Foreclosing A Mortgage The Lender Doesn’t Own

Ridiculous, you say.  What lender would do such a thing; it can’t happen.  Well, it does, and it has, as a new case dismayingly confirms [Rose Dev. Corp. v. Einhorn, 65 A.D. 3d 1115, 886 N.Y.S. 2d 59 (2d Dept. 2009)].

When a lender stumbles and begins a foreclosure of a loan it does not own – via a defective or ill-timed assignment for example – the likely consequence is a successful defense by the borrower.  (Or the court could take a position on its own relative to this point as we are more often seeing in New York.)  Then, the action is dismissed and the hapless lender loses time and incurs expense – a concern to be sure, but hardly a cosmic outcome.  But in the new case it was considerably worse:  the foreclosing lender was held liable for resultant damages.

This is based in part on a well known principle, that generally a foreclosure sale purchaser is entitled to a good, marketable title.  But here, the purchaser (initially the bidder) got nothing because the mortgage was not owned by the claimed lender and therefore could not have been foreclosed upon.  Thus, the foreclosing party was deemed directly responsible for the defective title.

The facts thereafter explain how the lender was forced to write a substantial check, although one somewhat less than it might otherwise have been.

Here, the bidder closed title with the referee (in the lender’s foreclosure) and thus became the owner.  The bidder then sold the property to a third party which insured that title for $275,000 with a title company.  Later, both sales were vacated because the title was defective – again because the lender didn’t own the mortgage.

The third party turned to its title company and, because the property was worth $350,000, the insurer was obliged to pay to the third party up to the limit of the policy, $275,000.

The title company then stood in the shoes of the third party (it was subrogated) and sued the bidder for the $275,000 loss.  The bidder then claimed over against the foreclosing lender for contribution and indemnification.  Because the bidder, however, never returned the $150,000 purchase price to the third party, the lender was liable only for $125,000.

This smaller number was just a peculiarity of the fact pattern.  It could have been the full $275,000.  Either way, the point is made.  While lack of care in assuring that the foreclosing party is actually foreclosing a lien it owns will usually result in not much more than annoyance (albeit substantial), it actually could be much worse.

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.