We have numerous times observed the self evident – that loss mitigation and finding ways to work out the foreclosure are watchwords of the servicing process. At the same time, desperate or devious borrowers will sometimes do or say outrageous things in an effort to stave off foreclosure – and sometimes they succeed.
Suppose for example that on the eve of sale, servicer and borrower agree that the loan should be modified. Servicer sends the package, it is never returned, the sale is conducted, a third party purchases, the mortgage holder will be paid and: upon borrower’s motion, the foreclosure sale is vacated! It really happened, in Fleet v. Galati, N.Y.L.J., Mar. 23, 2005, at 19, col. 3 (Nass. Co., Sup. Ct., Winslow, J.).
So how did a servicer trying to accommodate a borrower get beaten up so badly? The answer (to be reviewed) tells us two things: one, some servicers may need to consider a change in procedures; two, being gracious and amenable can sometimes backfire.
Servicers should understand that courts have many grounds upon which they can vacate sales, such as based upon equity and fairness, or mistake, among others. Interestingly, where the mistake hurts the lender, courts are reluctant to provide relief. Where the error affects the borrower, however, far more sympathy emerges.
In the case at issue, the court concluded that relief could be granted if the borrower was led to believe that the sale would be cancelled or postponed pending consummation of the loan modification or if the borrower never received the loan modification package.
The court’s view of the facts then hurt the servicer. It found that the borrower was allowed to believe that the sale would not be conducted because of the oral agreement to modify the loan. Although the borrower was specifically notified of the foreclosure sale, the court found no warning to the borrower that if the documents were not signed and returned in time the sale would go forward. (Requesting a response within 48 hours and emphasizing urgency was deemed insufficiently explicit.) It was reasonable therefore (the court decided) for the borrower to assume that all would be well while things were pending.
As to delivery of the loan modification package, the borrower claimed she never received it. The servicer, however, sent it by UPS nine days before the sale and UPS was able to attest to delivery the next day. But there was an unexplained discrepancy in the UPS records whereby the package is noted to have arrived at the nearby distribution center at precisely the time it was delivered to the borrower (9:31 a.m.).
Because the borrower had a pattern of consistent conduct in contacting the servicer endeavoring to elicit settlement, and because the borrower asserted she could have readily staved off the foreclosure sale via a bankruptcy filing had she thought anything was amiss, doubt was raised regarding delivery of the loan modification package.
In the end, the court found a pattern of mutual mishap which created a question about the fairness of the sale, observing that the servicer didn’t contact the borrower after it sent the documents (but why would it have been bound to do so?), failed to notify her that they were sent (but if sent they would arrive and borrower would know it) and neglected to ascertain receipt (how often do overnight delivery services fail?). From the borrower’s side, she didn’t contact the servicer searching for the loan documents or checking on the foreclosure sale status. Borrower mistakenly assumed that the sale was postponed while the plaintiff was found to make no assumptions at all – which seems appropriate. When borrowers ignore correspondence, which so often happens, there is nothing servicers can do.
Finally, the court held that the servicer’s failure to particularly tell the borrower that if the documents were not returned by a certain date the foreclosure sale would go forward allowed the borrower to continue “her misapprehension and neglect” – all resulting in a forfeiture which was inadvertent and unfair.
This is all rather bizarre from a lender or servicer’s point of view. After all, how much does a servicer have to do to create a settlement? Here, the servicer agreed to the modification and sent the papers. It had a valid judgment of foreclosure and sale and had a sale date scheduled. The borrower needed to act. Inaction is what puts borrowers in this unenviable position in the first place so it is hardly surprising when a defaulting borrower returns to his or her inexplicable slumbers.
It is not that what the court did was irrational. But it does not take into account the real world of servicing – and the role of neglectful borrowers. And it is overly sympathetic to the borrower here under circumstances that arguably don’t call for such largesse.
So we return to the lesson. Eve of sale settlements are fraught with more peril than others. They may not always be so productive. If the servicer nevertheless feels compelled to entertain a settlement, be very clear and specific. Set time limits and make the terms clear. Servicers may even want a signed acknowledgment of those time dictates, in advance of the settlement, if time permits. Will such precautions save the day? Maybe.
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.