Prior blog posts have dealt with various aspects of foreclosed properties in New York State. This post discusses the possibility of a deficiency judgment being entered against the borrower. This can occur when the value of the property is less than the amount owed by the individual who signed the note and mortgage which is the subject of the foreclosure.
However, what happens when the opposite occurs? Properties, especially those in Westchester County, may increase in value over time. There may be certain situations when the value of the property is greater than the amount owed by the borrower. When such a property is the subject of a foreclosure, there may be a funds surplus after the foreclosure is completed. For example, a borrower purchases a single family house for $200,000.00, and takes out a mortgage for $150,000.00. After making payments for many years, he loses his job and is unable to pay his mortgage. The current balance on the mortgage is now $100,000.00, but the house has appreciated in value and is now worth $400,000.00. How does this affect the foreclosure process?
As attorneys representing borrowers in the foreclosure process, the first possibility is that the borrower can simply sell the house for its current fair market value, and then use the proceeds from the sale to pay the mortgage in full. However, there may be some situations in which this is not possible. Some borrowers wait too long in the foreclosure process before engaging experienced counsel, and it may be too late to sell the property, as the lender has already obtained a judgment of foreclosure and scheduled a public auction of the property. Another possibility is that the original borrower may have passed away, and her heirs may have failed to engage estate counsel to represent their rights in a foreclosure proceeding before the auction is scheduled.
In such cases, the property may be sold at public auction. Such auctions are held only after the entry of a foreclosure judgment and the public advertising of the sale, usually at the Supreme Court Courthouse of the county in which the property is located. Members of the public may attend and bid on the property. The foreclosure judgment will usually state the amount owed to the lender, including costs and attorneys’ fees. Let’s assume that the property is worth significantly more than the amount owed. In that case, the winning bid may exceed the judgment amount. Who is legally entitled to those surplus funds?
If there are excess funds after the sale, any other monetary liens on the property must be paid from those funds, in the order in which the liens were entered. For example, if there was a second mortgage on the property, the amount due would be paid from the surplus funds after the balance due on the first mortgage is paid. There may also be other judgments outstanding against the property owners, which, if they have been recorded properly, act as liens on the property. These outstanding judgments are also paid from the surplus, again, from the oldest judgment to the newest.
After these liens on the property are paid in full and if there are any funds remaining, then the property owner would be entitled to receive these monies. Our recommendation is that property owners use counsel to represent their interests to ensure that they receive any potential surplus funds to which they may be legally entitled after the property is sold at auction.