Loss Mitigation – Honor Thy Modification Agreement

In the mortgage foreclosure process, some, even many, errors can be considered mere irregularities and can be ignored.  There are, of course, limits to such saving interpretations.  One of those arises from a new case [335 Second St. Hous. Corp. v. Fridal Enters., Inc., __ A.D.3d __, __ N.Y.S.2d __ (2d Dept. 2007)] where the lender failed to enforce the new interest rate in its modification agreement – and was ruled bound to the old rate of interest.

While all the details do not appear in the decision, it is apparent that the interest on the loan was increased via a modification agreement.  For whatever reason, the lender continued to bill the borrower for nine years at the former, lower interest rate. Obviously, the lender accepted those deficient payments without incident or complaint and certainly no declaration of default.

Eventually the matter came to a head in litigation when the lender finally awakened and demanded interest at the agreed upon increased rate.  “Not allowed” said the court, given the circumstances.

The lender’s conduct in accepting payments all those years induced the borrower’s reasonable belief that the higher rate would not be imposed so that the borrower refrained from obtaining better terms elsewhere.

Yes, an agreement is to be enforced as written.  But here, the court invoked the doctrine of equitable estoppel against the lender who was then prohibited from insisting upon the terms of the modification agreement because of its conduct.  The lesson then is apparent.  Follow the terms of your agreement or eventually some rights could be lost.

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.