Watch Out For Effect Of Mortgage Modification On Guarantor

Mortgage modifications are all the rage today, as lenders and servicers well understand and appreciate.  But a recent case reminds us that a modification of a note or mortgage obligation can serve to release or discharge any guarantor of that obligation – unless the guarantor consents. [Excelsior Capital, LLC v. Superior Broadcasting Company, Inc. 82 A.D.3d 696, 918 N.Y.S. 2d 148 (2d Dept. 2011).]

Because many mortgage loans have guarantors, and because mortgage modifications are so common, the noted concept is meaningful and assuredly presents practical issues.

To highlight the points, observe initially that the presence of a guarantor has particular meaning when the value of the mortgaged property may be less than the debt. Thus, the guarantor can be pursued for any shortfall – the deficiency – upon a post foreclosure sale deficiency judgment motion.

The other instance when this is important is when the lender may decide to sue on the note and the guaranty (or just the guaranty) and forego foreclosure. (This would be pursued where it is determined that the obligor and/or the guarantor have readily reachable assets to satisfy a money judgment.)

Returning to the legal principle, if the note and mortgage are modified (one example of many is an extension of the maturity date) the guarantor is discharged, unless his consent has been obtained.  The theory is that when a modification occurs, that substitutes a new obligation for the original and the guarantor should not be liable for the principal’s failure to perform upon other than what was the subject of the original guaranty.

Having reviewed this compelling point, it should be emphasized that many – perhaps most – well drafted guaranties will recite that they are still binding upon the guarantor notwithstanding any modification of the note or mortgage.

The suggested lesson:  When a guaranteed mortgage obligation is to be modified, consult the terms of the guaranty.  If it is unaffected by modification, then no further thought need be given to the guarantor, although having him sign the modification can save litigation later.  If the guaranty does not have the noted saving provision, then the modification must be consented to (i.e., signed) by the guarantor to keep him liable.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.