A securitization trustee is petitioning the Supreme Court to hear New York's Foreclosure Abuse Prevention Act, but the wheels of justice turn slowly, in the interim the law raises concerns for various industry stakeholders.
"They haven't decided whether to review it or not, but that will be conferenced by the justices of the Supreme Court," said
If the Supreme Court does decide to hear the case after its conference this month, it could determine whether certain foreclosures in New York proceed or not for borrowers, and if older loans from before the law's time remain exposed to certain risks.
"The investors are suffering losses because the judicial process continues to operate notwithstanding that the highest courts have not spoken yet. Mortgages are being discharged and rendered unenforceable," Swanson said.
A conundrum for some older New York loans in foreclosure
Industry losses have mounted as some courts have ruled the law, intended to curb deliberate servicing delays in foreclosures, applies retroactively.
FAPA rolled back a previous New York Court of Appeals decision that allowed a clock on the state's six-year statute of limitations to be reset if a servicer took certain "affirmative" actions such as de-accelerating the debt.
Although the revised statute of limitation rules
As a result the law, loans going through some older foreclosures have lost value,
hurting not only investors holding the mortgages but others like trustees, servicers, local attorneys and foreclosure counsel, some of whom have indemnity obligations, Swanson said.
A recent amicus brief weighing in on the U.S. Bank National Association, NA, Trustee v. Cassandra Fox case that has a petition for review pending before the Supreme Court shows the harm extends further.
Why it's an issue for the state's secondary mortgage market
The statute allows "only the 'original plaintiff' in a dismissed mortgage foreclosure action to institute a new foreclosure action," which would be costly, according to the American Legal and Financial Network's amicus brief in the Fox lawsuit.
As a result, a loan "becomes worthless if sold to anyone else," the ALFN said in the brief, noting that this is what happened to the Supreme Court's petitioner.
The ALFN estimates this to be a problem potentially affecting at least $1.2 billion or 7,100 loans in New York with dismissed foreclosure actions based on its survey of seven servicers responsible for $66 billion or 235,000 Empire State mortgages.
At least one company "has entirely stopped bidding on New York loans on the secondary market," while another two have made downward pricing adjustments to such mortgages, and a third has changed representations and warranties for them, according to the ALFN brief.
How industry stakeholders are challenging FAPA
Legal arguments challenging the New York law generally revolve around the interpretation of the NY statute, the U.S. Constitution or the state's equivalent, according to Swanson.
"On the statutory interpretation grounds, mortgage holders are challenging that the legislation does not evince a sufficient purpose for retroactivity," Swanson said.
Constitutional arguments assert conflicts with protections for due process and contracts, and also with the "takings" clause, which states that "private property shall not be taken for public use, without just compensation."
The Empire State's constitution also has equivalents of the due process and "takings" clauses.
The petition before the Supreme Court centers on arguments around the U.S. Constitution's "takings" and due process clauses.
Cases to watch in addition to the Fox lawsuit include one called Article 13 LLC v. Ponce De Leon Bank and Van Dyke v. U.S. Bank N.A., both of which called upon New York's Court of Appeals to re-examine some of the aforementioned issues.
Multiple lawsuits pending in the court system
"One of the challenges being faced by the industry is that the application of the law needs to be challenged on a case-by-case basis. So therefore you see various lawsuits where a mortgage holder is trying to foreclose the mortgage, and because of FAPA, the court is ruling that it is unenforceable," Swanson said.
In the Article 13 case, the U.S. Court of Appeals for the Second Circuit certified questions around FAPA's retroactivity based on statutory interpretation and the New York state constitution.
"The Second Circuit reserved to itself the question of whether or not FAPA violates the federal constitution, but invited the New York court of appeals to expound upon that question and give their view of it," Swanson said.
Both these cases are scheduled for argument next month.
