Selling The Loan – Be Careful With Warranties
When a mortgage loan is sold, if warranties are made by the seller to the buyer (the assignor to the assignee), a recent case emphasizes that those warranties meant what they say and if breached, can be a basis for a damage suit. [USHP Real Estate Development, Inc. v. Mitrano, 85 A.D.3d 1719, 925 N.Y.S.2d 793 (4th Dept. 2011)].
Mortgages are of course sold with regularity. (Sometimes it is referred to as a note sale.) When the assignment arises through a borrower in foreclosure, there may be no contract – a sum is paid and in exchange an assignment of mortgage is delivered. But where the purchase of the loan is an investment, the assignee will want, and need, a contract reciting what is being purchased and the terms of that purchase (typically with a due diligence period to explore any possible issues). The terms of such contracts can be extensive and varied. For those wishing to explore possible provisions, see 2 Bergman on New York Mortgage Foreclosures §24.10.
A part of any such contract will be representations by the seller – warranties – among many others, the sum due on the mortgage. What if the seller errs or misstates the amount due (or falsely offers some other warranty)? The answer as noted at the outset is that a damaged purchaser can sue to recover the extent of the resultant damages.
That is what happened in the cited case and a quick look at the facts together with the emerging principles should highlight the special need for care on the part of assigning lenders and servicers.
In this case, as part of an assignment of a note and mortgage, the seller-lender expressly warranted that the principal balance due was $378,092.87 (This promise was expressed in the assignment, and a lost note affidavit.)
After the closing, though, the buyer discovered that in calculating the sum due on the mortgage the seller neglected to credit the borrower for an earlier $5,000 prepayment. The math of how precisely this translated into a damage claim of $24,920.22 was not apparent, but that was the amount at issue and the peril to the selling lender.
Because the selling lender did indeed expressly warrant the sum due on the mortgage, and the buyer relied upon the representation of the sum due, the court ruled that the buyer established all the elements of a cause of action for breach of express warranty.
The seller countered that the purchaser could not rely on the warranty because it could have determined the actual amount due if it had exercised due diligence during the negotiation period.
But “no”, ruled the court: a warranty is designed precisely to relieve the party to whom the promise is made of any duty to determine the fact for itself. Furthermore, the warranty becomes a promise to indemnify for any loss if the warranted fact proves untrue.
So the point is made. When the mortgage assignment process elicits promises from the seller, that seller must be sure about what it represents lest it be sued for damages for errors.
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.