Lender Alert: New York Permits Defendants in Foreclosure
Actions to Assert Standing Defense at Anytime

Whether a mortgagee has standing to foreclose on a home loan is a frequently litigated issue in mortgage foreclosure actions in New York. Simply put, a mortgage lender has standing to foreclose on a promissory note if it is the holder of the note at issue at the time the foreclosure action is commenced. As is set forth in more detail below, a recently enacted law in New York provides that the defense of “lack of standing” in a foreclosure
action is not waived if the defendant fails to raise the defense at the start of the litigation, thus introducing a new level of uncertainty in foreclosures and possibly prolonging an already lengthy, and costly, procedure for lenders.

It is well-established that a homeowner must assert the defense of lack of standing in an answer to a foreclosure complaint or in a pre-answer motion to dismiss or it is considered waived. See e.g.,Wells Fargo Bank Minnesota, N.A. v. Mastropaolo , 42 A.D.3d 239 (2d Dep’t. 2007). However, with the enactment of the new legislation, a defendant does not waive the lack of standing defense and in particular situations, a defendant may assert this defense even after a foreclosure sale takes place!

The new statute, section 1302-a of New York Real Property Actions and Proceedings Law (“RPAPL”) states in pertinent part, that “any objection or defense based on the plaintiff’s lack of standing in a foreclosure proceeding related to a home loan … 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.” NY RPAPL § 1302-a.

Notably, with the implementation of section 1302-a, instead of waiving the standing defense in home loan foreclosures, a defendant may assert the defense of lack of standing at any stage of the action. Thus, in a case where a defendant fails to answer a complaint, or otherwise appear in the action, and the Court grants a judgment of foreclosure and sale, a mortgagee would normally schedule a sale shortly thereafter. However, RPAPL § 1302-a now permits a defaulting defendant to potentially invalidate both the foreclosure sale and the judgment of foreclosure by alleging mortgagee’s lack of standing.

RPAPL § 1302-a raises a multitude of potential issues for mortgagees and homeowners alike by incentivizing defendants to postpone asserting a standing defense in order to delay entry of a judgment of foreclosure or vacate a sale. Significantly, the uncertainty created by 1/2
RPAPL § 1302-a may chill bidding at foreclosure sales where a judgment of foreclosure was entered in default and a defendant may allege lack of standing subsequent to the sale. In addition, title companies may be wary of insuring title on such properties.

By: Michael L. Moskowitz and Melissa A. Guseynov

Reprinted with permission by Weltman & Moskowitz, LLP