Is Your Default Foreclosable? Facts And Equity Determine The Answer.

There exist two major theories of mortgage law in the United States: the title theory, in which title to the collateral is transferred to the mortgagee until the debt secured by the mortgage has been satisfied; and the lien theory, where legal title to the property remains with the mortgagor and the mortgagee is granted a lien on the collateral until satisfaction of the debt secured by the mortgage.

In a mortgage foreclosure, one inalienable right of a mortgagor or borrower is their right of redemption or right to repay the debt secured by the mortgage and obtain a release of the lien of the mortgage against their property.

In New York, this right of redemption is generally available at any time after a default of the underlying obligation until the foreclosure auction has occurred. The inalienable nature of a mortgagor's right of redemption is further codified in the many court rulings that strike down waivers and other creative mechanisms that "clog" the mortgagor's right of redemption. The inviolate nature of the equity of redemption reflects the severity that New York courts regard the divestiture of title and evidences the high level of scrutiny that courts will apply to the foreclosure process. In the recent downturn, we have seen many cases where foreclosures were dismissed for a myriad of technical reasons.

In this context, the question of when can a mortgage be foreclosed in New York becomes relevant. This article will discuss whether all defaults under a mortgage loan, whether they be monetary, material, non-material or otherwise, will enable a lender to maintain a foreclosure proceeding that will be enforced by a New York court.

Under New York law, there is well-established precedent granting mortgagees the right to accelerate a loan and commence a foreclosure proceeding following a monetary default. Generally courts have held that "when a mortgagor defaults on loan payments, even if only for a day, a mortgagee may accelerate the loan, require that the balance be tendered or commence foreclosure proceedings."1 When faced with non-monetary defaults, the courts have turned to principles of equity to aid in determining whether a mortgagee is entitled to foreclosure as a remedy. In exercising its equitable authority, New York courts have introduced a level of uncertainty into the analysis of whether a mortgagee will be authorized to commence foreclosure proceedings. While courts seem inclined to permit the commencement of foreclosure proceedings, there exist examples in which the court exercises its equitable authority to deny this remedy to mortgagees. While these decisions cannot pinpoint how a court will rule in a particular circumstance, they do provide insight into the court's decision-making process.

As...