Now The Lender Maintenance Obligation Really Hurts


1 March, 2013


Mortgage Lender and Servicer Alerts

Lenders and servicers will be aware – if perhaps only vaguely – that as part of the sundry new foreclosure statutes passed in New York, one was to impose the obligation upon the foreclosing party to be responsible for maintenance of the premises in foreclosure from the moment of issuance of the judgment of foreclosure and sale.  Why a lender, with only a lien on the property – not ownership – would have to assume control over the borrower’s property was always an especially troubling and incongruous notion.

We mention here the perhaps vague familiarity because the statute, RPAPL §1307, passed in 2009 and effective April 14, 2010, is still relatively new and its effects are not being so strongly felt – yet.  Moreover, it is a particularly confusing bit of legislation, but we have addressed its myriad infirmities in other writings and those can be consulted.  (See, for example, “The Trouble With the Lender Maintenance Obligation”, New York Law Journal, August 31, 2011 at 5, col. 2.)

One of the points we made when this was passed, though, was that it would preclude a foreclosing party’s option to walk away from a foreclosure which had ultimately become futile, a losing exercise.  And a new case has just told us that quite painfully. [Trustco Bank v. Franklin, 2012 WL5681315 (N.Y.Sup.)].

Practitioners – and mortgage servicers – are aware that in some foreclosure actions delay, the accrual of interest, mounting insurance and tax expenses, declining property values and/or deterioration of the premises through mortgagor neglect may render the foreclosure exercise useless.  No one will bid for the property at the sale and the lender certainly would not want to own it.  In the past, when a lender or servicer reached such a conclusion in any particular case – and it assuredly did happen – it was free to simply refrain from thereafter pursuing and completing the action.  Now, though, once a judgment is obtained in the case, per the cited RPAPL section, the foreclosing party becomes responsible to maintain the property – theoretically forever.

That is what happened in the cited new case.  It must be underscored that the maintenance mandate, arising with the judgment, continues until recording of the referee’s deed, which can be a much longer time than we believe the drafters of the statute recognized.  Thus, the responsibility would end when a new party bought the property at the foreclosure sale, except that if there is no such new party, the lender is stuck with the property and all the headaches it never wanted to inherit.

Perhaps via epiphany, this occurred to the chagrined lender in the new case.  In an effort to extricate itself from the dilemma, it detailed all the costs and hardships it incurred, cited them to the court and moved to vacate the judgment, to undo what it had wrought.

The court was unimpressed; it denied the motion – twice.  Finding the intent of the statute to make the lender responsible for maintenance, it elected not to unravel the action.  What the lender would have done until April, 2010 could no longer be accomplished.  There was no going back and that is but one of the serious problems in the arena.

The lesson (aside from highlighting the danger of the maintenance imperative): if the property being foreclosed upon is a disaster, and if there might be a decision not to prosecute the action to a conclusion, that decision is wisely addressed before the judgment of foreclosure and sale issues.

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.