The Secondary Mortgage Market involves the buying, selling, and trading of existing mortgage loans and mortgage-backed securities after they are originated by a primary market lender. The buying, selling, or trading of a mortgage after origination is considered a secondary marketing transaction. The secondary market involves government agencies including the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA) and the Federal Home Loan Mortgage Association (FHLMC), as well as private investors (investment bankers).

The need for the secondary mortgage market arose from the necessity of lenders having to sell their existing mortgages to secure additional funds for local lending. By selling existing mortgages the lender reduces the risk of having a portfolio filled with mortgages at rates below the current market rate. The secondary marketing arose in direct response to the need to increase the supply of mortgage money available for direct lending in the primary market. Areas of the country, particularly the northeast, have historically been capital rich areas. Other areas of the country which needed additional mortgage money funds attracted investment funds through the device of the secondary market.

Primary lending institutions, by creating securities based on mortgages, have created a mechanism by which means investors can buy securities backed by numerous mortgages thereby avoiding the risk of early maturity and other problems inherent in buying individual mortgages.

The Federal Housing Administration was authorized to establish national mortgage associations to increase the supply of mortgage money and provide a secondary market for home mortgages in 1938.¹⁹⁹

There are currently three different types of national mortgage associations: the Federal National Mortgage Association (FNMA), referred to as "Fannie Mae", the Federal Home Loan Mortgage Corporation (FHLMC), referred to as "Freddie Mac" and the Government National Mortgage Association (GNMA), referred to as "Ginnie Mae". There is also a private sector secondary market where lenders may sell their mortgages. All of these participants in the secondary market buy qualifying residential mortgages from lenders and either retain them for their own portfolios (as in the sale of whole loans) or package them into securities backed by mortgages (mortgage-backed securities) and resell the securities on the open market.

The Federal National Mortgage Association was created in 1938 as part of Title Ill of the National Housing Act which authorized the Federal Housing Administration to establish national mortgage associations.²⁰⁰ The purpose of these associations would be to provide a secondary market for Federal Housing Administration-insured home mortgages. Title VIII of the Housing and Urban Development Act of 1968,²⁰¹ made the Federal National Mortgage Association (FNMA) a privately owned corporation. The Federal National Mortgage Association (FNMA) was divided into two entities: the Government National Mortgage Association (GNMA) and the Federal National Mortgage Association (FNMA). The change in character to private ownership did not alter the Federal National Mortgage Association (FNMA) ties to the federal government or its function to purchase residential and other mortgages from lending institutions.²⁰²

The Federal National Mortgage Association (FNMA) was empowered in 1944 to purchase VA-guaranteed loans.²⁰³ In 1970, as part of the Emergency Home Finance Act of 1970, the Federal National Mortgage Association (FNMA) was authorized to purchase conventional mortgages.²⁰⁴ The Federal National Mortgage Association (FNMA) provides financing for single-family, multi-family and cooperative mortgages, second mortgages and operates its mortgage-backed securities program.²⁰⁵

An understanding of the workings of the secondary market will become increasingly important as the influence of standardization affects state and local practices as well as legal requirements for residential and commercial loans.

A mortgagor retains title to the land which is the subject of the security agreement or mortgage transaction.²⁰⁷ A grantee of the property will take subject to the terms and conditions of the mortgage instrument if the grantee had actual or constructive knowledge of the lien of the mortgage.²⁰⁸

If the grantor conveys the premises "subject to the mortgage," the land remains burdened with the lien, the mortgagor remains personally liable on the debt and the land remains as security for the performance of the debt or obligation.²⁰⁹ The grantee of property who takes subject to the mortgage is not personally liable for the debt,²¹⁰ although the land can be foreclosed upon to satisfy the debt in the event of default.²¹¹

If, however, the grantee expressly agrees to assume and pay the indebtedness,

the original mortgage becomes a surety and the assuming grantee becomes the principal debtor.²¹² The original mortgagor may still be liable as a surety after foreclosure and sale in the event of a deficiency.²¹³

Transfers by mortgagors are currently limited by the practice of lenders requiring that the time for the payment of the mortgage debt is accelerated upon a transfer or conveyance of the property or any interest therein. These provisions, called a "due-on-sale" clause have been upheld by the courts in New York²¹⁴ even where the proposed transferee is qualified to assume the debt or take the premises subject to the mortgage.²¹⁵ The federal government permits due on sale clauses subject to specific limitations.²¹⁶

The mortgagee does not have title to the land and a transfer of the mortgagee's interest does not therefore, convey title to the land.²¹⁸ The mortgagee's interest is personal property²¹⁹ and has been characterized by the New York courts as a chose in action.²²⁰

The assignment of a mortgagee's interest is subject to the same rules affecting any conveyance of real property or an interest therein. Thus, a mortgagee must have the legal capacity to make the assignment.²²¹ There must also be consideration for the assignment.²²² The mortgage must be delivered in order to effected an assignment²²³ and must be made to the original mortgagor to bind that person to the assignment.²²⁴ Likewise, an assignment of a mortgage should be recorded under section 259 of the Real Property Law.²²⁵

There are a number of special issues affecting the rights of mortgagor and the assignee of the mortgagee regarding the terms of the original mortgage instruments, defenses and claims by the mortgagor against the mortgagee and the rights of other parties to the security or debt.²²⁶

A mortgage is security for the repayment of a debt or the performance of an obligation. A default may occur in the performance of either repayment of the underlying debt or the performance of an obligation, or in the breach of other provisions of the mortgage instrument or transaction relating to acts or promises essential to the security agreement.

The mortgage instruments themselves generally provide for those acts or conditions which constitute a default or breach of the mort age agreement. The occurrence of a default usually triggers an acceleration clause²²⁸ which renders the underlying debt due and payable. Likewise, acceleration and default invoke the right of the mortgagee to foreclose on the property.²²⁹ An acceleration clause will generally require the payment of the remaining unpaid principal, either automatically or at the option of the mortgagee, upon the happening of a specified condition of default.²³⁰ Unless the mortgagee has agreed to waive a default,²³¹ thereby modifying the conditions of the original mortgage, the failure of the mortgagor to cure a default gives the mortgagee the right to bring an action in foreclosure for the sale of the property.²³²

Standard provisions in mortgages which typically constitute a default under the mortgage and trigger an acceleration clause and commensurate right of the mortgagee to foreclose are: (a) non-payment of principal and interest due;²³³ (b) failure to pay or provide for payment of real estate taxes;²³⁴ (c) non-payment of water bills or any other assessments which affect the property;²³⁵ (d) failure to maintain adequate insurance on the premises;²³⁶ (e) causing or planning destruction of existing structures on the property; (f) failing to maintain the existing structure in good repair²³⁷ and (g) the mortgagor ceasing to do business on the premise or subjecting the mortgaged property to bankruptcy proceedings.²³⁸

Foreclosure in New York is a procedure whereby the mortgagee terminates all the right, title, and interest in and to real property belonging to the mortgagor or anyone claiming by, through or under the mortgagor.²⁴⁰ The foreclosure process results in the transfer of title to the mortgagee, or, in the sale of the property to a third party with the proceeds of the sale used toward payment of the outstanding mortgage debt.²⁴¹ The foreclosure action itself will not discharge the mortgagor from further obligation on the debt where the foreclosure sale was insufficient to satisfy the amount of the obligation and the mortgagor was personally liable on the debt.²⁴² A mortgage instrument containing a covenant to pay will allow a mortgagee to bring a deficiency action the mortgagor if after the sale the proceeds do not satisfy the entire debt owed.²⁴³ Absent a promise on the part of the mortgagor to pay the debt in the mortgage, note or bond, the mortgagor is not personally liable for the debt and the mortgagee can only look to the property secured by the mortgage instrument to pay the debt.²⁴⁴

Before the right of foreclosure may be exercised, the following conditions must be met:

(1) There must be a valid mortgage securing a debt or obligation which is wholly or partially unpaid or unperformed;

(2) The mortgage must convey an estate or title to the mortgagee as security for the debt;

(3) There must be a breach of a condition of the mortgage.²⁴⁵

The New York Real Property Actions and Proceeding Law (RPAPL) provides for foreclosure and sale of part of the security upon default in any payment of the mortgage debt.²⁴⁶

The New York Real Property and Action Law section 1353 specifically provides the purchaser at foreclosure receives the same estate as would have vested in the mortgagee had the equity of redemption been foreclosed.²⁴⁷ The conveyance of an estate on foreclosure is equally as valid as if the conveyance executed between the mortgagor and mortgagee.²⁴⁸ Except as provided in sections 1315 and 1342(2) of the New York Real Property Actions and Proceedings Law (RPAPL), a conveyance pursuant to foreclose is a complete bar against the mortgagor and mortgagee, as well as any other duly summoned parties or person claiming from, through, or under a party by title accruing after the filing of the notice of the pendency of the action.

New York State generally recognizes three means by which a mortgage can be foreclosed in state: (1) by action and sale; (2) by advertisement; and, (3) by strict foreclosure. Though potentially time consuming and costly, foreclosure by action and sale is the most widely used method. The common law remedy of Strict foreclosure which was used to cut off the mortgagor's right of redemption is no longer permitted as a general remedy in New York.²⁴⁹

Actions to foreclose and sell mortgaged property are governed by the New York Real Property Action and Pro Law (RPAPL).²⁵⁰ An action to foreclose is commenced by filing a complaint²⁵¹ setting forth the specific cause of action. Foreclosure is an action to force the sale of the mortgaged property and apply the proceeds of the sale to the discharge of the mortgage debt.²⁵²

The New York Real Property Action and Proceedings Law (RPAPL)²⁵³ provides for the sale of property held as security upon default of an underlying condition of the mortgage where the mortgage instrument contains a power of sale clause.²⁵⁴ Foreclosure by advertisement does not require judicial action.²⁵⁵

A foreclosure proceeding is only valid and enforceable against those interests which were made a party to the action.²⁵⁶ And a foreclosure action will not affect, as a general rule, rights paramount to that of the mortgagor.²⁵⁷

A prominent condition of a mortgage transaction is that the mortgagor has the right to a defeasance of the interest of the mortgagee in the security upon payment in full of the debt or obligation.²⁵⁹ The right to a "defeasance" of the mortgagee's security interest means the termination of the mortgagee's interest in the premises and a release of the security effective to remove any cloud on the title of the mortgagor.²⁶⁰ The right of a mortgagor in New York to a defeasance of the Mortgagee's security interest is often confused with and must be distinguished from the mortgagor's right to redeem or right of redemption of the property after default on the mortgage debt.²⁶¹ These terms are used interchangeably in New York and refer to the Mortgagor's right to a defeasance or to redeem the property from the security interest. The mortgagor is permitted in New York to redeem the property, before or after default, whether the mortgagor or the mortgagee has been or is in possession.²⁶²

The equitable right of redemption arose because of the early common law rule that if the mortgagor failed to pay on the due ("law") date, the mortgagee immediately and irrevocably became the absolute owner of the land.²⁶³ It is in this context that the courts of equity have intervened to relieve the mortgagor against absolute forfeiture.²⁶⁴ The intervention of courts of equity to permit the mortgagor to redeem after forfeiture at law is denominated the mortgagor's "equity of redemption."²⁶⁵

The parties to a mortgage transaction cannot agree to cut of the mortgagor's equity of redemption by a covenant in the mortgage instrument or by collateral agreement.²⁶⁶ It has been repeatedly stated by the courts in New York that the remedy of the mortgagee to cut off the mortgagor's equity of redemption is to secure a foreclosure thereon.²⁶⁷

The parties to mortgage transactions often attempt to cut off the mortgagor's equity of redemption by either having title conveyed as security in the form of a deed absolute on its face,²⁶⁸ or, by the device of the mortgagee accepting a "deed in lieu of foreclosure" or some other mode of conveyance of title from the mortgagor to the mortgagee.²⁶⁹ The courts have continually rebuffed these attempts and have held that the only mechanism by which the parties can cut off the mortgagor's equity of redemption is by a foreclosure proceedings and sale.²⁷⁰

The mortgagor's equity of redemption is both necessary and essential to every mortgage.²⁷¹ The equity of redemption corresponds to the mortgagee's right to foreclosure and is often stated to be reciprocal thereto.²⁷²

It should also be noted that the mortgagor's right of redemption in New York is a right enforceable against another in the nature of a property right.²⁷³ The right of the mortgagor is not dependent on the mortgagor being in possession of the premises.²⁷⁴ The mortgagor's equity or redemption may be enforced against the mortgagee, successors in interest of the mortgagee, or the purchaser at a mortgage foreclosure sale.²⁷⁵

The right of redemption lies in the mortgagor or other holder of legal title, person, or entity having any right to, interest in, the property covered by the mortgage.²⁷⁶ A partial listing of the parties entitled to exercise the equitable right of redemption includes: (1) the mortgagor,²⁷⁷ (2) a purchaser of the mortgagor's equity of redemption,²⁷⁸ (3) a judgment creditor,²⁷⁹ (4) a contract vendee under a binding contract of sale,²⁸⁰ (5) a seller with an option to repurchase,²⁸¹ (6) a grantor who conveyed the premises "subject to the mortgage" who is a surety for the payment of the obligation,²⁸² (7) a lessee,²⁸³ a junior or subsequent creditor,²⁸⁴ and a partial owner of the property.²⁸⁵

New York makes special provision to protect the equity of redemption of a mortgagor where the mortgagee has entered into and maintains possession of the property.²⁸⁶

The equity of redemption is the right of the mortgagor to redeem the property given as security at any time after maturity, regardless of default, up to the point the equity of redemption is cut off by an action in foreclosure and sale of the subject property under supervision of the court.²⁸⁸ The mortgagor's right to redeem can only be barred by a properly instituted foreclosure action and sale.²⁸⁹ There are few instances where equity will, after foreclosure, permit the mortgagor to redeem the property and this based solely on the equities and behavior of the parties.²⁹⁰

There are special rules in New York based upon statutory proceedings involving foreclosure and redemption which permit a redemption after the default has occurred and in limited instances after foreclosure. New York generally does not permit strict foreclosure or foreclosure proceeding with additional redemption periods.²⁹¹ A full and complete title, representing the total interest of the mortgagor and mortgagee, is conveyed to the purchaser at a properly conducted foreclosure sale.²⁹² Absent fraud or the showing of special equities,²⁹³ the judgment of the court in the foreclosure sale will remain absolute.²⁹⁴

The limited instances of statutory relief are: (1) an action to redeem a mortgage,²⁹⁵ (2) an action to have an instrument which appears to be a deed absolute on its face declare a mortgage with the commensurate right of the mortgagor to redeem the premises,²⁹⁶ (3) an action to compel the determination of a claim to real property,²⁹⁷ (4) judgment of foreclosure²⁹⁸ (5) an action to determine claims where foreclosure was void or voidable²⁹⁹ (6) action to open judgment where there was a failure to join a necessary party in interest.³⁰⁰

An individual who executes a mortgage containing a covenant to pay the indebtedness,³⁰² or absent such covenant, executes a bond simultaneously with the mortgagee,³⁰³ becomes personally liable for the debt.³⁰⁴ A deficiency judgment can be entered against the individual as mortgagor³⁰⁵ and any other person who obligated himself or herself to the repayment of the debt.³⁰⁶ A person who is not made personally liable upon the execution of the mortgage, however, cannot later be held accountable where the mortgage is foreclosed, the property sold and a deficiency judgment obtained for the remaining unpaid debt.³⁰⁷

The New York Real Property Actions and Proceedings Law, Section 1371 stipulates the procedures that must be followed in order for a mortgagee to obtain a deficiency judgment. New York Real Property Actions and Proceedings Law, Section 1371 specifies that a deficiency judgment can only be granted if the suit is brought for foreclosure of the mortgage and does not apply to an action brought on the debt, for taxes, or interest owed.³⁰⁸

A motion by the mortgagee for a deficiency judgment must be made within ninety days after the foreclosure sale, as evidenced by the delivery of a deed to a good faith purchaser and such motion can be made in conjunction with a motion to confirm the referee's report of sale.309

A prerequisite to a mortgagee obtaining a deficiency judgment is that the mortgage

has been foreclosed and a valid sale of the encumbered property has occurred.³¹⁰ Upon confirmation of the referee's report of sale, and within ninety days thereof the mortgagee can make a motion to recover the deficiency of the remaining debt.³¹¹ A failure of the mortgagee to make the motion within the specified time will serve as an estoppel should he or she attempt to secure a deficiency judgment at a later date.³¹²

Any individual the mortgagee desires to obtain a deficiency judgment against must be made a party to the suit. This is accomplished by serving the person against who a deficiency judgment is to be taken personally with a copy of the notice of motion or any other type of service approved by the court.³¹³

The valuation of the property is critical to a determination of what deficiency, if any, the mortgagor shall be deemed to be held personally liable for. The court in its endeavor to obtain the true value of the premise may act upon its own initiative to inspect the property³¹⁴ or appoint a referee to assist in the valuation process.³¹⁵

The New York Real Property Action and Proceeding Law, Section 1371 specifies the formula to be used in calculating the amount of the deficiency judgment. First, a determination as to the fair and reasonable market value of the property must be ascertained. The court is not bound by the price obtained for the premises at a foreclosure sale and can use the market value of the property if it is higher.³¹⁶ Second, the Court will subtract from this value is amount of debt owed plus the interest in arrears and costs. Finally, any tax liens filed against the property, the cost of the foreclosure and sale of the property, the fees of the referees and any other disbursements will be subtracted, leaving an amount, if any, the mortgagor will owe to the mortgagee. As the formula indicates, the undervaluing of the property can leave the mortgagor with a substantial deficiency judgment to pay. The valuation of the property therefore becomes the point in the judicial process where the amount, if any, of the deficiency judgment is established.

A corporation is a creature of law and the authority for a corporation to enter into a mortgage transaction must be found corporate charter or in the legislation authorizing the formation of the corporation.³¹⁸ Under current statutory provisions, the New York Business Corporation Law provide that the board of directors of a corporation may authorize the creation of a security interest in corporate property unless the certificate of incorporation provides otherwise, with or without the consent or vote of the shareholders.³¹⁹ The creation of the security interest, however, must be in the ordinary course of business.³²⁰ A corporation, therefore, in order to further its business, may make contracts, borrow money or otherwise create liabilities for which it may mortgage or pledge any of its property.³²¹

A not-for-profit corporation is not organized for profit or financial gain³²² is subject to different rules and strict compliance with statutory requirements must be met or a mortgage is invalid.³²³

Likewise, religious corporations are controlled under the provisions of the Religious Corporation Law and wherein it is provided that religious corporations may not sell, mortgage or lease for a term in excess of five years any of their real property without first obtaining judicial approval therefore as provided for in section 511 of the Not-For-Profit Corporation law.³²⁴

A mortgage created by a religious corporation without leave of the court is voidable.³²⁵ Likewise, the religious corporation must secure the consent of the membership to create a mortgage.³²⁶

The authorization for the corporation to execute a mortgage must emanate from the Board of Directors of the corporation under circumstances which will withstand judicial scrutiny.³²⁷

Many problems are encountered regarding corporate mortgages because a corporation, as an artificial entity, can only act through its agents. The authority for the creation of a mortgage, therefore, must come from the board of directors³²⁸ and be within the agent's apparent scope of authority.³²⁹

A critical distinction between individual mortgages and corporate mortgages has been the historical limitation imposed on corporations to use usury as a defense. Usury has not been permitted as a defense to a corporation³³⁰ or to any individual who guaranteed the corporate note.³³¹ A traditional method for attempting to avoid the usury law applicable to individuals was to make a loan to a corporation, or form a corporation for the express purpose of avoiding the usury laws.³³²

Foreign corporations not or organized under the laws of the state of New York have not right of recognition in the state.³³³ New York state, if the situs of property held by a foreign corporation may regulate and prescribe the method of conveying or encumbering such property.³³⁴ A part of the problem of the foreign corporation which attempts to create a mortgage or to enforce a mortgage in New York state is the difficulty of access to the courts for the purpose of enforcement of the foreign corporation's rights.³³⁵

[FOOTNOTES OMITTED]

1. Where final judgment for the plaintiff has been rendered in an action to recover any part of the mortgage debt, an action shall not be commenced or maintained to foreclose the mortgage, unless an execution against the property of the defendant has been issued upon the judgment to the sheriff of the county where he resides, if he resides within the state, or if he resides without the state, to the sheriff of the county where the judgment-roll is filed; and has been returned wholly or partly unsatisfied.

2. The complaint shall state whether any other action has been brought to recover any part of the mortgage debt, and, if so, whether any part has been collected.

3. While the action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought.

Each of the following persons, whose interest is claimed to be subject and subordinate to the plaintiff's lien, shall be made a party defendant to the action:

1. Every person having an estate or interest in possession, or otherwise, in the property as tenant in fee, for life, by the curtesy, or for years, and every person entitled to the reversion, remainder, or inheritance of the real property, or of any interest therein or undivided share thereof, after the determination of a particular estate therein.

2. Every person having a right of dower or an inchoate right of dower in the real property or any part or share thereof.

3. Every person having any lien or incumbrance upon the real property which is claimed to be subject and subordinate to the lien of the plaintiff.

4. Where the mortgage is upon any of the public utilities regulated by the public service law, the public service commission.

1. If the defendant fails to answer within the time allowed or the right of the plaintiff is admitted by the answer, upon motion of the plaintiff, the court shall ascertain and determine the amount due, or direct a referee to compute the amount due to the plaintiff and to such of the defendants as are prior incumbrancers of the mortgaged premises, and to examine and report whether the mortgaged premises can be sold in parcels and, if the whole amount secured by the mortgage has not become due, to report the amount thereafter to become due. Where the defendant is an infant, and has put in a general answer by his guardian, or if any of the defendants be absentees, the order of reference also shall direct the referee to take proof of the facts and circumstances stated in the complaint and to examine the plaintiff or his agent, on oath, as to any payments which have been made.

2. When he moves for judgment, the plaintiff shall show whether any of the defendants who have not appeared are absentees.

Add, L 1962, ch 312, eff Sept 1, 1963; deriving from RCP 256, 257.

1. Where the action is for the foreclosure of a mortgage providing that a receiver may be appointed without notice, notice of a motion for such appointment shall not be required.

2. Where a receiver has been appointed, upon the application of the plaintiff or of any holder of a certificate evidencing an undivided interest in the mortgage or mortgage debt and upon proof that no answer has been interposed affecting the validity of the mortgage or the amount due thereon, or asserting any prior lien, or asserting a plea of tender of payment of the amount due, or which if sustained would affect in any way the right of the plaintiff to a judgment in foreclosure and to the payment of the amount claimed by the plaintiff in his complaint to be due, the court may direct that the receiver of the rents appointed in such action apply, during the pendency of the action, the rents received by him towards the payment of accrued interest on the mortgage, provided due provision shall have been made for the payment of taxes, administration expenses, fees and charges and such reserve as the court may direct. Any monies so paid over by the receiver shall be deducted from the amount of the judgment in said action.

3. In a city with a population of one million or more persons an order appointing a receiver to receive the rents and profits of a multiple dwelling shall provide that the receiver:

(a) register with any municipal department as provided by applicable law; and

(b) expend rents and income and profits as described in subdivision two of this section, except that a priority shall be given to the correction of immediately hazardous and hazardous violations of housing maintenance laws within the time set by orders of any municipal department, or, if not practicable, seek a postponement of the time for compliance.

The plaintiff, at least twenty days before a final judgment directing a sale is rendered, shall file in the clerk's office of each county where the mortgaged property is situated a notice of the pendency of the action, which shall specify, in addition to other particulars required by law, the date of the mortgage, the parties thereto and the time and place of recording.

Where an action is brought to foreclose a mortgage upon real property upon which any part of the principal or interest is due, and another portion of either is to become due, and the defendant pays into court the amount due for principal and interest and the costs of the action, together with the expenses of the proceedings to sell, if any, the court shall:

1. Dismiss the complaint without costs against plaintiff, if the payment is made before judgment directing sale; or

2. Stay all proceedings upon judgment, if the payment is made after judgment directing sale and before sale; but, upon a subsequent default in the payment of principal or interest, the court may make an order directing the enforcement of the judgment for the purpose of collecting the sum then due.

1. The judgment shall direct that the mortgaged premises, or so much thereof as may be sufficient to discharge the mortgage debt, the expenses of the sale and the costs of the action, and which may be sold separately without material injury to the parties interested, be sold by or under the direction of the sheriff of the county, or a referee.

2. Where the mortgage debt is not all due, and the mortgaged property is so circumstanced that it can be sold in parcels without injury to the interests of the parties, the final judgment shall direct that no more of the property be sold in the first place than is sufficient to satisfy the sum then due, with the costs of the action and expenses of the sale. Upon a subsequent default in the payment of principal or interest the plaintiff may apply for an order directing the sale of the residue, or of so much thereof as is necessary to satisfy the amount then due, with the costs of the application and the expenses of the sale. The plaintiff may apply for and obtain such an order as often as a default happens. If it appears that the mortgaged property is so circumstanced that a sale of the whole will be most beneficial to the parties, the final judgment may direct that the whole property be sold discharged from the entire mortgage debt and that the proceeds of the sale, after deducting the costs of the action and the expenses of the sale, be either applied to the satisfaction of the whole sum secured by the mortgage, with such a rebate of interest as justice requires; or be first applied to the payment of the sum due, and the balance, or so much thereof as is necessary, be invested at interest for the benefit of the plaintiff, to be paid to him from time to time as any part of the principal or interest becomes due, or may, at the option of the mortgagee, direct that the whole property be sold to satisfy the debt then due with the costs of the action and expenses of the sale, subject to the continuing lien of the mortgage for the amount of the debt not then due and unpaid according to its terms. The provisions of this section shall not limit or affect the plaintiff's right to judgment and sale in an action specified in section 1315.

3. If it appears to the satisfaction of the court that there exists no more than one other mortgage on the premisis [premises] * which is then due and which is subordinate only to the plaintiff's mortgage but is entitled to priority over all other liens and encumbrances except those described in subdivision 2 of section 1354, upon motion of the holder of such mortgage made without valid objection of any other party, the final judgement may direct payment of the subordinate mortgage debt from the proceeds in accordance with subdivision 3 of section 1354. [*Bracketed language inserted by Publisher.]

Where real property has been sold pursuant to a judgment in an action to foreclose a mortgage, and an action is thereafter brought to foreclose or extinguish a right of redemption in such real property, the judgment, instead of directing a sale of the property, shall fix the right of any person having a right of redemption therein or the right to foreclose a subordinate mortgage or other lien and shall provide that a failure to redeem or commence an action for the foreclosure of such mortgage or other lien within such time shall preclude such person having a right of redemption or the holder of such mortgage or other lien from redeeming such property or foreclosing such mortgage or other lien, and thereafter such person having a right of redemption or the holder of such mortgage or other lien shall be excluded from claiming any title or interest in such property and all title or interest of such person having a right of redemption in, or the right to foreclose a subordinate mortgage or other lien against such property shall thereby be extinguished and terminated.

1. After the property has been sold, the officer conducting the sale shall execute a deed to the purchaser. The plaintiff, or any other party, may become a purchaser.

2. Before a deed is executed to the purchaser, the plaintiff shall file the mortgage and any assignment not shown to have been lost or destroyed in the office of the clerk, unless it is in a form which can be recorded; in which case it shall be recorded in the counties where the lands are situated; the expense of filing or recording and entry shall be allowed in the taxation of costs; and, if filed with the clerk, he shall enter in the minutes the time of filing.

3. The conveyance vests in the purchaser the same estate only that would have vested in the mortgagee if the equity of redemption had been foreclosed. Such a conveyance is as valid as if it were executed by the mortgagor and mortgagee, and, except as provided in section 1315 and subdivision 2 of section 1341, is an entire bar against each of them and against each party to the action who was duly summoned and every person claiming from, through or under a party by title accruing after the filing of the notice of the pendency of the action.

1. The officer conducting the sale shall pay, out of the proceeds, unless otherwise directed, the expenses of the sale, and pay to the plaintiff, or his attorney, the amount of the debt, interest and costs, or so much as the proceeds will pay and take the receipt of the plaintiff, or his attorney, for the amount so paid, and file the same with his report of sale.

2. The officer conducting the sale shall pay out of the proceeds, unless the judgment otherwise directs, all taxes, assessments, and water rates which are liens upon the property sold, and redeem the property sold from any sales for unpaid taxes, assessments or water rates which have not apparently become absolute. In any city having a population of one million or more, such officer shall pay out of the proceeds any liens or incumbrances placed by a city agency upon the real property which have priority over the foreclosed mortgage. The sums necessary to make those payments and redemptions are deemed expenses of the sale. The provisions of this subdivision shall not apply to any judgment in an action wherein any municipal corporation of this state is the plaintiff and the purchaser at the foreclosure sale thereunder.

3. The officer conducting the sale after fully complying with the provisions of subdivisions one and two of this section and if the judgment of sale has so directed shall pay to the holder of any subordinate mortgage or his attorney from the then remaining proceeds the amount then due on such subordinate mortgage, or so much as the then remaining proceeds will pay and take the receipt of the holder, or his attorney for the amount so paid, and file the same with his report of sale.

4. When the sum of the amount of the proceeds before any distributions are made under this section and the amount of any other liens which the real property is taken subject to is one million dollars or more, the officer conducting the sale shall pay, out of the proceeds remaining after the provisions of subdivisions one, two and three of this section have been complied with, the amount of tax on gains derived from certain real property transfers due from the defendant pursuant to article thirty-one-B of the tax law to the state tax commission. Such amount shall be ten per centum of the sum of the amount of the proceeds before any distributions are made under this section and the amount of any other liens which the real property is taken subject to, unless the defendant shall furnish the officer conducting the sale a statement of tentative assessment or statement of no tax due issued by the state tax commission, in which case the officer shall pay over to the state tax commission the amount stated on such tentative assessment or statement of no tax due. The officer conducting the sale shall, along with such payment, file returns and information in accordance with procedures established by the state tax commission.

5. All surplus moneys arising from the sale shall be paid into court by the officer conducting the sale within five days after the same shall be received.

1. Within thirty days after completing the sale and executing the proper conveyance to the purchaser, unless such time be extended by the court within said thirty days, the officer making the sale shall file with the clerk his report under oath of the disposition of the proceeds of the sale, accompanied by the vouchers of the persons to whom payments were made.

2. A motion to confirm such report of sale shall not be made within three months after the filing of the report and shall in any event be made not later than four months after the filing of such report, except that if there be no surplus moneys arising from the sale of the mortgaged premises under such judgment, an application for confirmation of the report of sale may be made at any time after the report shall have been filed eight days. Where the report of sale shows surplus money the party moving for confirmation of the report of sale shall present with his motion papers a proper voucher for the surplus moneys showing that they have been paid into court, a certificate of the clerk specifying the notices of claim to the surplus moneys, if any, so filed with him, and an affidavit showing any other unsatisfied lien on the property.

1. Any person claiming the surplus moneys arising upon the sale of mortgaged premises, or any part thereof, either in his own name, or by his attorney, at any time before the confirmation of the report of sale, may file with the clerk in whose office the report of sale is filed, a written notice of such claim, stating the nature and extent of his claim and the address of himself or his attorney.

2. On the motion for confirmation, or at any time within three months thereafter, on notice to all parties who have appeared in the action or filed claims, on motion of any party to the action, or any person who has filed a notice of claim on the surplus moneys, the court, by reference or otherwise, shall ascertain and report the amount due to him or any other person who has a lien on such surplus moneys, and the priority of the several liens thereon and order distribution of surplus moneys.

3. The owner of the equity of redemption, or any party who has appeared in the action or any person who files a notice of claim or who has a recorded lien against the property shall be given notice by mail or in such other manner as the court shall direct, to attend any hearing on disposition of surplus money.

Add, L 1962, ch 312, eff Sept 1, 1963; deriving from RCP 262, 263.

1. Upon confirmation of the report of sale, or upon such proceedings as are provided in section 1361, the court shall order the payment of the surplus proceeds of sale out of court to such persons as are entitled thereto.

2. If the property sold has included a right to dower, whether inchoate or consummate, a tenancy by curtesy, or any other estate for life or years, the owner of such particular estate in the real property sold is entitled to receive from the surplus, in satisfaction of his estate or interest, either a sum in gross or the earnings of a sum invested for his benefit. The determination as to whether a sum in gross or the earnings of a sum invested shall be awarded to the owner of such particular estate shall be governed by the provisions of section 968 with respect to the proceeds of a sale in partition.

3. If real property or an interest in real property which is liable to be disposed of as prescribed in article thirteen of the surrogate's court act, be sold to satisfy a mortgage or other lien thereon, which mortgage or lien accrued during the decedent's lifetime, the surplus money shall be paid in to the surrogate's court having jurisdiction to issue letters testamentary or of administration upon the estate of the decedent, in the following cases: (a) If eighteen months have not elapsed since the date when letters testamentary or of administration were first issued. (b) If a proceeding for a judicial settlement of the accounts of such executor or administrator has been commenced within eighteen months from the date of the issue of such letters and is still pending. (c) If no such letters have been issued and two years have not elapsed since the death of the decedent.

1. If a person who is liable to the plaintiff for the payment of the debt secured by the mortgage is made a defendant in the action, and has appeared or has been personally served with the summons, the final judgment may award payment by him of the whole residue, or so much thereof as the court may determine to be just and equitable, of the debt remaining unsatisfied, after a sale of the mortgaged property and the application of the proceeds, pursuant to the directions contained in such judgment, the amount thereof to be determined by the court as herein provided.

2. Simultaneously with the making of a motion for an order confirming the sale, provided such motion is made within ninety days after the date of the consummation of the sale by the delivery of the proper deed of conveyance to the purchaser, the party to whom such residue shall be owing may make a motion in the action for leave to enter a deficiency judgment upon notice to the party against whom such judgment is sought or the attorney who shall have appeared for such party in such action. Such notice shall be served personally or in such other manner as the court may direct. Upon such motion the court, whether or not the respondent appears, shall determine, upon affidavit or otherwise as it shall direct, the fair and reasonable market value of the mortgaged premises as of the date such premises were bid in at auction or such nearest earlier date as there shall have been any market value thereof and shall make an order directing the entry of a deficiency judgment. Such deficiency judgment shall be for an amount equal to the sum of the amount owing by the party liable as determined by the judgment with interest, plus the amount owing on all prior liens and encumbrances with interest, plus costs and disbursements of the action including the referee's fee and disbursements, less the market value as determined by the court or the sale price of the property whichever shall be the higher.

3. If no motion for a deficiency judgment shall be made as herein prescribed the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist.

4. Notwithstanding the foregoing provisions and irrespective of whether a motion for a deficiency judgment shall have been made or, if made, shall have been denied, the court shall direct that all moneys remaining in the hands of a receiver of the rents and profits appointed in the action, after the payment of the receiver's fees and the expenses of the receivership, or any moneys remaining in the hands of a mortgagee in possession or an assignee of the rents and profits of the premises, shall be paid to the plaintiff to the extent of the amount, if any, by which the judgment of foreclosure and sale exceeds the amount paid for the property upon the sale.

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79 N.Y.2d 1016; 594 N.E.2d 918; 584 N.Y.S.2d 424 (1992)

OPINION: MEMORANDUM

The order of the Appellate Division should be affirmed, with costs, for the reasons stated by the Appellate Division ( AD2d ).

We would but add the following, in response to the dissent. The best evidence of what parties to a written agreement intend is what they say in their writing. Here, the words used in the parties' contract are clear and unambiguous, and entitle the purchasers to return of their down payment. That this may be astandard clause in a form for the sale of real property suggests even more strongly that the clause should be rewritten if it is indeed inaccurate, rather than for this Court to speculate as to what the parties to a particular transaction could have believed it meant.

Order affirmed, with costs, in a memorandum. Chief Judge Wachtler and Judges Kaye, Titone, Bellacosa and Yesawich concur. Judge Hancock dissents and votes to reverse in an opinion. Judge Simons took no part.

DISSENT BY: HANCOCK

DISSENT: HANCOCK, J. (dissenting):

I would reverse and reinstate the order of Supreme Court.

The appeal turns on one issue: the meaning of paragraph 23, the mortgage contingency clause in form M 146 -- the standard contract of sale for condominiums, prepared by The Committee on Real Property Law of The Association of The Bar of the City of New York. The standard mortgage contingency clause, -- with the blank spaces for the date and the amount of the lender's commitment filled in by the parties -- provides in pertinent part:

23. Mortgage Contingency: The obligations of Purchaser hereunder are conditioned upon issuance on or before September 1, 1988 of a written commitment from any Institutional Lender pursuant to which such Institutional Lender agrees to make a loan to Purchaser, at Purchaser's sole cost and expense, of not less than $ 201,375.00 * * * Purchaser shall (a) make prompt applications to one or more Institutional Lenders for such first mortgage loan * *

The purpose of the typical mortgage contingency clause is simply to relieve the purchaser of the obligation of going through with the contract if mortgage financing is not obtainable in a given amount. No one contends otherwise. The commonly understood meaning of a mortgage contingency clause, as described by Justice Burrows at Supreme Court, is this:

A mortgage contingency clause in a contract of sale of real estate is for the benefit of a purchaser who has represented that he is only ready, willing and able to purchase if third-party financing is obtainable. In order to enter into the contract and allow purchaser time to obtain the requisite financing the contract is made conditional upon fulfilling the very financing requirement represented by purchaser as necessary. Thus, a purchaser, who has made a good faith estimation of his ability to obtain the requisite financing, is protected from conclusively binding himself to an otherwise impossible contract should his good faith estimation prove incorrect (emphasis added).

It is not suggested that the Committee on Real Property Law which drafted form M 146 intended that the standard mortgage contingency clause should be given any meaning other than the generally accepted meaning -- i.e., one which makes the purchaser's obligation depend not on the purchaser's action in applying for a loan but on the willingness of a third party to make a loan. Yet, here the purchasers and the Appellate Division in reversing Supreme Court and, indeed, the majority of this Court read the standard clause as though it says something quite different. Instead of making the contract contingent on a third party's willingness to make a commitment "of not less than $ 201,375.00", they make it contingent upon action by the purchasers; i.e., their act of applying for a loan "of not less than $ 201,375.00". Under this construction, the condition is met if the purchasers apply for a loan in any amount equal to or greater than $ 201,375.00. In this case, because the purchasers applied unsuccessfully for a loan in the amount of $ 241,650.00, the contingency was met and they are relieved of any obligation under the contract. This is so, even though a third-party (i.e., any Institutional Lender) might well have been willing to commit for a loan "of not less than $ 201,375.00." Thus, the construction adopted is contrary both to the plain language of the mortgage contingency clause and to its commonly accepted meaning.

The practical result of this construction is to convert the standard mortgage contingency clause into a clause which gives the purchasers a unilateral option to cancel -- to be effected by the simple expedient of applying unsuccessfully for a loan in an amount higher than the stipulated sum. It can hardly be thought that the parties could have believed that this was the way the clause was intended to operate. No one suggests that the Committee of the Association of the Bar intended to draft a standard contract containing a clause which could be so easily employed to defeat the purchasers' obligation.

Nevertheless -- although contrary to the ordinarily accepted meaning of a mortgage contingency clause and to the effect of this clause that the parties and the drafters of the clause must have intended -- the majority holds that the construction advanced by the purchasers is correct. The argument is that the plain meaning of the contract compels this construction. But the plain meaning, I respectfully submit, does just the opposite. The obligation of the purchasers is clearly conditioned on the actions and agreement of a third party, i.e., the "issuance on or before September 1, 1988 of a written commitment from any Institutional Lender pursuant to which such Institutional Lender agrees to make a loan" (emphasis added). The contingency does not depend on actions or events within the control of the purchasers. The only reference in Clause 23 to an application being made by the purchasers is in the second sentence of the Clause, i.e., "purchasers shall (a) make prompt application to one or more Institutional Lenders for such first mortgage loan." The reference to "such first mortgage loan", of course, is to the loan "of not less than $201,375.00" referred to in the first sentence in Clause 23 for which the lender has issued its commitment.

No case has been cited where the standard mortgage contingency clause has been given the effect which the purchasers advocate here. This construction is contrary to the commonly understood purpose of a mortgage contingency clause, to what appears to be the common sense meaning of the clause intended by the drafters, and to what, I believe, the parties to this must reasonably have intended. To be sure, Clause 23 can easily be redrafted to avoid the purchasers' construction and to close what Supreme Court aptly describes as "an unfettered escape hatch for a purchaser who would use it to his advantage." Rejecting the purchasers' meaning and staying with the commonly understood meaning of the standard clause would obviate the need for any such amendment; and it would avoid what may be the resulting confusion and controversy over the rights of parties under existing form M 146 contracts containing Clause 23, as it now reads.

Decided May 7, 1992

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28 N.Y.2d 620; 268 N.E.2d 805; 320 N.Y.S.2d 79 (1971)

SYLLABUS: APPEAL from an order of the Appellate Division of the Supreme Court in the Second Judicial Department, entered March 17, 1969, which affirmed, by a divided court, a judgment of the Supreme Court in favor of plaintiffs, entered in Nassau County upon a decision of the court on a trial at Special Term (PAUL J. WIDLITZ, J.). The action was commenced for the recovery of a deposit made pursuant to a real estate contract entered into by the parties on March 12, 1965. The contract stated, in pertinent part, that "(10) In the event the lending institution, V.A. and/or F.H.A. shall refuse to approve the application aforesaid for the amount set forth and upon the terms and conditions above described, the money deposited hereunder, shall be returned to the purchasers, and upon such repayment both parties hereto shall be released from any further liability hereunder." There was testimony that plaintiffs' application was approved by a bank on April 15, 1965 but that said approval was withdrawn prior to closing, following receipt of a letter from plaintiffs' attorney dated October 25, 1965 informing it that plaintiff husband had lost two of his three jobs; that said withdrawal was made pursuant to bank policy that approval could be canceled at any time prior to closing if economic or other conditions changed so as to endanger the loan; that although plaintiff husband had lost said jobs in June he had not given notice at that time because he hoped that his economic situation would improve; that he had diligently sought other employment during said period, and that he was truly desirous of purchasing the property involved. The Appellate Division determined that the mortgage commitment was "qualified" in that it was conditioned upon plaintiffs' earning capacity at the time of closing, and affirmed on the finding at Special Term that plaintiffs had acted in good faith. In the Court of Appeals defendant argued that refund of the deposit was mandated by the contract only if plaintiffs' mortgage application was refused, and that, because said application was originally approved, the subsequent withdrawal did not entitle plaintiffs to a return of their deposit.

OPINION: Order affirmed, with costs; no opinion.

Concur: Chief Judge FULD and Judges SCILEPPI, BERGAN, BREITEL, JASEN and GIBSON. Taking no part: Judge BURKE.

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2.11. PROBLEMS:

Following is an excerpt from the Buffalo Courier Express, September 2, 1981, page 7, addressing questions of current policy in granting mortgage loans. Assuming you are the attorney for the buyer/mortgagor, what questions do you have regarding the proposed lending policy of Manufacturers Hanover Trust Co. and what would you recommend to your client?

"NEW YORK (AP) - Manufacturers Hanover Trust Co., the fourth largest commercial bank in the Nation, said yesterday it bad started offering fixed-rate mortgages with maturities of five years.

The monthly payments on the mortgages are based on a 25-year repayment schedule. At the end of the five years, the bank and the holder of the mortgage could negotiate renewal terms, although the bank is not obligated to do so.

Manufacturers Hanover said the interest rate on the mortgages would be 16.5 percent plus 3 points as an origination fee for bank customers meeting certain requirements. Other people will be charged 17.25 percent plus 3.5 points.

The bank's conventional 25-year home mortgages carry interest rates at least 2 percentage points above those on the five-year loans, the bank said."

2.11.2. Problem Two:

A newsbroadcast over the Canadian National Radio indicates that a meeting has been called in Ottawa to consider the plight of homeowners who are losing their homes due to inflationary interest costs. This is due to the writing of mortgages which have a variable interest rate during the life of the obligation. As the banks have increased the interest rate, the marginal ability of the borrower to pay each increase is obviously affected. Not only are interest rates going "up", but also consider the fact that taxes, utilities, and other incidental costs are also rising.

Assume that a mortgage with an interest rate which was capable of change periodically (yearly, bi-yearly, every third or fifth year) had no upper limit. Suppose that the interest changes merely reflected current lending practices as follows:

Loan initiated for $50,000.00 in 1978 at 10%

Interest increased in early 1979 to 11.5%

Interest increased in late 1979 to 12.5%

Interest increased in early 1980 to 13.5%

Interest increased in late 1980 to 14.5%

Interest increased in early 1981 to 15.5%

Interest increased (as the notice actually indicated in September 1981) to 17.5%.

Calculate the changes in monthly payment your client would have to make. Assuming that the monthly payment of interest, principal, taxes, and insurance should not exceed one third of the monthly take-home pay of the individual, then what should have been the earning power of the borrower, what would have to be the monthly earnings of the borrower to cope with the loan at the end of 1981. Assume a normal increment of 7% per year from 1979 to 1981, what percentage of take-home salary would be committed to the repayment of this obligation?

What can you, as an attorney include in the mortgage commitment that would protect your client? What expectations do you have to articulate in order to develop alternatives to "protect" your client? What "creative" devices could you come up with here to protect each of the articulated expectations?

Some key words might help here:

Equity

Principal Place of Residence

Home

Do the protections have to be permanent? Could some of the interests be protected for a period of time? For example, suppose that the purchaser had school age children, could the bank enter into an agreement whereby the increase in interest might be levied, but the impact deferred? If so, how do you think this could happen?

2.11.3. Problem Three:

Numerous cases have extended the protections of traditional security devices to the Land Sales Contract on the assumption that the purpose of the arrangement is to provide the seller with security in a debt situation. Thus, by statute in many Jurisdictions, provisions are included for matters such as (a) notice (b) time for repayment (c) fixing of damages (d) public sale and the like.

Despite the increasing treatment of Land Sales Contracts on a parity with traditional land security arrangements, Land Sales Contracts have re-assumed some importance as a financing device in the 1980s? What benefits do you think exist for the buyer under a land sales contract? Why would a purchaser enter into an agreement where a simply default of a months installment could result in forfeiture of the entire interest without any of the protections afforded other secured obligations?

See generally, Carlson v. Hamilton, 332 P.2d 989 (Utah 1958); Rothenberg v. Follman, 172 N.W.2d 845 (Mich App 1969); Union Bond & Trust Company v. Blue Creek Redwood Company, 128 F.Supp. 709, affirmed 243 F.2d 476 (U.S.D.C. N.D. Calif 1955).

What inherent problems exist with a land sales contract where the interest rates to be charged are variable? Suppose the rate of repayment does not cover the interest due and owing each month, what would be the net effect on the transfer of title? What if the original monthly payment at the rate of interest stipulated would have reduced the obligation, but the increases in Interest made the monthly payment inadequate - do you see any public policy problems with either this situation or the situation where the monthly payment increases beyond the means of the debtor to make repayment?

In the two previous problems, what role can government and lending institutions play in preventing the impact of inflation front having a catastrophic affect on the individual borrower? Can you devise several alternatives which would protect the bank, the borrower, and the public interest?

2.11.4. Problem Four:

Suppose that your client has a mortgage at a rate significantly below the prevailing rate of interest. What alternatives would your client, the seller, have to secure the benefit of this favorable mortgage rate?

Could your client sell the unit at a price in excess of the value of like houses without a similar mortgage?

Could you client sell the unit at the same value as other houses, but secure some advantage, at little or no risk, by not paying the mortgage off?

What do you think a "wrap around" mortgage is?

Are all mortgages assumable? If, not, then does the above device provide a mechanism where the buyer can get the advantage of the lower interest rate, even if the seller does not wish to make an additional profit on the deal?

Lefcoe, Land Finance Law, Bobbs-Merrill 1969

Nelson & Whitman, Real Estate Finance and Development, West 1976

Axelrod, Berger, & Johnstone, Land Transfer and Finance (2nd Ed) Little Brown, 1978