The Foreclosure Process in NY and How It Favors Borrowers

The foreclosure process in New York can take multiple years with ample opportunities for borrowers to ask for delays. This is primarily due to New York being a judicial foreclosure state with very liberal minded courts that have always tended to be highly sympathetic towards borrowers vs lenders.

We’ll discuss in the following article how foreclosures in New York are different, how long the process takes, the step by step foreclosure process, common delaying tactics as well as how to buy a foreclosure.

How foreclosures are different in New York vs other states

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.

The following infographic illustrates which states are judicial and which states are non-judicial when it comes to the foreclosure process.

Infographic illustrating which states in the US are judicial vs non-judicial foreclosure states.

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.

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How long does the foreclosure process take?

The foreclosure process in New York can take 3 to 5 years on average for a contested foreclosure, meaning the borrower responded.

If the borrower doesn’t respond to notices and the foreclosure goes unchallenged, then the process can take as little as 6 or 7 months which is considered extremely fast for New York.

A borrower may get to keep the house for free if the process takes longer than 6 years

A contested foreclosure is not only extremely costly for a lender due to the lender having to advance housing expense payments in lieu of the borrower during all these years, but because the statute of limitations kicks in at 6 years after the borrower’s last payment.

This is because lenders typically accelerate the loan (i.e. ask for a full repayment) on the date the summons and complaint is filed. Therefore, the statute of limitations applies to the entire loan amount after 6 years.

Don’t believe it? We’ve heard of a borrower in Queens who was able to drag out the foreclosure process for more than 6 years, then raise the statute of limitations defense.

The bank was at a complete loss on what to do, and the mortgage was stripped from the property through either a quiet title action or a quiet title counter-claim.

The foreclosure process can take multiple years in New York, which is a non-judicial foreclosure state. Step by step process, delaying tactics & more.

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.

The foreclosure process in NY explained

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 lis pendens is essentially legalese for a document in public records that states there’s a controversy surrounding the property.

Note that this controversy doesn’t have to be mortgage related; there could be a lis pendens for a mechanic’s lien or some other breach of contract claim.

An infographic explaining how the foreclosure process in New York works for residential properties.

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.

As long as the borrower attends the settlement conference and gives the most basic of answers, he or she will have another 30 days.

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.

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Declaring bankruptcy and other delaying tactics

Borrowers have traditionally had it easy in New York when it comes to foreclosure, and liberal-minded courts have always tended to look the other way when it came to excuses for delaying the process.

Bringing an order to show cause

For example, borrowers could ask the judge to stop the foreclosure sale at any point with an order to show cause, and claim that they never got served with the papers or some other excusable default, i.e. the bank doesn’t have standing, the borrower doesn’t owe what the bank claims etc.

Judges in New York will hear all sorts of excuses, from “I never got the papers” to “I had no idea a foreclosure was pending.” Some of these excuses will be downright unbelievable. For example, how could you not know that a foreclosure was pending if you haven’t paid your mortgage for months or even years?

Yet, judges will stop the sale and ask a hearing to be conducted 99% of the time, even if the request is made at the 11th hour on the morning of the auction. We’ve heard this statistic from numerous real estate attorneys specializing in foreclosures in every borough of NYC, Westchester and even Long Island.

Once this gets signed by a judge, the foreclosure can easily be delayed by another 6 months to a year. If done right before an auction is scheduled to take place, the bank will have to go through the motions again and re-advertise the sale in local newspapers.

Filing for bankruptcy as a last resort

As a final tactic to delay a foreclosure sale, the borrower could file for personal bankruptcy which will stay the process for 90 days at least, until the filing is dismissed or discharged.

A pro se (i.e. one representing him or herself without a lawyer) litigant is allowed to file for bankruptcy twice a year, and each filing will give them at least 90 days of breathing room.

Though outside the scope of this article, it’s interesting to note that a Chapter 7 bankruptcy wipes away all unsecured debts like credit card debts, but the borrower is allowed to keep their home. A Chapter 13 bankruptcy is more like a re-payment plan.

How to buy foreclosures in NY

Everyone wants to be a real estate mogul, and we hear lots of agents and buyers tell us that they want to invest in and buy foreclosures. However, we want to caution that this is a very niche part of the real estate market dominated by professionals who specialize in buying foreclosures for a living.

So just who are these professionals?

They are the people who come to the county courthouse with stacks of certified checks in $10,000 increments so they can bid effectively.

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.

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Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.

5 thoughts on “The Foreclosure Process in NY and How It Favors Borrowers”

  1. It’s interesting to note that the mandatory settlement conference was only initially meant for primary residences. But courts in NY ended up offering it for second homes, HELOCs, co-ops, reverse mortgages, investment properties etc.

    The mandatory settlement conference has never been repealed, so it’ll be interesting to see it in play for the current Coronavirus pandemic in 2020.

  2. It’s interesting that condo boards can file a lawsuit for unpaid common charges (i.e. common charge lien) and ultimately get a judgment, which impedes the owner from being able to sell the condo. The board would also have the right to foreclose on the common charge lien.

    However, very interestingly, whoever buys the foreclosed condo in that scenario would be subject to the original mortgage on the property, which is superior to the more junior common charge lien.

    Now for co-ops, it’s almost like the reverse of the process in this article since foreclosures for co-ops are subject to the UCC (i.e. it’s non judicial) since it’s not real property.

    The co-op board will give a delinquent shareholder tenant 30 days notice, then the board will need to publish the sale in a local newspaper, the shareholder gets a certified letter that the board intends to sell their unit and the sale is conducted at the local court house. Generally, it’ll be the bank lender that’s the foreclosing party.

    Now co-op shareholders in New York can file a special proceeding and can usually get the courts to agree to a settlement process, but they have to move quickly because a co-op foreclosure moves very quickly.

  3. Andrew Prestle

    The extremes described in this article won’t be for everyone. Not everyone wants to take maximum advantage of the liberal court system here in New York but destroy their credit score.

    This is why many borrowers in trouble try to get the lender to agree to a short sale, which is reported on one’s credit report as “settled for less.” While that’s not great either, it’s still way better than being foreclosed upon which is the worst for one’s credit.

    One thing to keep in mind, a short sale can be considered forgiveness of debt by the government, and form 1099-C reports that “income” from the forgiveness of debt (i.e. the amount the bank was “short” by agreeing to a short sale).

    With that said, for years short sellers didn’t have to report this as income if it was their primary residence, though I’m not actually certain now with the new tax laws. Anyone know?

  4. Quick addition to this great article, if the borrower is released from the mandatory settlement process, the court usually gives a 60 day stay on action. Thus, more free time in the home for the borrower.

    Another delaying tactic is for the borrower to agree to a trial modification, and if the borrower makes these trial payments then the bank has to discontinue the foreclosure case. Then, if the borrower falls behind again, the poor bank has to restart the whole process again!

    Regarding short sales, yes they’re interesting opportunities for investors, but just like foreclosures you have to be careful. For short sales, the property can easily come with open water and sewer bills for example.

    Also, it’s important to get a release from the 1st and 2nd lender (if any) in a short sale purchase. Lastly, perhaps you can consider a cash for keys program, like $2k to $10k as a financial incentive for the seller to show up to closing with the keys.

    Last interesting side note, banks usually have a separate short sale department with its own underwriting team.

  5. NYC Condo Foreclosures

    Filing bankruptcy right before a foreclosure auction is supposed to happen is a common stall tactic in New York, but it is by no means foolproof.

    We had a recent example where we anticipated that a delinquent borrower was going to file for bankruptcy again, after failing to go through with the repayment plan as we expected after filing for bankruptcy the first time.

    We petitioned the court to allow us to continue with the foreclosure if they tried to file for bankruptcy again to stall the sale. Lo and behold, they filed for bankruptcy a second time right before our second attempt to conduct the foreclosure sale, but the court order protected us, we re-noticed the foreclosure and were able to sell the condo unit. This was a condo common charge lien foreclosure by the way.

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