One lawyer who specializes in foreclosures in New York told us that theoretically borrowers could go back to mandatory settlement conference 10 or 11 times if they aren’t able to make an agreement with the lender.
Keep in mind that during all of this time, everything is stopped until a determination can be made on whether a loan modification might be agreeable.
This can go on for a couple of years, and often times the bank will simply give up and agree to a favorable loan modification.
Remember that the courts in New York tend to be so liberal that they’d allow borrowers with no income to keep coming back to court to delay the process. Why? Because the extremely liberal courts in New York simply don’t want foreclosures to happen.
The discovery process if no settlement is made
If a settlement is made during the conference, then the case is over. If however a settlement can’t be agreed on, both parties will then gather information from each other during what’s called the discovery process.
During discovery, the borrower’s attorney will serve the bank’s attorney with discovery demands such as proof of the chain of title, payment history, etc.
Note that the courts in New York tend to put the onus on banks’ attorneys to certify that everything in the summons and complain is true, and that all original documents referenced are in their possession.
This can be a real problem for lenders if the loan was actually originated by another bank, and has hence been sold or assigned one or more times.
Savvy borrower’s attorneys could claim that the lender has no standing and doesn’t have the right to bring action if the bank wasn’t the original lender and doesn’t have the original paperwork.
For example, the bank could be in real trouble if it fails to provide proof of the chain of title, all the way from the original promissory note to every assignment to a new lender.
Motion for summary judgment and order of reference
After the discovery process where the lender will also collect information from the borrower such as pay stubs and account statements, the lender will ask the court for a judgment without trial and for the court to appoint a referee (i.e. usually an attorney) to decide the amount owed.
Keep in mind that a summary judgment means there’s no issue of fact yet to be determined, and that this is rarely the case in real life.
Regardless, banks will make this motion and then it will take another 5 to 6 months to get in front of a judge. Note that it can take up to a year or we’ve even heard 2 years to get a decision on the motion.
Motion for default judgment and order of reference
If the borrower doesn’t answer the 90 day pre-foreclosure notice and doesn’t attend the mandatory settlement conference, then the lender can ask the court for a judgment on default, and to appoint a referee (i.e. again usually an attorney) to decide on the amount the borrower owes.
Motion to confirm referee’s report and for judgment of foreclosure and sale
If the lender wins the motion for summary judgment or the motion for default judgment, then the lender asks the court to confirm the referee’s findings.
Note that it’s possible at this stage just like any other stage for the borrower to delay proceedings. At this stage, the borrower could simply challenge the referee’s report to further prolong the process.
Judge signs judgment of foreclosure and sale
The judge signs the foreclosure judgment and orders the sale of the borrower’s home. The lender and the referee then choose an auction date at the local courthouse (i.e. typically the county courthouse’s steps).
The sale must be advertised once a week for 3 weeks in a local newspaper. The advertisement will list the property’s address and list when and where the foreclosure auction has been scheduled as well as the estimated amount owed to the lender.
The foreclosure auction is finally held
On the day of the public sale, the “upset price” will be posted outside the courtroom which is kind of a reserve price for the bank. The upset price is typically the amount owed by the borrower, plus any fees, interest and any other costs accumulated in the interim.
If the property sells for more than the upset price, then that additional money is called a “surplus” to which the borrower is entitled. The former homeowner will need to make a motion in court to get that surplus, which is essentially the borrower’s home equity less any fees, interest and expenses incurred by the bank.
In rising markets, we’ve seen cases where a borrower who hasn’t paid their mortgage in years ends up actually making money in a foreclosure because home prices have risen significantly.
If on the other hand the property is sold to the highest bidder and the amount is less than the upset price, then we have what you call a “deficiency.” In a deficiency scenario, the bank is still owed some money and can sue for the difference. However, the bank will only have 90 days to initiate proceedings after the foreclosure sale.
It’s interesting to note that once a foreclosure takes place, all junior liens including home equity loans and mechanic’s liens are wiped out and no longer secured by anything.
So this means all junior debts effectively become unsecured debts like credit card debt, and thus 2nd lien lenders will need to also sue to recover their deficiency immediately after the foreclosure happens.
A trial happens if the lender loses the motion for summary judgment
The last possibility to explore is the scenario where a mandatory settlement conference fails to produce an agreement, and the judge declines the lender’s motion for summary judgment after the discovery phase.
In this situation, a trial occurs and the lender must prove its case to the judge. Both sides will testify and show evidence, and the judge makes a decision.
As previously discussed, the onus is often more on the lender than the borrower in New York’s liberal minded courts. The bank will have to prove that they have everything in order such as the chain of title, payment history etc.
This process can easily take several months, but remember, the courts are inclined to make life difficult for lenders and to do everything possible to force big banks to settle with homeowners.