New York’s New Foreclosure Statute – A Critical Analysis – Danger, Delay, Expense, Imprecision
INTRODUCTION
Prosaically referred to as Governor’s Program Bill No. 46, New York State has passed, on December 15, 2009, a new foreclosure statute which will impose considerable delay upon the mortgage foreclosure process in New York and create numerous new opportunities for borrowers and other defendants to contest the foreclosure case. The law will expose lenders to potentially significant repair and maintenance costs for properties in foreclosure – and even after foreclosure – as well as incurrence of increased insurance premiums, legal and administrative costs and exposure to tort liability. It will also work a reversal of title priorities so that leases junior to the mortgage will survive foreclosure and thereby be elevated to seniority. (There is more to the changes but the focus here will be upon those relating to mortgage foreclosure aspects.)
Via amendment of existing statutes and creation of new sections (RPAPL, UCC, CPLR and BL), the noted effects will result from requiring:
- a notice to all occupants at the inception of a foreclosure (effective 30 days after December 15, 2009); and
- a ninety-day notice as a condition to institute a foreclosure for all home loans (including condominiums and co-ops) (effective 30 days after December 15, 2009); and
- leases (written, oral or implied) to survive foreclosure with tenants and occupants to be sent a post-foreclosure notice (effective 30 days after December 15, 2009); and
- lenders to file certain information about the delinquent loan with the superintendent of banking within three days of sending ninety-day pre-foreclosure notice (effective 60 days after December 15, 2009); and
- lenders to maintain and repair the premises in foreclosure (upon certain events) from issuance of judgment of foreclosure and sale until recordation of the referee’s deed (effective 120 days after December 15, 2009; and
- conferences in all foreclosure cases involving home loans (effective 60 days after December 15, 2009).
All this will, not surprisingly, affect the insurability of foreclosure titles, requiring new title underwriting standards for such properties.
Issues presented by the statute (actually a group of provisions) can be viewed as objectionable in two broad areas: philosophically and mechanically. As will be discussed, the impositions upon lenders are to a significant extent unprecedented – and whether they will serve the stated purposes is assertively questionable. Even were the impositions welcome, flaws in the drafting of the provisions will lead to unfortunate litigation to clarify the patent – and latent – ambiguities.
The review which follows will examine each major tenet of the new laws, then observe the problems they create, finally presenting the unintended consequences which will emerge.
Regarding this later exploration, there may be some critical concepts overlooked by the legislature. Time is an enemy of the foreclosure process and all its parties. The passage of some time can be salutary; it allows the defaulting borrower to pursue a rescue path, be that sale or refinancing of the property, the filing of a bankruptcy or arranging some settlement with the lender. But New York foreclosures are already overly extended, longer than almost any other state and often measured in years. So it is not as if there is a paucity of time available needing yet more time to be inserted in the process.
The danger of all the delay inevitable with the new requirements is that time translates into accrual of debt through ever accumulating interest. Administrative costs, litigation fees, taxes and insurance (and in the instance of a junior mortgage, possible advances to the senior mortgagee) also mount.
The greater the debt – ever increasing by the noted factors – the more onerous it becomes to settle the case. More must be paid by the borrower or the lender must sustain an ever greater loss, or both. None of this can be an agreeable consequence.
Then too, should a foreclosure action proceed to sale, the foreclosing lender is entitled to receive only the sum adjudicated as due to it. So if the foreclosure sale brings a sum greater than due the lender, the overage – the surplus – is available to any other lienors on the property and, if sufficient, to the borrower as the owner of the equity of redemption. Except in times of wildly escalating real property values (certainly not these days) the passage of time, the delay in the foreclosure action, will assure that the debt escalates to extinguish any possible surplus.
The converse is also a factor. If the debt becomes greater than the value of the property, it creates a deficiency for which the borrower (and possibly others, i.e., friends or family who were guarantors) is personally liable. So time and expense lead to dual undesirable events – surpluses disappear and deficiencies arise.
NOTICE TO TENANTS
MANDATE: In continuing the requirement of RPAPL §1303 to serve an additional notice as part of the summons and complaint (on different colored paper, certain size type and a separate page) upon the mortgagor of an owner occupied one-to-four family dwelling, the amendment now directs a notice to any tenant of a dwelling unit, such notice to be delivered within ten days of service of the summons and complaint. (The appearance, but not the language, of the notice mirrors the version to the mortgagor.) If the building has less than five units, delivery is to be by certified mail return receipt requested and by first class mail to the tenant at the property, if the tenant’s identity is known. If the identity is not revealed, the mailing is to be by first class mail directed to “occupant.” Where the building consists of five or more units, the notice must be posted “on the outside of each entrance and exit…”
The provisions of the notice appear in the statute and include advisements that if the lease payments at the time of inception were not substantially less than the fair market rent, the tenant may be able to remain for the lease term; if no lease, remaining for ninety-days after the acquirer of title sends a notice as required by the new section 1305.
PROBLEMS/COMMENT: There are immediate anomalies in the composition of this section. For example, rent protected tenants cannot be named or extinguished by a foreclosure so the required notice is at least a non-sequitur as to them. Other tenants who a lender would choose not to name and serve, and who therefore would not be effected by the foreclosure, must likewise receive the notice. Creating a new separate notice step just adds another bureaucratic plateau and creates more room for error.
Regarding occupants the foreclosing lender would desire to cutoff (traditionally an economic decision relating to the post foreclosure value of the property) their status is unknown. Overwhelmingly, the lender will not know who has a lease, (who now cannot be extinguished by the foreclosure), who is just a month to month tenant or who may claim to have an oral or implied lease. Everyone will get a notice, but the foreclosing plaintiff cannot know who can efficaciously be served in the action. A further serious problem is that when a tenant with a lease is served in the action (because the plaintiff won’t know their status) an answer is sure to follow from that party because their rights cannot be affected by the action.
The only references in this §1303 to the nature of the property encompassed by its dictates are “residential real property” (not defined in this section) and, as mentioned regarding notice to the mortgagor “…if the action relates to an owner-occupied one-to-four family dwelling.” This seems to confine the purview of §1303 to this latter category. But then notice to tenants is also discussed when there are five or more units in the building. So this section itself never describes with certainty what buildings require the tenant notice. Does it apply to a building with four stores on street level and one apartment above? Does it cover the foreclosure of the underlying mortgage on a building dedicated to co-op use? Does it really apply to a fifty unit apartment building?
The new RPAPL §1305(a) (discussed, infra.) does indeed define “residential real property” – but in the context of a later notice to tenants required in a foreclosure case and it is cited as confined to §1305. It may be that the broad definition of “residential real property” in §1305 was intended to apply to §1303 – but it does not say that. It is tangibly confusing and inconsistent. Lenders will not know for sure which properties require the initial tenant notice. This is a major mechanical shortcoming of the statute and merits corrective action by the legislature.
Next, as noted, lenders do not know who the tenants are at the property subsequent to the mortgage loan closing. Whether a process server sent to the premises can determine the names of such tenants is problematic so the notices will almost invariably be sent to “occupant”.
While earlier versions of this statute suggest that the requirement to post the notice is separate, applying to the exclusion of any other notice, it might not be clear to all that it is not some posted notice in addition to mailing. If there is room for misinterpretation here, redrafting would be welcome.
The notice which triggers the ninety days for occupants without a lease to depart also suffers from imprecise language. The notice is to be sent by the acquirer of title. If that means the purchaser at the foreclosure sale, it should say so. Later statutory references to the sale of the property through foreclosure or otherwise indicate legislative confusion about how the foreclosure process works. So if the mortgagor/owner sells the property during the foreclosure – which he is absolutely empowered to do – whether the acquirer of title must now send the notice is unclear. It makes no sense, but it appears possible from the words themselves.
UNINTENDED CONSEQUENCES: One of the stated needs for the surfeit of new foreclosure statutes is the view that borrowers (and by implication, tenants) are ignorant of law, finance, customs and procedures. In short they suffer – it is assumed – from lack of knowledge. So when tenants are advised by a notice that they can continue to remain in residence, foreclosure notwithstanding, neglect to recite required adherence to tenant obligations – particularly paying rent – presages tenants’ declining rent obligations not only to the current owner, but the foreclosure sale bidder who succeeds to title.
Lenders know that foreclosure tenants (defaulting mortgagors in particular) often allege lack of service as a claimed defense to foreclosure, commonly on the eve of sale. It would be easy for a tenant to assert either that the notice due them was never received, thereby requiring the lender to prove the mailing which can often be difficult. Likewise, a tenant in a building could allege that the notice was not posted at each entrance/exit, again (presumably) compelling the lender to prove the affixation.
What happens if a court concludes that a mailing to one tenant could not be proven, or that proof of affixing the notice to one of the two entrances was not satisfactorily demonstrated? (It would be effortless for anyone to immediately rip down the notice.) The statute is silent on the consequences of such a failure. There is more than sufficient case law for the proposition that in the absence of prejudice, an error can be disregarded as ministerial.1 But there is one case 2 which treated lack of the additional notice in the summons to a mortgagor fatal to the case. So a miscue here, or one so perceived by a court, portends danger to a lender under circumstances where harm to anyone would be difficult to discern.
A tenancy subsequent in time to recordation of a mortgage is junior and subordinate to that mortgage. Declaring a later lease viable despite foreclosure works a reversal of priorities and renders the recording statute3 void. It also potentially reduces the value of mortgaged property burdened by interests which would not otherwise be predictable; more on these perils when later reviewing the portion of the statute which effectuates the tenancy preservation.
NINETY-DAY NOTICE FOR ALL LOANS
MANDATE: The ninety-day notice as a prerequisite to foreclosure is now expanded to encompass all home loans.4 (Previously it had applied only to certain subprime loans.) While the language of the notice remains unchanged, “an assignee” (presumably of the mortgage, although it does not specifically define the term) is added to lender and mortgage loan servicer as the parties denominated to send the notice before a foreclosure is commenced. And this notice must be in an envelope separate from any other mailing or notice. Thus, the usual thirty-day breach letter must be in its own mailing.
Home loan is no longer confined to any amount.5 It is a loan to a natural person (therefore not a corporation an LLC or LLP), with the debt incurred primarily for personal, family or household purposes and the security – the mortgaged property – improved by a one-to-four family dwelling or a condominium unit (the expansion to a condo is new) “used or occupied, or intended to be used or occupied wholly or partly, as the home or residence of one or more persons which is or will be occupied by the borrower as the borrower’s principal dwelling.”
“Foreclosure” of a co-op interest now elicits a ninety-day notice too, per amendment to the Uniform Commercial Code.6 For a lender who may propose to take the co-op without a sale, or if the borrower offers the equivalent of a deed in lieu of foreclosure,7 new provisions apply and should be consulted.8
PROBLEMS/COMMENT: When first the ninety-day notice imperative was imposed, there was no empirical data showing that the notice would ameliorate foreclosure concerns. The theory was that borrowers were somehow unaware of their plight, were otherwise ignorant of any way to rescue themselves and, as subprime borrowers, were more in need of some help with their plight. Because the subprime crisis seemed so acute, it was hoped by the legislature that this notice would somehow rectify problems. We know of no evidence that it does. Foreclosure lawyers can anecdotally confirm, though, that borrowers call plaintiff’s counsel puzzled by the meaning of all the notices they receive.
One can also wonder whether the legislature was consciously aware of the existing contractual requirement in the universally employed Fannie Mae/Freddie Mac Uniform Instrument (mortgage) for a thirty-day breach or cure letter. This is already a condition precedent to acceleration and foreclosure. Why ninety days notice (aside from length alone) will somehow be curative is a mystery.
If no one can say whether the notice was of identifiable aid to subprime borrowers, imposing it now for all home loans is a reliance solely upon hope.
In defining the home loan as one which “will be occupied as the borrower’s principal residence”, the door is opened for considerable mischief and may be affording protection for investors who were not the intended beneficiaries of the legislation. Existing case law already indicates how language such as this can foster irresolute litigation.9
New York has always been known nationally as one of the most difficult, expensive and time consuming states in which to prosecute a mortgage foreclosure action.10 Even were it not that non-judicial foreclosure is the preferred and efficient methodology in more than half of the other states (oddly repealed in New York as of July 1, 2009), clogged calendars, litigious borrowers, ritualized plateaus and a vigorous defense bar-all exacerbated by continuing statutory impediments – contribute to glacial progress of the foreclosure case in the Empire State. Because of this, there are lenders who decline to become licensed to lend in New York because they fear the losses which can be incurred by the woefully extended foreclosure case.
Indeed, volume alone assures stupefying delay in the New York foreclosure action. In Kings County for example11 as of October 2009, clerks were first reviewing orders from October 2008. This imposes a one year delay for each order stage. There being two such stages (order of reference and judgment), these steps alone consume two years, meaning that in an ideal, uncontested foreclosure action, free of the myriad problems which can so easily torpedo case progress, two and a half years will be the minimum consumed by the foreclosure action (in Kings County). This does not take into account the time from the borrower’s default until the ninety-day notice was sent, or, of course, the ninety-day wait consumed by the notice period itself.
In short, without legislative help, the time afforded to defaulting borrowers to extricate themselves from their dilemmas is extraordinary in any event. Assuring yet another three month delay in most cases seems just to extend the period during which borrowers can refrain from remitting mortgage payments, real estate taxes and insurance.
UNINTENDED CONSEQUENCES: The ninety-day notice requirement for all home loan mortgages in default creates an automatic three month moratorium on pursuing enforcement of any default. It also grafts ninety-days of interest accrual on to the debt creating – obviously – a greater obligation to be paid (a case therefore harder to settle) and/or a yet greater loss to be absorbed by the lender.
Regarding co-ops now added to the mix, one might inquire what statistics suggested that without this addition of delay, co-op owners were suffering untoward loss of their proprietary leases. That aside, because co-ops can control who buys at the “foreclosure” sale, among other reasons, co-op loans have always been more tenuous and merited a higher rate of interest for the loan. Co-op lenders found solace, however, in the knowledge that a sale pursuant to the UCC, a non-judicial process, took only about three months. So a rapid remedy and conclusion was typical. Some of that comfort is now gone because three months more interest has been grafted upon the obligation. The interest rate for co-op loans may therefore be raised still higher making such loans less accessible.
LEASES SURVIVE FORECLOSURE
MANDATE: A new RPAPL §1305 provides detail as to the new tenant notice and it is here that the depth of problems and confusion in this arena are highlighted.
Residential real property (for which the tenant notice is required) is defined as any building or structure that is, or may be used, in whole or in part, as the home of one or more persons and includes any building used for both residential and commercial purposes.12 In short, from a one family home, to the largest apartment building, to any mixed use structure, tenant notification will be required.
The definition of tenant (at the time the notice is required) is not confined merely to a lessee junior to the mortgage. Rather, it includes also “a party to an oral or implied rental agreement…”13
“Successor in interest” elicits a curious definition in the statute.14 It is a way to describe the purchaser at the foreclosure sale who must provide written notice to tenants of their right to remain.15 It also applies to any person or entity who acquires title by “other disposition during the pendency of the foreclosure proceeding…”16 If this was meant to apply to a lender which takes a deed in lieu of foreclosure it makes some sense. (Even that is limited because a deed in lieu takes subject to all interests anyway, inclusive of leases.) But if that was the purpose, it should say so or it is pointedly unclear. If it refers, however, to someone who may buy the property from the owner prior to the foreclosure sale, it makes no sense. Such a person simply succeeds to the title of the former owner – not the mortgage holder. (Therefore tenancies are simply unaffected.)
The tenant is then afforded the right to remain in possession17 from the date of mailing of a notice (later provided for in the statute) for the greater of ninety days or the remainder of the lease.18 To qualify to remain, though, the rent pursuant to the lease cannot be substantially less than the fair market rent which in turn is to mean for a unit of similar size, location and condition.19 As to other conditions of the lease, those in effect at the time of entry of the judgment of foreclosure and sale apply.20
The purchaser at the foreclosure sale (or successor in interest) must provide written notice to all tenants of their right to remain, presenting also the name and address of the new owner. If there is a successor after the issuance of what the statute calls the ninety-day notice (but which “ninety-day” notice is meant?) the tenants must be notified of his or its name and address.21
PROBLEMS/COMMENTARY: Defining residential real property as property which may be used as a home or residence is immediately conflicting. If it is not yet used in that fashion, then there could not be tenants needing notice. Refinement here should be considered.
As discussed, supra., reversing priorities and making subsequent leases superior to an earlier mortgage creates astounding rights which seem to have little to do with foreclosures. While it is true that federal legislation did the same thing (one could argue against it for like reasons) it applies only to federally related loans.22 This legislation takes it further and applies to all loans for residential property (as defined).
When a tenant leases property which then goes into foreclosure, if the foreclosure preceeds to a sale, and if the tenant was named and served (or if the tenancy is subsequent to the filing of the notice of pendency) then yes, the tenancy will be cutoff and the tenant can, but won’t necessarily, be evicted. It has always been so. It may seem unfortunate, but a tenant who leaves loses no ownership interest. New quarters need be found, but is such an occurrence of sufficient magnitude to foist a reversal of priorities upon mortgage lenders?
If someone without a lease can nonetheless remain for ninety days post foreclosure sale, need they not pay rent or more accurately, use and occupation? The statute is silent but surely should require it. Otherwise, while the bidder at the sale (the former mortgagee or a third party) is liable for taxes and insurance and has lost the use of the money invested, the holdover resides for free. There is no basis for such an untoward bonus.
And what if a claimed existing lease is of some unusually extensive duration, perhaps ten or twenty years? The defaulting mortgagor may have conferred this benefit upon a relative or a friend. Even were it near market rent, foreclosure sale bidders might have other intentions for the property, such as conversion to another use, expanding or contracting the units. Those goals would be denied.
Even had a lease at its inception been near market rates, in the absence of appropriate escalation provisions it could readily over time fall below market. The statute does not address this meaningful point and is yet another circumstance under which leases forced upon foreclosure sale purchasers could be notably unpalatable.
In preserving leases, the legislation intended not to honor “sweetheart” leases. But how to assess what is “substantially” below market rent will always be a question of fact. Moreover, even somewhat lower rents may be conspicuously unattractive to bidders. Consequently, preserving tenancies which never had such a right can serve to chill foreclosure sale bidding creating yet greater losses for lenders.
For the purpose of assessing how to bid at a foreclosure sale, it will be difficult or impossible to know what leases are claimed to exist. So the problem of who a foreclosure sale bidder inherits as a tenant is an unknown until after the foreclosure sale – a serious matter indeed.
This conundrum is compounded by imposing upon foreclosure sale purchasers the terms of “oral” or “implied” leases. No one can ever know what the terms of these creatures are. A tenant claiming an oral lease, which otherwise of course must be in writing, could assert its duration as ten years. (Even a written lease of more than three years would have to be recorded to be protected but such niceties are disposed of by this legislation.) What the various oral or implied lease terms may be which when written typically fill many pages remain unknowable.
While the need to transmit a notice to tenants after the foreclosure sale is manifest, how to send the notice is recited only as mailing. Therefore, purchasers will need to be careful in selecting a method which can be proven lest tenants garner yet further time asserting that notice was never given, a common ploy.
Any occupant is assured by the statute that he can stay at the premises for ninety days after the mailing of notice. Should the occupant nevertheless remain after the ninety-days, evicting can be exceptionally time consuming. Anywhere in New York City, that process regularly consumes many, many months at best. Thus, three months can easily become six months – or much more. An assumption of the statute appears to be that tenants faced instant dispossess after a foreclosure. It is just not so in the real world.
UNINTENDED CONSEQUENCES: Occupants remaining at foreclosed premises for ninety-days, only to then delay eviction for extended periods and tenants remaining for unknown durations pursuant sometimes to unwritten terms, create far too much uncertainty for many potential foreclosure sale bidders. This has considerable potential to chill the bidding process and devalue foreclosed properties.
Even encountering the holdover tenant peril portends litigation expense in battling below market rentals and claimed oral or implied leases.
If bidders will be fewer, or if properties lenders take back will be worth less than they might have otherwise been absent imposition of reversal of priorities, lending becomes more hazardous. Interest rates would need to be higher and lending standards far more strict to account for the hazard.
LENDER TO FILE DOCUMENTS WITH STATE; PLEADING
MANDATE: A new RPAPL §1306 directs every lender (assignee or mortgage servicer) to file electronically with the superintendent of banks within three business days of mailing the ninety-day notice (for mortgages and co-op loans) certain information about the delinquent loan.23 The complaint in the foreclosure must then contain – as a condition precedent to the action-an affirmative allegation that as of commencement of the action (which is accomplished by filing the complaint) the plaintiff has complied with this section as to filing information. (Because there is no complaint in a co-op foreclosure, it must be assumed no burden in this regard is imposed.)
Specifically recited as minimum data to be filed with the superintendent includes the name, address and last known telephone number of the borrower, the amount claimed as due on the mortgage “and such other information as will enable the superintendent to ascertain the type of loan at issue.” Still further, the superintendent is authorized to later request such readily available information as may be reasonably necessary to support a review as to whether the borrower might benefit from counseling or other foreclosure prevention services.24 The electronic filing system was not developed at the time the statute was passed but will be created within 180 days – or such later time as the superintendent may determine.
PROBLEMS/COMMENTARY: Adding still another step to the foreclosure process imposes yet further cost upon lenders and servicers. At least as to the information specifically categorized, it is possible for lenders to comply (if the electronic system existed). But how can the lender determine what is included in “such other information as will enable the superintendent to ascertain the type of loan at issue”? One can guess; it might refer to variable interest or reverse mortgage and so forth. But if it is not certain – and it assuredly is not – a lender can never know with confidence if it complied. And yet the lender must affirmatively plead compliance.
The superintendent is then empowered to request further information. Rhetorical questions are in order. But how often? What exactly is “readily available?” What precisely might be reasonably necessary for the superintendent to glean how to help a borrower? How could any such thing be devised without extensively reviewing the borrowers finances? Indeed, the Banking Department recently acknowledged a shortage of resources which is a worsening problem.
In the meanwhile, until the electronic system is established, it will be an utter impossibility for any lender to plead compliance with submission because submission cannot be accomplished.
UNINTENDED CONSEQUENCES: Because designing the electronic system may not be accomplished for half a year – or even longer – there is effectively a moratorium upon foreclosures in New York for this unknown period. The simple reason is because no plaintiff can plead the required condition precedent of filing compliance.
Even when finally the system is in place, what information must actually be submitted remains open to interpretation. This both augurs borrower imposed defenses that the lender did not comply with the obligation and potentially mires the foreclosure action in yet further delay engendered by litigating the point.
There is then the unknown of how often the superintendent may request further information, what it will be and what additional expense lenders will incur in locating and presenting what is requested. There could then be disputes as to whether the information fits the imprecise language of the statue or whether it is even available. This too presages expense and possibly litigation.
LENDERS TO MAINTAIN PROPERTY
MANDATE: A new RPAPL §1307 requires that from the moment a plaintiff “obtains” a judgment of foreclosure and sale upon residential real property (so broadly defined in RPAPL §1305) the plaintiff must maintain the property until recordation of the deed through foreclosure, or other disposition (whatever precisely that is supposed to be).25 The maintenance obligation applies when the property “is vacant, or becomes vacant after issuance of such judgment, or is abandoned by the mortgagor but occupied by a tenant…” (This language is markedly inexact, discussed, infra.)
The plaintiff is given the right to peaceably enter the property for inspections, repairs and maintenance, although if there is a tenant present, at least seven days notice must be provided; reasonable notice in the event of emergency repairs.26
Not only is there an obligation to maintain and repair, it is enforceable by the local municipality , a tenant lawfully in possession and a homeowner’s association (if applicable), upon seven days notice to the plaintiff, except for emergency repairs, in which event notice is unstated. The enforcer also is granted a cause of action against the foreclosing plaintiff to recover the costs of maintenance.27
Appropriately, a bankruptcy filing suspends the maintenance mandate until the stay is lifted28 and there is no maintenance responsibility while a receiver’s authority is pending.29
The level of maintenance is controlled by the standards in the New York property maintenance code chapter 3, sections 301, 302 (with exclusions listed) , 304.1, 304.3, 304.7, 304.10, 304.12, 304.13, 304.15, 304.16, 307.1 and 308.1.30 However, where the property is occupied by a tenant, the additional requirement of maintenance in a safe and habitable condition is imposed.31
PROBLEM/COMMENT: How long the maintenance period is to be, and precisely when the obligation applies are answers falling victim to inexplicit verbiage.
One parameter is that the repair obligation will exist if the property is vacant. Because the mixed use building is covered by the statute, must the commercial establishments be vacant as well, or only the residential portions? The point is not addressed. We must therefore assume the answer is completely vacant.
Another line of demarcation is if the property becomes vacant after issuance of the foreclosure judgment. This presents two immediate problems. How is the foreclosing party to know if property becomes vacant. Must they send staff or a service to ascertain occupancy status once a month, or once a week, or every day? What is the standard and what will it cost?
Next in this regard is the inquiry, when does a judgment “issue”? It is not a term of art. A judgment is first signed and thereafter entered. The time between the two events can be days, weeks or more. Mindful that imposing of maintenance responsibilities is earlier recited as occurring when the plaintiff “obtains” a judgment, the statute is both indefinite and inconsistent. So how to measure the obligation in regard to a time of vacancy is unknown; it must be clarified by the drafters or it will just be the subject of wasteful litigation.
The next defining moment recited is “abandoned by the mortgagor but occupied by a tenant.” The definition of residential property for the purpose of this section does not include owner occupied. So if the mortgagor never resided at the property, how could a foreclosing lender measure “abandonment”? If a tenant is present, maintenance is required only if abandoned by the mortgagor so this will typically be extraordinarily difficult to assess. Even if the mortgagor did live at the premises, knowing if he departed, with the intention never to return, is always an uncertain question of fact. Assuming that was determinable, it is not clear whether abandonment means merely the mortgagor’s physical departure or abandonment of his responsibilities as the owner.
Still further, the mortgagor and the owner are not necessarily the same person. A mortgagor who owns the property can (and sometimes does) sell the mortgaged premises, an act valid at any time up to the moment the property is struck down at the auction sale. So measuring anything by referring solely to the mortgagor is misplaced. It only has genuine meaning if that person is denominated as the owner.
As to commencement of the repair obligation time period, according to the statute it begins when the plaintiff “obtains” the judgment of foreclosure and sale. That too is not a definable moment. It is either when a judgment is signed or when it is entered. Mindful that a signed judgment is often unavailable to be seen prior to entry, and that there is controversy as to whether a foreclosure sale founded upon an unentered judgment is valid,32 the most meaningful moment from which to measure is “entered”. This is another shortcoming of the statute which needs attention.
Because entry of a judgment of foreclosure and sale is the last step in a foreclosure action prior to the sale, it seems likely that the drafters assumed that duration of the maintenance period imposed upon foreclosing lenders was, if not finite, of limited length. The real world actuality is that it is certainly not finite and its duration can be of remarkable breadth.
Entry of judgment is the first moment a foreclosing plaintiff can endeavor to schedule a foreclosure sale. (If the statute means some earlier date – but we don’t know – then the repair obligation could have begun weeks before.) The sale advertising process is to be once a week for four weeks.33 But depending on the newspaper selected by the court, the submission date for the ad could have passed. (A difference is publications which appear weekly as opposed to daily.) This can add up to a week to the process.
But then, the available date four and a half or more weeks hence must be confirmed with the referee. While the referee may be amenable to that first possible date, he or she may have scheduled a trial or vacation at that time. Or the referee may be ill and needs a still later date. (The reasons a referee might not be immediately available are legion.)
Once the sale date is set, there remain many common perils which create delay: the paper publishes incorrectly requiring an additional week to publish anew; the referee becomes sick, or is appointed to a governmental or judicial position prohibiting his service which then necessitates a motion for a successor; the newspaper has gone out of business thereby needing an order to select a new paper; the borrower or other party has an order to show cause signed which stays the sale. In this latter instance, how many weeks – or months – the action will be delayed is unknown.
Whether or not any of these events are encountered, there is still considerably more room for delay. (Recall that the outside date for the repair obligation is recordation of the referee’s deed.) To elucidate, suppose the foreclosure sale is conducted and the property is struck down, but the bidder defaults – which typically occurs only after delay in and adjournments of the closing. Then, the scheduling and advertising of the sale must begin anew. (This is hardly uncommon.)
Another usual scenario is that the bidder professes a desire to close title, but requests an adjournment from the initial closing date (by all standard terms of sale thirty days after the auction date) to thirty days thereafter to secure financing. The foreclosure sale was not subject to securing a mortgage, but because resetting the sale would consume more than thirty days anyway, the adjournment request is granted.
There can then be yet further adjournments and even if the plaintiff is reluctant to agree, the referee can do so on his own. A part of this can be, and usually is, the title aspect. Bidders’ title insurance carriers raise exceptions. Whether real or illusory, they need to be attended to either by curing those which need remediation or producing documentation which persuades the prospective insurer to omit the exceptions. Sometimes title disputes lead to litigation between bidder and plaintiff. [For a review and analysis of fact patterns and case law exploring the astounding variety of grounds to assault a foreclosure sale see 3 Bergman on New York Mortgage Foreclosures §30.06, LexisNexis Matthew Bender (rev. 2009)].
When finally a closing arrives, the foreclosing plaintiff has no control over recording the deed and cannot even know when exactly that occurs – and yet per the statute the obligation to repair continues until that unknowable moment. It will be the bidder/purchaser, or more likely the bidder’s title company, which submits the deed for recording. Precisely what date that will be depends in part upon the time of day of the closing, the day of the week (a Friday closing will incur delay of the weekend) and the diligence of the title closer. One can inquire too, does the statute deem recording to be when delivered to the recording officer or when actually of record to be searched? (This is less of an issue in New York City with ACRIS.) In this regard, delivery of the deed – not its recording – is a more sage delineation.
In sum, how long a foreclosing party may endure the obligation to maintain someone else’s property cannot be assessed and has the potential to be very long indeed.
Forcing a foreclosing lender to maintain properties in foreclosure exposes them to tort liability they would otherwise never encounter. Constraining them to repair can be argued as foisting upon lenders the care, custody and control over the property which is a necessary element to make them liable. One example of those far too many to enumerate would be a claim that in the course of maintenance a lender left a tool at the premises which led to a trip and fall – and the resultant negligence action against the lender. If the repair responsibility is imposed upon lenders, the statute should insulate them from tort liability which can readily be done but is not provided.
If a tenant is present (and the mortgagor has “abandoned”), it anomalously falls to the lender to render the premises habitable, which would include the cost of heat. Whether tenants were nonetheless paying rent the owner is perhaps unlikely (but assuredly not impossible). What is apparent is that the statute provides no recompense to the lender for the cost of all the repairs and maintenance. Whether this can be added to the mortgage debt is uncertain; it would depend upon the mortgage documents. The statute could easily make this compensable and should do so.
When some dangerous condition exists at mortgaged property, under long-standing current law, a municipality after constitutional notice can perform the work and then lien the property for the sum. Thus, payment to the municipality comes from any surplus foreclosure sale proceeds but is not the personal responsibility of the lender. This statute, however, puts lenders at the mercy of tenants and others to make the repairs and then be subject to a personal judgment for that amount – all sums which could never be determined in advance of making the mortgage loan.
A mortgage is a lien on real estate. It is not an ownership interest. If a lender deemed it advisable as a matter of business judgment to become a mortgage in possession to collect rents and maintain the property, it is free to do so pursuant to the mortgage documents and case law – but for all the reasons renewed here invariably does not so elect. The lender can have a receiver appointed for that purpose, but may refrain if the income is insufficient because the lender could be obliged to pay the receiver – just what it might not want to do. Indeed, as a matter of law a lender has no repair liability for mortgaged premises.34 A mortgagee not in possession is not an owner for the purposes of Multiple Dwelling Law §4(44).35
Not only is it dismayingly revolutionary to require a party with only a lien interest (the mortgagee) to be liable for property maintenance, there is also a startling anomaly in making a mortgagee responsible for anything once the property is struck down at a foreclosure auction sale. From that moment, and until conveyance of the deed when the bidder becomes the legal owner, that bidder is the equitable owner of the property.36 The mortgage is gone and the mortgagee has no interest in the property. Still, the statute demands responsibility when even the lender’s lien interest has vanished.
UNINTENDED CONSEQUENCES: It seems exquisitely incongruous that a mortgagor could default, constraining a lender to institute a foreclosure action and face expense and loss, then forcing the lender to attend to the defaulter’s property at the lender’s expense and peril. That, of course, is what the statute does.
But this is an event lender’s did not bargain for and could never accurately calculate in advance. The duration of the repair obligation is uncertain (potentially much longer that the legislators imagined) and the monies to be expended for the indefinable period are likewise not predictable. What repairs and maintenance any building might need would depend upon the quantum of owners’ neglect and how long the property suffered that neglect. Nor could the cost of supplying heat and utilities for any size building for an immeasurable period be capable of prior contemplation.
If any loan could present such a time bomb, lenders will elect to make far fewer loans. And the loans they do fund will have extraordinarily strict standards. Lending will be deleteriously effected in this state.
Then there are eve of sale settlements. Borrowers seem not to face their plight until the eleventh hour. But lenders exposed to maintenance and habitability expense will decline to adjourn sales to accommodate possible settlement lest they further extend the period of liability. This will hardly benefit borrowers.
With lenders bound to maintain property, there is seductive incentive for borrowers to keep lenders so obligated – it only serves to make the mortgaged premises more valuable. But keeping lenders in the game means delaying the case further. This encourages orders to show cause, appeals with a stay and other dilatory litigation devices – all quite unwelcome.
As an adjunct to this, the increased potential for tort liability for an extended period will incur new and greater insurance costs for lenders. There is also the imponderable of what insurable interest a lender has once the auction is held. Where there is a third party bidder, the lender possesses neither mortgage nor title but remains exposed to tort claims. This is yet another factor destined to chill lending.
Finally, lenders sometimes realize as a foreclosure nears its end that proceeding to a sale has no value. They have gone forward hoping that some favorable resolution will emerge, an approach everyone would encourage. It may be, though, that outstanding taxes are greater than the value of the property, or that deterioration has reduced the value too much. In such instances (and there are of course others) a lender would just elect to spend no more and not go to sale. But if the lender is saddled with the repair obligation, it becomes interminable should the sale never be conducted. Thus, the option not to proceed is effectively removed unless this evaluation can be made much earlier in the case, something lenders find difficult for the very reason that encouraging or eliciting more amenable conclusion requires prosecution of the foreclosure action.
CONFERENCES FOR ALL FORECLOSURES
MANDATE: In a foreclosure of a home loan (one-to-four family home, owner occupied, or to be so occupied, borrower a natural person and loaned sums used for personal, family or household purposes)37 in which the defendant resides at the property, the court must hold a mandatory conference within sixty days of proof of service filing with the court. Or, the conference will be on such adjourned date as agreed by the parties.38
At the conference, both plaintiff and defendant must negotiate in good faith to reach a resolution, to include a loan modification if possible.39 When a settlement agreement or loan modification may be fully executed, within one hundred fifty days the plaintiff must file a notice of discontinuance and cancellation of the notice of pendency.40
No attorneys’ fees or other sums can be charged for appearance or participation at the settlement conference.41
PROBLEMS/COMMENT: The original impetus for conferences in foreclosure cases assumed that subprime borrowers needed court supervision to help them find a solution. Statistics, though, do not bear out the optimism. According to an article in the New York Law Journal on November 18, 2009, in the last three month period, of the more than 1000 settlement conferences held in Kings Supreme Court, a mere 27 yielded settlements-less than 2.7%. Overall, the court system estimates that only 13.3 percent of the conferences have resulted in settlements. Most of these then fail. Fitch Ratings in analyzing loss mitigation efforts for the first half of 2009 conservatively projects that 65% to 75% of securitized subprime loan modifications will fall back into default a year after modification. Even those figures understate the modifications which fail because they do not include remodified loans later liquidated.
The math, then, suggests that only some 3.33% of subprime modifications ever achieve an actual result. How much better the statistics will be for all residential loans is problematical – certainly the legislature cannot predict substantial success. Yet, the statute imposes still more delay on foreclosures, which translates into greater debt through interest accrual, together with legal fees for the conferences which lenders are commanded to absorb.
Requiring conferences to be conducted within sixty days is a welcome attempt to somewhat limit crushing delay, but it won’t be hard to predict that the huge number of foreclosure cases will cripple the courts42 so that conferences will simply not be held within that period. Conferences today – fewer in number -often well exceed sixty days.
The portion of the statute which permits conference adjournment to a date mutually agreed upon is disingenuous. The way it works now is that borrowers (if they appear at all) seek multiple adjournments. They say they need counsel; then they aver they don’t have all their documentation ready, ad infinitum. So long as they continue to reside at the property with no obligation to pay anything, there is no penalty for delay but with concomitant compelling incentive to stretch the process. At present, not surprisingly, the courts generally accommodate borrowers’ desires so that multiple adjournments are typically imposed upon lenders. It can be predicted that such will continue, rendering the agreement language as to adjournments effectively meaningless.
Requiring the parties to negotiate in good faith seems innocuous and well intentioned, but goes beyond original intentions (to get parties together and hope something good results). It also exposes lenders to a charge that they lack good faith. A recent case voiding a loan on this ground shows just how explosively parlous such a standard can be.43 There is a sacred contract – the mortgage – which should be honored. Lenders may be amenable to reducing or eliminating some components of the debt (late charges or default interest for example) and postponing payment of arrears (perhaps to a balloon at the end), even reducing the interest rate. But given securitization complications there can be limits upon what a servicer can do. Moreover, there are limits to losses than can be volitionally incurred. Yet, a court could want more and assess a charge of lack of good faith.
Another aspect of this which seems benign – but is not – is the dictate to file the settlement with the court. One of the most common settlement paths is the forbearance agreement. Certain payments are made for a specified period with the mortgage becoming current at the conclusion or with some other arrangements, perhaps a modification, becoming effective at that time. But a forbearance agreement (which can be denominated as a standstill agreement or a stipulation) does not conclude the case.44 The action typically holds in place pending ultimate compliance with the terms. Thus, one of the most common settlement vehicles cannot and must not be filed with the court. The statute needs to be amended to take that into account lest lenders be forced to litigate the point because the statute is being misunderstood.
UNINTENDED CONSEQUENCES: Countless foreclosures will now suffer new and greater delays. Conferences will consume far greater time than is contemplated. All this, together with new legal fees lenders must absorb will result in greater mortgage debt. That in turn will either render cases harder to settle or cause lenders to take even greater losses. This combined with portent of lack of good faith litigation should serve to further diminish loan availability.
CONCLUSION
That the time and expense suffered by a foreclosure action would result in a borrower losing a claim to surplus – because accrual of debt caused the excess to evaporate – or the borrower becoming personally liable for a significant deficiency would doubtless be lamented by all. There is apparently far less sympathy for lenders which will incur ever greater losses as foreclosures are delayed, impeded and made more expensive through legal impositions. A quote from Pogo in the nineteen fifties is apt here: “…we have met the enemy and he is us.”
Banks and other lenders may apparently be faceless, but they are not strangers. They are us. We deposit our money in banks. We take car loans from banks (and would prefer competitive rates). The FDIC insures banks and funds that with fees from other banks. We own bank stocks, directly or in mutual funds. Public and private pension funds invest in banks. Securitized mortgages are owned by various funds in which individuals and pension funds invest. Fannie Mae and Freddie Mac own more than a trillion dollars in mortgages and we as taxpayers support those government sponsored enterprises now in conservatorship. TARP funds – our taxpayer monies – have been used to bail out banks. This is but a part of the equation and should make the point.
The zeal of elected officials to help citizens in apparent distress is understandable and laudable. Whether this statute, however, will in the real world supply a hoped for result is more than doubtful. And in pursuing an elusive goal the laws pummel banks and other lenders – all of us in the end – creating ever greater losses.
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.