The legal framework for foreclosures is often complicated and requires a great deal of specialized knowledge, as requirements and regulations vary from state to state. The process is also time-intensive, especially in New York State, where it can take up to 3 years to finalize the process. As such, we’ve doubled down on extensive research in order to provide a clear step-by-step walk-through of New York State’s foreclosure process, including lender’s obligations and homeowners’ rights.
New York is a judicial foreclosure state, meaning that the lender cannot foreclose on a home without filing a lawsuit in court. Foreclosures themselves can be handled in or out of court, although the former is the most common.
The length of proceedings can vary on a number of factors, such as whether or not the property is owner-occupied, or whether or not the lender receives a ruling from the court or the case goes to trial. Overall New York foreclosures are expected to take 445 days or more.
Step 1: Pre-foreclosure
Mortgages, promissory notes, late charges
Taking out a loan in New York state to buy residential property usually involves signing both a mortgage agreement or deed of trust, and a promissory note – often simply referred to as a “note”. While the mortgage or deed of trust is recorded in county records, the promissory note is held by the lender until the loan has been satisfied, whereupon it is transferred to the borrower.
There is also the avenue of deed-in-lieu of foreclosure, whereupon the delinquent borrower voluntarily chooses to give up all legal claims to the property to avoid foreclosure in exchange of the lender formally agreeing that all financial balances are now considered settled. The latter option has the benefit of the borrower not having a deficiency judgement or foreclosure sale on their credit report.
Per the Consumer Financial Protection Bureau’s January 10, 2014 ruling, a lender or loan servicer cannot file to start foreclosure proceedings with the court before 120 days have passed from the date of the first missed payment. This timeframe is set to allow delinquent borrowers to look into loss mitigation options previously mentioned. The lender can still continue to send notices to the delinquent borrower detailing the outstanding balance, late fees, the number of days since the first overdue payment – referred to as loan default.
Breach notice or letter of demand
Most mortgage contracts in New York State also feature a breach clause requiring lenders to send delinquent borrowers a letter of breach or demand before filing for foreclosure. Notices of breach will usually set a 30-day time limit for the borrower to balance missed payments and any applicable late charges. Noncompliance with the notice of demand allows the lender to start the foreclosure process and if applicable, accelerate the loan.
The latter allows lenders to call in the entirety of the loan for immediate repayment, which can result in the property being sold.
However, New York state law stipulates an additional 90-day foreclosure notice be sent to defaulting homeowners before the process of foreclosure can be initiated with the courts. The pre-foreclosure notice must detail the number of days the mortgage has been in default, the outstanding amount, the mortgage servicer’s or lenders’ phone number and a list of at least five government-approved non-profit housing counseling agencies that provide free or low-income housing in the borrower’s area.
The lis pendens
The note details not only the property’s address and the name of the borrowers, but also the interest rate, the loan amount and term – the number of years within which the loan needs to be repaid – as well as late charge amounts. It is also important to note that often a loan servicer is the one collecting mortgage payments, late fees, foreclosures, etc. on behalf of lenders, and not lenders themselves.
Missing one payment
Generally speaking, loans recorded in New York include a 15-day grace period, meaning being late up to 15 days with one mortgage payment will not incur any late fees or legal consequences. Passing the 15-day barrier however will incur borrowers a late fee, which usually hovers around the 2% mark of the overdue payment – but to make sure, borrowers can check their promissory notes or monthly mortgage statements for the exact amount.
Missing multiple payments
Missing more than one mortgage payment will generally be followed the mortgage servicer contacting the delinquent borrower(s) to remind them of their legal and financial obligations and to try and collect the overdue balance. Although ignoring calls and letters or other attempts to be contacted by the servicer sounds like an appealing defense strategy to some homeowners, this is in fact counterproductive.
Foreclosure loss mitigation period
Usually occurring after the 30th day from the first missed payment, this timeframe can be a crucial period to reevaluate things and manage losses by coming to an agreement with the loan servicer – this can take the form of a payment plan or loan modification among other options. Government-sponsored foreclosure assistance can also be a great option for qualifying homeowners such as the Home Affordable Refinance Program (HARP). A delinquent borrower may also try and refinance their mortgage with another lender or opt to sell the property via a short sale. The latter entails the borrower selling the property at fair market value – which will often be less than the loan itself – and the lender agreeing to settle for less than the full balance.
The lis pendens
The lis pendens is the first step in the actual foreclosure process. When a borrower misses three payments in a row, and all law-required notices have been sent, the lender will file a lis pendens with the county clerk, starting a lawsuit against the property that challenges its title/ownership. This means that parties interested in the property will be able to access public records and see that there is an outstanding lawsuit contesting ownership.
When the lender files a lis pendens, they are also legally obligated to send a “summons and complaint” notice, informing the delinquent borrower that a lawsuit has been initiated in court, challenging their ownership of the property. The summons and complaint letter will include additional information, such as the date when both borrower and lender or their representatives must appear in court.
The lender must provide and file with the court proof that the summons and complaint notice was received by the borrower. Starting from the date of filing proof, the delinquent borrower has 20 days to respond if the summons was delivered in person, and 30 days if it was delivered by mail. Failure to respond, or appear at the court-appointed date may result in a default ruling by the court in favor of the lender, which can lead to the property being foreclosed on. If the borrower chooses to respond, this response acts as the borrower’s defense as to why they have not complied with payments and is officially filed with the court.
Contracting the services of a foreclosure attorney is the most likely avenue for a delinquent borrower to have the case thrown out or receive an extension if the court finds there are adequate grounds. This can happen if the attorney or borrower who chooses to represent themselves, can make a case to the court regarding predatory lending practices, for example.
Step 2. The settlement conference
Starting February 15, 2010, a court-mandated settlement conference must be held for all owner-occupied or residential foreclosure proceedings. It occurs within a maximum of 60 days of the date the lender or servicer has filed proof with the court that the borrower has been served with the summons and complaint notice. In most cases, the court will allow for a delay in the settlement conference if requested by either party.
It is advisable for delinquent borrowers to attend the settlement conference accompanied by a foreclosure attorney to maximize their chances of a favorable ruling. The borrower should also have proof of income on hand as well as tax returns on hand for this court date. A defendant borrower may receive counsel if appearing without, and the lender or their representatives might be allowed to participate in this court proceeding via phone or video connection.
The initial loan amount, the outstanding loan amount, the up-to-date balance – including late charges – will all be discussed at a settlement conference, as will the borrower’s financial status, the reasons for defaulting and all paperwork supporting any claims. The borrower’s possible qualification for loan modification or government programs.
If the settlement conference is successful and lender and borrower reach an agreement, the lender or their representatives are legally required to drop the lawsuit by filing a discontinuation of the lis pendens in no more than 150 days after the officially recorded day of the settlement.
Step 3. The judgement
If the borrower did not respond to the summons and complaint notice or did not appear in court, the case may receive a default judgement by the court resulting in automatic loss of the lawsuit by the borrower. If the borrower did respond and took part in the settlement conference, but it proved unsuccessful, the lender can choose to file for summary judgement.
Taking this avenue, the lender will ask the court for a favorable ruling based on the borrowers’ lack of defense, lack of proof regarding unlawful lending practices for example, or claim there is no contesting the basic aspects of the lawsuit – i.e. there are no objective reasons for defaulting on mortgage payments. If the court rules for a summary judgement, the borrower loses the case. If a summary judgement is not issued, the case proceed to trial.
If the borrower looses the trial or is handed down a summary judgement by the court favoring the lender, the borrower looses the case and a foreclosure judgement s issued against the borrower and a sale date is appointed by the court for the contested property.
In New York State, reinstatement can occur if a delinquent borrower brings a delinquent loan current by paying all due mortgage payments as well as all additional fees and charges, collectively known as arrears. Per state law, this can occur even after a non-favorable decision has been issued by the court, but not after the date of sale. If the borrower pays arrears after judgement, foreclosure proceedings are put on stay, pending the borrower’s future compliance with the mortgage contract. If the borrower defaults after a stay is issued, the court can decide to release the stay on the decision and enforce the foreclosure judgement.
Step 4. The foreclosure auction
During the final step in New York’s foreclosure process, the foreclosed property is put on sale at a public auction, usually held at the County Courthouse. Anyone can bid on the property and it is always sold to the highest bidder. Once the sale is made, the delinquent borrower loses the right of redemption and cannot regain ownership of the property by settling all arrears.
Bidding usually starts at $1,000 or at the upset price. If there is a winning bidder, they must provide a 10% down payment, with the rest of the selling price due within 30 days. Should the winning bid not close within 30 days, the buyer loses all claim to the property, as well as the full down payment.
If the bid starts at amount lower than the upset price and this is not reached, the lender can request that the property reverts back into its ownership. If this occurs, the property becomes real estate owned (REO). An interested buyer may also approach the lender or their representative after this occurs and make an offer on the property directly to the lender. This process can be less risky than an auction, since a potential buyer may negotiate the terms of the sale.
Buyers interested in purchasing properties at foreclosure auctions are advised to always go through a thorough research process, to avoid unforeseen expenses or legal challenges stemming from building violations, non-paying tenants and more.
In some cases, the outstanding mortgage debt on the property will be higher than the foreclosure sale price or the fair market value of the property. Known as deficiency, this value difference may be legally pursued by the lender in New York State, if the borrower was personally served or takes part in the lawsuit. The lender may pursue payment of the deficiency by pursuing personal judgement in court against the borrower. If the court grants the lender’s request, a deficiency judgement is handed down, and the lender can collect the outstanding debt from the borrower.
Step 5. Foreclosure eviction
Following an unfavorable ruling and a foreclosure sale, the borrower will, in most cases, need to vacate the foreclosed property. This will usually happen either through a cash-for-keys agreement or eviction. If the new owner chooses a cash-for-keys approach, the former owner will be offered a financial incentive to voluntarily vacate the premises. If the former owner refuses, or the new owner doesn’t follow this approach, the new owner will most likely pursue eviction, usually through the Housing Court. Per state law, the new owner must give the former owner a 10-day notice to leave.
Legal Resources in New York City:
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