Just Who Is The Borrower Anyway?
Life used to be a lot simpler for mortgage lenders.
Now, things are even more complicated than they appear to be. Exhibit 1 is Sec. 1304 of NY’s Real Property Actions and Proceedings Law. On the face of it Sec. 1304 is straight forward. It provides that a pre-foreclosure notice must be provided to “the borrower” at least ninety days before a lender, an assignee or a mortgage loan servicer commences legal action against the delinquent borrower. Judging by the number of cases in which lenders have had foreclosures dismissed for violating this requirement, it is not as simple as it looks.
For example, just who is the “borrower” for purposes of this notice and are there steps your credit union can take to avoid any confusion over this issue? A clearly exasperated Richmond County judge provided some useful answers to both of these questions in OneWest Bank FSB v. Prestano, 49 Misc. 3d 1209(A) (N.Y. Sup. Ct. 2015), a case that was decided last week.
When Giuseppe and Caterina Prestano originally brought their home they both signed the note and the mortgage. Things get interesting because, when the house was subsequently refinanced, only Giuseppe Prestano signed the note. The mortgage, with its two riders (1-4 Family and Adjustable Rate), was signed by both Prestanos.
Mr. Prestano committed suicide; but, before he died he received a Sec. 1304 notice. Caterina did not. In the subsequent foreclosure action she argued that this invalidated the whole foreclosure. The bank argued that she was not a borrower because her name was not on the note. Here is the problem with that argument as the court saw it: if she was not a “borrower” then her signature on the Mortgage and Riders is there merely to consent to Giuseppe Prestano mortgaging his interests in the property and her ownership interest in the real property cannot be foreclosed upon. In other words the bank put itself in the corner in which it could either argue that it had complied with Sec. 1304 and lose the right to foreclose on the entire property or concede that it had violated Sec. 1304 and have to start the foreclosure from scratch.
Here is the real helpful part of the case: The judge pointed out that this dilemma could have been avoided had Giuseppe left her off the mortgage document entirely and been instead asked to execute a “consent to mortgage.” By such a document she would declare she was not obligating herself either on the Note or Mortgage, but would acknowledge that should her spouse default on his obligations, the lender could institute a foreclosure proceeding against the entire premises.
Consent to mortgage documents are a great device that have historically been used more frequently in commercial real estate transactions rather than residential ones. With so many different disclosures and notices being required now at so many different stages of the lending process, the more clearly you delineate who the borrower is, the better off you are. Now, don’t get me wrong, obviously the ideal situation is to have all borrowers sign both the mortgage and the underlying note. But increasingly, couples are doing their own thing. For example, one spouse might be starting their own business while the other continues to work at a 9-5 job. As a result, clearly delineating the right to foreclose on property is becoming that much more important.