Judge Jeffrey Spinner referred to the bank's actions as "harsh, repugnant, shocking and repulsive."
The decision, pending appeal, leaves the Horoski family free of debt on their East Patchogue home.
Greg Horoski and wife Diane Yano-Horoski, who fell behind on their mortgage payments because of health problems and an interest rate change, say they tried repeatedly to restructure their loan, but that the bank would not cooperate.
The Horoski's were freed of $291,000 in principal and $235,000 in interest and penalties.
OneWest issued a statement saying, "We respectfully disagree with the lower court's unprecedented ruling and we expect that it will be overturned on appeal."
The judge blasted the bank for refusing to work with the couple and for apparently misleading him about the dollar amounts at stake in the case. He also lambasted the bank's treatment of the couple over months of hearings.
Spinner said the bank "must be appropriately sanctioned so as to deter it from imposing further mortifying abuse."