This was the subject of an alert not so long ago and because a similar event has occurred in another case it confirms (not surprisingly) that this is a very real problem. The issue relates to fraud.
The vital legal principle reasserted in a new case [GMAC Mtg. Corporation v. Chan, 56 A.D. 3d 521, 867 N.Y.S. 2d 204 (2nd Dept. 2008)] is that where there is a deed into a borrower either based upon forgery or obtained by false pretenses, it is void from its inception. Therefore, a mortgage founded upon that title is likewise invalid.
Facts will, of course, vary from case to case, but here the property was owned by three brothers. One of the brothers executed a deed (with the supposed signatures of all three brothers) to himself. As the apparent sole owner of the premises this brother obtained a mortgage on the newly owned property.
When later he filed for bankruptcy, then died, followed by a foreclosure action, the surviving brothers defended the foreclosure asserting that their signatures on the deed were forged. Therefore, they argued, the deed was no good and so too was the mortgage on that property of no effect.
Summary judgment sought by the foreclosing plaintiff was denied (expensive and time consuming) although we do not yet know the ultimate outcome of the case; certainly there is likely some peril to the lender.
The focus of this scenario is perhaps more of an underwriting issue, but it must be addressed when such a loan goes into default. Happily for lenders (not so pleasingly to title companies) this is the variety of mishap covered by title insurance – if it exists. But servicers do need to know what claims like this could mean. The mortgage might be unenforceable.
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.