When a lender or servicer holds a mortgage in default it has two choices of enforcement paths: foreclose the mortgage or sue on the note for a money judgment. Mortgage foreclosure is most often the method of course, mainly because there is security for the debt to be sold – the mortgaged property. But there are assuredly cases where action on the note is a better approach – indeed, sometimes it is the only election, such as when a senior mortgagee has already completed its foreclosure or a tax lien may have been foreclosed. (The background on the relative merits of suit on the note versus foreclosure has been addressed in one of our alerts some time ago.)
If suit on the note is being considered, the important question we focus upon here is whether a ninety-day notice is a required first step.
Dismayed lenders are for the most part steeled to the obligation to send a ninety-day notice as a condition of initiating a mortgage foreclosure action in New York. New in 2008, this had been a requirement solely for subprime loans, but as of January 14, 2010, it applies to all home loans. (See our recent alerts exploring this in depth.)
Just to be clear on this, because the new statute refers in various places to “home loan” and also to “residential real estate”, home loan is defined [by RPAPL §1304(5)(a)] as “a loan, including an open-end credit plan, other than a reverse mortgage transaction (where) the borrower is a natural person (and) the debt is incurred… primarily for personal, family, or household purposes (and) the loan is secured by a mortgage …on real estate improved by a one to four family dwelling, or a condominium unit…used or occupied, or intended to be used or occupied wholly or partly, as the home or residence of one or more persons and which will, is or will be occupied by the borrower as the borrower’s principal dwelling.” (Parenthetical material added.)
In requiring the ninety-day notice, it is deemed by statute as applicable to commencement of “legal action against the borrower, including mortgage foreclosure…” This suggests that suit on the note (it is a “legal action”) would elicit the notice imperative. That stated, examination of the notice itself raises emphatic ambiguity.
The notice speaks pointedly of the borrower possibly losing the home. For example, observe this language in the statutory notice:
“YOU COULD LOSE YOUR HOME. PLEASE READ THE FOLLOWING NOTICE CAREFULLY”
As of ________, your home loan is ________ days in default. Under New York State Law, we are required to send you this notice to inform you that you are at risk of losing your home. You can cure this default by making the payment of ____________ dollars by ______________.
If you are experiencing financial difficulty, you should know that there are several options available to you that may help you keep your home…” (emphasis supplied)
But a suit on the note does not threaten ownership of the home. Rather, it seeks a money judgment and the one asset unavailable for execution upon that judgment is the very property which secured that mortgage. (CPLR §5230).
Still further, there is an exception to the ninety-day requirement if the borrower no longer occupies the residence as a principal dwelling. This additionally contributes to questioning applicability of the ninety-day notice mandate to an action on the note when the statute seems so directed to preserving ownership of a principal residence.
Imprecision in the statute (RPAPL §1304) regarding notice as a prerequisite to instituting an action solely upon the debt is apparent. It is that uncertainty, however, which creates a dilemma for the note holder.
Sending the notice as part of an understandably cautious approach incurs ninety days of delay – which might be unnecessary. Refraining from sending notice saves that ninety days, but portends the possibility of opposition to the note action founded upon neglect to mail the notice. Even if that opposition is unsuccessful (and it remains an open question) the delay incurred by virtue of that opposition is likely to equal or exceed the ninety days saved – all certainly a Hobson’s Choice.
Until the question is adjudicated, or at such time as the statute is clarified, the uncertainty will continue.
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.