Mortgage Foreclosures – Bank or Private Loan?

Our firm is called upon to both defend and prosecute mortgage foreclosure actions.  One of the first questions that should to be asked is who holds the mortgage loan, meaning the party who is entitled to bring the action.  In most cases, it is an “institutional lender,” such as a bank or a credit union.  However, there may be situations where the lender, or the note holder, is not an institutional lender.  This can occur in several ways.  Often, the institutional lender sells the mortgage and note to a third party.  This purchaser can be a company or a private individual.  The third party takes an assignment of the note and mortgage, and “steps into the shoes” of the institutional lender.  They pay a fixed amount to the original lender, and hope to make a profit by foreclosing the property and selling it for a greater sum than they paid for the loan.

There can also be situations where the loan originator is a private individual.  This can occur when a family member loans another family member funds to purchase a house or apartment, and takes back a note and mortgage, to be repaid over time.  Another possibility is that the seller of the property loans the funds to the buyer, and a purchase money mortgage is used to secure the debt of the buyer.

A person who may be in foreclosure may now ask, what’s the difference whether the holder of a mortgage and note is an institutional lender or a private individual?  Our experience has shown that the identity of the lender can make for quite a variation in the litigation and resolution of a foreclosure case.

The first difference will occur in certain notices that must be given by law prior to foreclosure.  Certain of the notices required only need to be sent by institutional lenders, and not private individuals.  It is important to have experienced counsel determine the identity of the lender, and make sure that the proper notices are sent and received by the borrower prior to the commencement of a foreclosure action.

Another possibility to be noted is where family members are involved in a foreclosure.  For example, let’s say a purchaser’s father lends the purchaser and her husband funds to purchase a house, and takes back a mortgage from the couple.  The couple then divorce and fail to pay the mortgage.  The lender may now find himself in the situation of having to bring a foreclosure action against his child, or his former in-law.  Counsel must be aware of any conflicts of interest which may arise from representing the individual lender in this situation.

One of the most notable differences in a foreclosure action brought by an individual as opposed to an institutional lender is in the possibility of negotiating a resolution, whether during a mandatory settlement conference or out of court.  Institutional lenders are usually represented by large law firms.  Any negotiations have to go through several layers of bureaucracy   and, in many instances, the lending bank may take months to respond to a settlement proposal.  Often, they do not respond at all, leaving the lender with no recourse other than to litigate the action in the courts.

When the lender is an individual, it is usually far easier to negotiate directly with their counsel to resolve a foreclosure action.  As previously described, there may be a situation where the lender and borrower actually know each other personally.  The parties may be far more motivated to reach a settlement out of court, as opposed to an institutional lender, which has no personal stake in this situation, and can easily absorb litigation costs.

Whether borrower or lender, our firm is available to represent parties in foreclosure actions, and looks forward to discussing such actions with all potential litigants.