A law passed in New York, effective Dec. 19, 2010, awards legal fees to borrowers who are successful in defending a foreclosure action. This creates potential problems, as will be explored.
The Empire State is important enough by itself so that this observation is meaningful on its own. More portentous, though, is the likelihood that this will find favor in other states. Further, it underscores the seemingly pervasive, unfortunate view of lawmakers that lenders and servicers are oppressive behemoths taking advantage of hapless, victimized borrowers.
Indeed, part of the impetus for the New York statute (Real Property Law section 282) was the claim that many borrowers were being sued without basis and that they were possessed of valid defenses to foreclosure actions. While there are any number of foreclosure actions dismissed for technical reasons--or just wrongly terminated--servicers will vigorously reject the notion that innocent borrowers are being foreclosed upon for no reason.
Some specifics about the law are relevant to reveal the ultimate peril they pose. Entitled "Mortgagor's Right to Recover Attorneys' Fees in Actions or Proceedings Arising Out of Foreclosures of Residential Property," whatever precisely the statute means, its application is solely to residential real property. (While exempting commercial cases, it still applies to the overwhelming majority of foreclosures.)
Residential real property is then defined in subsection 2 of the statute as property "improved by a one-to-four-family residence, a condominium that is occupied by the mortgagor or a cooperative unit that is occupied by the mortgagor."
So, while this clearly covers an owner-occupied condo or co-op, the one-to-four-family residence can apparently be an investment property; the condition of owner-occupied is appended only to the condo and co-op. And why investors--as opposed to homeowners--may need this protection is elusive.
The essence of the new statute is that where a mortgage contains a legal fee provision for the lender (which of course is typical), then there must be implied in the mortgage a covenant that the lender pay to the borrower the reasonable attorneys' fees and/or expenses incurred by the borrower resulting from the failure of the lender to perform any covenant or agreement on its part under the mortgage, or in the successful defense of any action commenced by the lender against the borrower arising out of the "contract." (Any waiver of this new obligation in a mortgage is deemed void as against public policy, so there is no escape by that route.)
While the idea that a borrower might be entitled to collect legal fees in a mortgage-foreclosure action is generally unpalatable to lenders (such an obligation had not previously existed in New York), where it might involve a lender breaching a mortgage, then reimbursing the borrower for legal fees does not seem so offensive. …