Effective December 1, 2014, the Courts of the State of New York will oversee negotiations between lenders and borrowers to achieve a short sale or deed-in-lieu within foreclosure settlement conferences. The Courts are empowered to sanction parties who negotiate in bad faith.

Previously, borrowers were only allowed to attend the conferences to discuss workout options, such as loan modifications and payment plans, which would allow borrowers to keep their homes. If borrowers were denied loan modifications, their cases would be released from the settlement conference part, and they would be forced to do short sales or deeds-in-lieu on their own without court intervention or oversight. Oftentimes, these exit strategies took a very long time because many borrowers with second mortgages had difficulties settling their second mortgages or were unable to keep up with the lender’s numerous and complicated document requests. Many borrowers simply gave up and allowed their properties to go to foreclosure rather than spend thousands of dollars on legal fees for help with a short sale that was never going to be approved.

Now, with court oversight, it is anticipated that lenders will now be making quicker decisions on short sale and deed-in-lieu applications within the State of New York, and there should be fewer foreclosures overall. The court referees will set deadlines for the submission and review of short sale and deed-in-lieu applications and will ensure that the borrower is complying with the lender’s document requests and that the lender is properly reviewing the applications.

Despite this new rule, it is likely that short sales will continue to decline because the Mortgage Forgiveness Debt Relief Act of 2007 expired at the end of 2013. Under this Act, borrowers were not required to pay income tax on cancelled mortgage debt as a result of loan modifications, short sales, or deeds-in-lieu. Now that it has expired, borrowers who choose to do short sales may be hit with large tax bills after they sell their properties for less than what is owed on the mortgage. Therefore, even though the short sale and deed-in-lieu application process will be quicker with court oversight, borrowers may still choose to not move forward with these exit strategies because they cannot afford the taxes.