Lenders and servicers never want to encounter this, but it happens. Borrowers may not be entirely candid in the mortgage application process; in fact, they may outright lie. For example, suppose the borrower stated in his application that he was employed by the XYZ Insurance Company and earned a certain annual sum. It was true, but between the time of the application and the loan closing he lost (or left) his job. Nevertheless, he signed a statement at the closing to the effect that none of his circumstances changed. That was an untruth.
The loan is then sold – which is, of course, typical – but the purchaser in the secondary market learned of the misstatement. In turn, the incorrect information is most often a ground to require the loan originator to buy back the loan. For a lender which carries few or no loans in its portfolio, suddenly having a thirty-year loan on the books is a problem.
And this dilemma is multiplied by any variety of other false statements borrowers can make which can lead to more loans which must be repurchased. Ah, but there is a solution – at least in New York, and worthy of exploration in other states.
Case law confirms that a lie on a mortgage application can in and of itself be a basis to foreclose. [See Loan America Fin. Corp. V. Talboom, 163 Misc.2d 199, 620 N.Y.S.2d 221 (Sup. Ct. 1994).] Since the lie cannot be cured, there is a reasonable assurance that the foreclosure will result either in a payoff or a foreclosure sale. While lenders and servicers usually prefer reinstatements, or at least desire not to proceed to a foreclosure sale, the falsehood in the application process is different because there the goal is to get that loan off the books.
But a word about strategy is in order here.
When a borrower defaults in remitting principal or interest, the courts are very firm in supporting foreclosure of the mortgage. When the default is of some other nature, however, there is more room for doubt. So, while there is indeed, as noted, case law authority supporting foreclosure for a lie on a mortgage application, it would be recommended that if foreclosing, this default be combined with non-payment. Although generally lenders and servicers will wait many months before declaring a default for non-payment, under these unusual circumstances, the recommendation is to consider accelerating for any payment which is late even for a few days. Combining that payment default with the misstatement on the application should make the foreclosure action unassailable and should assure a proper conclusion.
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.