The Foreclosure Process in NY and How It Favors Borrowers

New York is a judicial foreclosure state, which means the lender must sue the borrower in order to foreclose on a property. This is generally advantageous to the borrower as it extends the amount of time the borrower can stay in the home before the case is either settled or the home is foreclosed.

As you can imagine, borrowers generally don’t pay their mortgage, property taxes, home insurance premiums, common charges or maintenance fees during the foreclosure process.

This means borrowers get to essentially live for free for an extended period of time in a judicial foreclosure state; meanwhile, lenders have to advance payments for these housing expenses throughout the process.

In contrast, many states like California or Texas are non-judicial foreclosure states, which means the lender does not need to sue and go through a court process to foreclose on a property.

For example, in Nevada which is a non-judicial foreclosure state, if you don’t pay your mortgage, the sheriff used to be able to come and simply padlock your house 30 days later.

Of course, regulations have softened in favor of borrowers even in Nevada since the Great Financial Crisis of 2007-2008, but the process is still significantly more streamlined there vs in a judicial state like New York.

Note that some states can be both judicial as well as non-judicial, often depending on whether the mortgage or deed has language that allows a non-judicial foreclosure (i.e. a power of sale clause).

For example, even though most foreclosures in Nevada today are of the non-judicial variety (i.e. conducted by a trustee per the direction of the lender), sometimes a lender will have to get a court ordered foreclosure if they don’t have the proper authority within the deed of trust.

The potential to use the statute of limitations as a defense is why borrowers should re-consider making payments again during the middle of the foreclosure process. The same logic applies to eviction cases where holdover tenants should re-consider making payments during the eviction process.

Why do courts allow the foreclosure process to take so long?

Courts in New York are generally very liberal minded and favorable towards borrowers vs lenders. This sentiment was pervasive post the Great Financial Crisis of 2007-2008 when judges felt that banks should really be doing their utmost to help borrowers stay in their homes, especially after receiving billions of government bail-out money from programs such as TARP.

However, in the last several years of the 2010’s, we’ve noticed courts becoming less patient with borrowers. This change of trend became visible with some judges becoming exasperated with delinquent borrowers, telling them “look, you can’t stay here forever.”

It will be interesting to see whether the trend reverses back to extreme liberality following the Coronavirus pandemic at the start of the new decade in 2020.

Bank sends initial notice of default

After the borrower misses mortgage payments, the lender will send an initial default notice by mail, notifying the borrower that he or she is behind on payments, and that the borrower has a certain amount of time (i.e. 30 days) to become current.

Bank mails you a 90 day pre-foreclosure notice

If you don’t bring your loan current, then the bank will send you a 90 day notice of default by mail, with an intent to accelerate the debt and call in the full amount of the loan.

The notice itself will need to be on colored paper (i.e. blue vs white) to clearly separate it from the other papers in the package, and it will have big bold letters stating that this is a 90 day notice.

Essentially, the lender is required to mail you this package at least 90 days before starting a court case against you, and this package will also contain information on how to get help.

The bank files a lis pendens on the property

At this stage the foreclosure case officially starts and the lender will kick off the legal proceedings by filing a “lis pendens” on the property (i.e. technically the BBL number of the property) at the county clerk’s office.

The bank files a summons and complaint and serves the borrower

Concurrently with the lis pendens filing, the bank will also file a summons and complaint with the court against the borrower.

The summons essentially explains that the lender is filing a lawsuit against the borrower, and the complaint details the basis for the filing (i.e. borrower hasn’t paid the mortgage, lender has the right to collect payment and intends to foreclose on the property in order to do so etc.).

Banks will typically serve the borrower with the summons and complaint in person vs mail, due to the liberal nature of the courts in New York. Otherwise, borrowers could very easily claim in the 11th hour that they never received the summons and complaint by mail, and judges will usually buy this story in New York.

Note that it is only the summons and complaint that is usually served by hand, other notices are all typically mailed.

An answer to the complaint is due from the borrower

An answer to the complaint is due in 20 days if the borrower was served in person, or 30 days if the borrower was served by mail. The answer should tell the borrower’s side of the story and should include not only the borrower’s defense to the claims but also any claims the borrower has against the lender.

Mandatory settlement conference

In New York, regardless of whether the borrower responds to the complaint, a mandatory settlement conference will be scheduled to get the parties together to see if they can work something out to avoid foreclosure.

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.

They are the people who understand that they’re buying a property sight unseen, as is.

They understand that they’ll get clear title with all liens wiped out, but they also understand that the property is sold as is, which means they might even have to go to court to evict a bunch of squatters.

Still interested? Well you’d better be prepared to close in 30 days in most cases if you are the winning bidder, and you’d better bring certified checks for the down payment in person. Furthermore, the deal won’t be subject to any contingencies such as financing, which means you’ll most likely have to close all cash in 30 days.