Because it remains confusing in some quarters, this is a subject we cannot visit too often. And so, we embark upon some helpful clarification, particularly in light of a new notice statute in New York
When a borrower is in default, the lender or servicer will do everything possible to elicit a reinstatement or a payoff. Almost without exception, a performing loan (or a satisfied loan) is preferred over one in default. Efforts to solve the problem will likely include various letters and calls. Other than what may be required by investors, these contacts are motivated by good business (and often a dose of compassion). The obvious goal is to return the borrower to compliance.
If all else fails, eventually, a foreclosure will be begun, which brings us to the underlying analysis: What correspondence may be required s a matter of law to allow there to be a valid foreclosure action? It is here where the confusion reposes.
First, we note what we are not addressing here, at least beyond mere mention. In this era of the subprime crises, there is much state and federal legislation requiring notifications to borrowers. Those had typically applied to the summons or as part of the legal process and did not involve pre-foreclosure action correspondence. In New York, there is much of this and we have discussed it in other alerts. It is not the point here. We do, nonetheless, underscore a new law in New York applicable solely to certain mortgages defined as subprime, effective September 1, 2008, which requires a 90-day notice before a foreclosure can be started. This is not a breach letter. Even if the 90-day notice applies to a particular mortgage, the breach letter must still be sent.
Nor is the 90-day notice the equivalent of an acceleration letter. Whether a mortgage can even be accelerated prior to expiration of the 90-day period is problematic for obscure technical reasons not economically reviewed here. It is enough to know that the 90-day notice is not a substitute for an acceleration letter.
This new statute is both critical and lengthy and was addressed in our Special Alert of late August, 2008 previously e-mailed to our readers. (If anyone does not have it please contact us. Its importance can not be overemphasized).
We return, then, to our concentration, which is the letter or letters which must be sent (other than the 90-day notice) as a precondition to validly begin a foreclosure.
DEMAND OR BREACH LETTER
If you were drafting a mortgage, you would likely not impose upon yourself an absolute requirement in advance of, and as a prerequisite to starting a foreclosure action, the need to first send a letter or notice informing the borrower of the nature of the default, what had to be done to cure that default, how long the borrower could devote to pursuing that cure and a number of further advisements. Indeed, New York law (and the law of most states) imposes no such necessity.
So why are we talking about some demand or breach letter? The simple answer is that the parties themselves (lender and borrower) can agree in their contract (the mortgage is the contract) to such an obligation. And if it is in the contract (again, the mortgage) then it must be honored – the letter must be sent.
Is this mandate in the mortgage? That is the question lenders or servicers must always ask. Because the most commonly used form of mortgage is the Fannie Mae/Freddie Mac uniform instrument, which does indeed contain a provision for the breach letter, then most often it will be necessary to send this demand (breach) letter. It requires that 30 days be afforded the borrower to cure the default.
Having observed that the Fannie/Freddie form requires the breach letter immediately suggests that other mortgages may not impose this. In fact, most other mortgages do not. Therefore, the command is to read the mortgage. The breach letter may not be necessary.
The breach letter announces a default – provides a cure period. It does not declare due the balance of the mortgage; it is not an acceleration letter.
As earlier noted, some time during or after settlement efforts, eventually, the lender or servicer will elect to foreclose. (This assumes that the mortgage is in first position, that they won’t abdicate responsibility to a senior mortgagee and that abandoning the investment is not a viable choice.) When that time to institute foreclosure comes, sending an acceleration letter is recommended. It “locks in” the default and allows the servicer to deal from a position of some strength (another discussion for another alert).
But if a breach letter is required by the mortgage, the acceleration letter is not authorized until the breach letter has been sent and the applicable grace period has expired. If there is no obligation to send the breach letter, then the acceleration letter can be sent at any time after there has been a default continuing beyond any applicable grace period.
Precisely what the breach letter and the acceleration letter must say, and how they must be transmitted are different subjects. The message here is that the breach letter is different from an acceleration letter – an important distinction worthy of lucid understanding.
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.