Foreclosure can be a nerve-wracking business, particularly in judicial foreclosure states. New York, for example, tends to be near the top in time-consuming litigation.
One additional problem beyond time generally is that the consequences of a mistake can be so critical. If, for example, a foreclosure might last two years, an error at the inception could push the foreclosing party right back to the beginning stage – certainly a bungle of some dismaying significance.
So it is apparent that avoidance of miscues is always a worthy goal for lenders and servicers. But some are just inevitable.
A Major Misstep
Among the most upsetting missteps is failing to name and serve a party with a junior interest.
The underlying goal of a mortgage foreclosure is to cause the secured property to be sold in the same legal condition it was when the mortgage was given. That is why lenders and servicers are not especially concerned about interests which later attach to the property, such as judgment or junior mortgages. If those are made defendants in the foreclosure case, as typically they would be, their interest will be cut off and the property is then presumably attractive for purchase at the foreclosure sale.
But if a party who could (and should) have been named and included in the case was omitted, an obvious problem survives. The property is now burdened by an interest (a mortgage, judgment, mechanics lien or tenancy) which should not be there. A $25 parking ticket judgment won’t mean much, but a $200,000 mortgage will, so – depending upon the circumstances – this can be a genuinely troublesome incident.
How this can happen is not so difficult to imagine. Lender’s counsel could misread a search and neglect to include a necessary party. Perhaps a staff will inadvertently omit a name which had properly been included by the drafter. Or, the process server might not observe the presence of a tenant who could have been named.
Most likely, though, the fault would lie with the foreclosure search where an interest of record was overlooked.
Help Is Available
Suppose that the missed party was a judgment creditor for $12,000. The sum due upon the foreclosed mortgage was $200,000. If the duration of a strict foreclosure case (in New York for example) is about six months (which will be discussed in a moment), because the mortgage interest during that time (at 10%) would aggregate $10,000, offering the judgment creditor perhaps $6,000 or $8,000 to release the lien is probably a good deal for both parties.
If pursued, the strict foreclosure will extinguish the judgment against the property, thereby banishing the judgment creditor solely to chasing the defaulting mortgagor. Since the latter was unable to pay the mortgage, ability to satisfy the judgment is likely to be remote. All this will be highly dependent upon the circumstances – who holds the interest and how much it is, among others – but the concept should be clear. Settlement in this fashion is something to consider.
A Strict Foreclosure
If the purely practical route is unavailable, then the remedy of strict foreclosure can be considered.
For our purposes, we will refrain from exploring the highly technical nuances of the process and note instead that the essence of a strict foreclosure (in New York) is a short version of a foreclosure action, designed not to have the property sold, but to extinguish the interests of a party who could have been named in the action, but was not.
In essence, that omitted party is given by the court a right to redeem the mortgage; that is, pay all that was due upon the mortgage together with interest and any improvements made to the property in good faith. A narrow time frame in which to manifest that redemption is given, usually 30 days, but it can be up to 60 or even 90 days.
If the redemption is not accomplished, then the judgment which issues forever forecloses the right of redemption of the party who had previously been omitted. The result then is the same as if the party had been included in the original foreclosure action.
A Safety Net
None of this is to suggest that the strict foreclosure action is an off-handed or casual calling. It necessitates a summons and complaint, service of process, and, if an answer is received, a motion for summary judgment, among other things.
There is some finesse required in preparing the pleadings properly and it does require an understanding of the concept and procedures. Nevertheless, it is an uncommonly sure way of solving what would otherwise be a very thorny dilemma.
Knowing that the solution exists can and should be a source of considerable comfort. It is there if needed.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2022), 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.