payments," said Frank Nothaft, CoreLogic's chief economist, in an interview. "Unfortunately, many lost businesses, jobs, or family members and some households will be forced to sell."
While the number of bad loans has declined from their pandemic spikes, the numbers in New York are still higher than any other state, according to CoreLogic's latest monthly report. New York's 90-day exceedance rate of 4.2% in September was down from 6.6% a year earlier, but it was one of the two highest in the nation, matched only by Louisiana.
Ultimately, there could be a silver lining for that cloud if foreclosures or other alternatives release some of the home inventory to other buyers, but since the state's lawsuits typically take a few years, the more immediate damage mitigation rules for New York service forces will take precedence over the next Year.
These are not only tricky, not because they are country-specific, but because they are open to interpretation and one of several guidelines for service personnel.
While New York isn't trying to replace things like government loan guidelines, it does set home mortgage guidelines that are somewhat similar to the former, but not necessarily in line with investor or federal bank servicing rules.
"There's a big problem there: Who is subject to these laws?" Larry Platt, a mortgage lawyer at Mayer Brown, said in an interview. "The law itself suggests that it is an entity holding a home loan with the borrower's primary residence in New York, but … New York cannot make laws such as a federally recognized bank decision to to accept the repayment of a loan. "
The Empire State's loss mitigation rules have a similar goal to those of some other federal government affiliates: avoid forcing borrowers with pandemic hardship to repay everything at once in order to restore the mortgage after a deferral.
However, New York doesn't offer the kind of detailed decision-making waterfall for personal mortgages that federal agencies do. Instead, servicers are instructed to select certain options, such as extending the life of the mortgage or holding a non-interest-bearing balloon payment based on criteria that may be interpretable.
New York requires a servicer to use "reasonable, good faith" efforts to provide an adequate loss mitigation option and says it should be consistent with policies such as the service agreement, Platt said. Mortgage banks are also obliged to design a modification that is “reasonably affordable and sustainable” for the borrower and to examine alternatives if the risk of default is imminent.
In other words, New York's servicing rules are in some ways the same as the federal agencies, "but they are much more aggressive in that duty or obligation to find an option," said Platt.
“So there are a lot of interesting legal questions, like can you force a loan owner to change their terms to avoid foreclosure,” he added. "And will they come and doubt that the loss-limiting options available to private investors are not good enough?"
It's possible that other states might enact similar rules, considering they often turn to stand-alone jurisdictions like New York and California for guidance, Platt said.
The most common problem that New York and other states must deal with is the distribution of the Homeowner Assistance Fund's money. Interpreting the implications of the Empire State's rules could be one of the biggest questions in New York.
James recently directed service providers to apply HAF funds after other types of loss mitigation have been exhausted, but there can be many interpretations of how that money should be used in accordance with state rules, Platt said. This issue, as well as the question of how progressive foreclosures will actually play out, will become even more pressing in the future.
When pandemic-era loans finally move into foreclosure, service providers will also grapple with some new court precedents that surfaced in New York's Byzantine court case last year. Due to the inactivity of the market, service providers and lenders may not have widespread awareness of them.
That includes a July 28 ruling in VFS Lending JV II LLC v Krasinski that could be used to delay or block foreclosures on non-traditional loans that lenders have set above standard interest rates to offset their risk, Christopher Gorman said , Partner at Abrams Fenstermann.
In this case, the Appeals Department of the New York Supreme Court voided a lender's foreclosure claims based on allegations by the borrower that the mortgagee involved had deliberately violated certain banking regulations governing high-priced home loans.
Indeed, it is rare for a court to tell a lender, directly or indirectly, that the lender is completely prevented from enforcing its loan documents and collecting the funds the lender allegedly owes from a borrower, Gorman wrote in a report about the consequences of the decision in individual cases.
The decision is expected to have a broader impact on foreclosures on other expensive home loans as foreclosures resume at these times of the loans in New York.
“Lenders in foreclosure cases involving loans that are subject to certain provisions of the State Banking Act should expect Krasinski to be used as a basis for demanding disclosure from lenders and as a contradiction to those of the lenders in the coming years Lenders submitted summary judgments is quoted, "Gorman said the report said.
Ultimately, it may seldom be the case that the courts cancel a loan as a result of this case. However, if a consumer challenges a foreclosure on this basis, the lender will likely still face delays in the foreclosure process as the lender or service provider puts the burden of proof on compliance with banking law, Gorman said in an interview.
"There has been such a rise in the price of houses that foreclosure is less likely," said Platt. "However, there will be a lot of tributaries in New York when the credits get there."