If a lender holds more than one mortgage with the same borrower secured by the same parcel(s), and if there are no intervening liens, can those mortgages conveniently be pursued in one action? A recent case clearly says “yes” and it is noteworthy. [Swedbank, AB v. Hale Avenue Borrower, LLC, 89 A.D.3d 922, 932 N.Y.S.2d 540 (2d Dept. 2011).]
This is cited as meaningful not only because lenders can commonly hold two (or more) mortgages on the same property, but also because wily borrowers may attack the procedure and some courts may not be so sure about the efficacy of the approach. The fact is that it is correctly done with regularity but the issue is not litigated in reported cases, thereby perhaps making the methodology informally hazy.
HOW IT HAPPENS
One example is a lender who takes a $400,000 mortgage on a property worth $600,000. The borrower then requests, and is approved for an additional $50,000 loan secured by a mortgage on the same property. In the absence of intervening judgments, liens, mortgages or other encumbrances which have attached to the property subsequent to recording the original mentioned mortgage, the lender would typically consolidate the new mortgage with the initial mortgage to form a single lien. But on occasion, a lender will not do what is usual and be content (or without forethought) simply hold two separate mortgages, the first senior to the second.
Another commonplace scenario is a first purchase money mortgage followed by a home equity line of credit mortgage, each remaining separate. This is typical with lending institutions where the home equity loans may originate from a different department, often in a different location.
Still a third example – in the commercial realm – is a first mortgage as an acquisition loan and the second a building loan mortgage.
In the two-mortgage situation (always for this exploration with no intervening liens), it certainly appears that foreclosing both in one action is the most economical and the fastest method. But if there are intervening liens – and even if there are not – the circumstance presents a number of alternatives. Each leads to lengthier explanations than need be examined here. But having a sense of those adds helpful perspective and so will be noted.
If the junior mortgage alone is foreclosed, the lender will either derive all sums due upon that obligation (thus being made whole) or will itself be the successful bidder at the foreclosure sale and succeed to title. If an outside bidder buys, that bidder takes the property burdened by the lender’s senior mortgage which, of course, survives foreclosure of any junior interest. The bidder, who becomes the owner when there is a closing after the foreclosure sale, must then either satisfy the surviving senior mortgage – thus making the lender whole for the remaining portion of the mortgage loan – or suffer divestment of title through foreclosure of the senior mortgage.
Instead of foreclosing only the second mortgage, the lender could opt to simultaneously initiate separate foreclosures of both the first and second mortgages. The goal would be to bring the junior mortgage to a sale first. (Reversing the order of sale would damage the lender because foreclosure of the senior mortgage would extinguish the junior). Strategically, both foreclosures would be brought to the point where a judgment of foreclosure and sale has issued. A sale would be advertised for the junior mortgage, but the senior foreclosure would halt in place at the moment of judgment.
A lender could elect to refrain from foreclosing the junior mortgage and choose instead to initiate foreclosure upon the senior mortgage alone. Since holders of interests junior and subordinate to the mortgage in foreclosure are “necessary” parties this suggests the anomalous necessity for the lender to name itself in the foreclosure in its capacity as second mortgagee. That means that at the foreclosure sale, anyone who takes title does so free of the lender’s junior mortgage which was extinguished by the sale. While it is to be hoped the lender will derive, in our example, $400,000 at the foreclosure sale (plus interest, costs, disbursements, allowances and, if applicable, legal fees), what has happened to the $50,000 secured by the now-extinguished junior mortgage? The simple response is that this sum is lost, which is hardly a favorable result for the lender. Hence, foreclosing solely the senior mortgage when the lender holds both a senior and junior mortgage position is a dangerous approach which portends a loss. There are solutions to such an outcome but that analysis is too lengthy for our purposes here. [See, 1 Bergman on New York Mortgage Foreclosures, §2.07(1)(b)(iv) for explanation.] And it ought not to be necessary much of the time as confirmed by the recent case noted at the outset.
CONFIRMATION IN RECENT CASE
For courts which may be timorous in accepting foreclosure of two mortgages in a single action, the cited case banishes any concern. There, the bank plaintiff was foreclosing two mortgages in the action against the same property. Litigation ensued and upon summary judgment the Appellate Division ruled that the plaintiff had indeed established prima facie entitlement to judgment upon its two mortgages. The court accepted foreclosure of the dual mortgages as without issue. A later case at the trial court level emphasized the point again, and opining that despite protest from the borrowers “a plaintiff may seek the foreclosure of two separate mortgages held by it within the confines of one action, where both mortgages are against the same property and are claimed to be in default, and no intervening liens are filed as against the property.” [LIC Assets, LLC v. Chriker Realty, LLC, 2011 WL 673677 (N.Y. Sup.).]
This should be a closed matter.
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.