When borrowers obtain a mortgage loan, they sign a Note, promising to repay the loan, and a Mortgage, that provides for the property to be sold at a public auction if they default so the loan may be repaid from the proceeds of the sale. Sometimes, however, the property is sold at the auction for less than the balance due to the lender, resulting in a deficiency.
When this occurs, the Lender may obtain a Deficiency Judgment against the parties who signed the Note, which is a money judgment against the debtor for the remaining balance due. New York’s RPAPL 1371, however, limits the amount of the deficiency to the difference between the property’s “Fair Market Value” at the time of the foreclosure sale (NOT the lesser amount the property was actually sold for) and the amount due pursuant to the Judgment of Foreclosure.
Additionally, RPAPL 1371 provides an extremely short Statute of Limitations of only 90 days, from the date the Referee executes and delivers the deed until the motion seeking a deficiency judgment must be filed. Failure to adhere to this severe time constraint will enable the Defendant to plead the Statute of Limitations as a complete defense and the application for a Deficiency Judgment will be dismissed.
It is important to note that when seeking a Deficiency Judgment, one must establish the “Fair Market Value” of the property. In order to do so, one must submit an actual affidavit from an appraiser, describing his/her qualifications and describing the methodology employed to determine the “Fair Market Value” as courts will not consider a bare appraisal by itself. One can, and should, however, annex the appraisal as an exhibit in support of the affidavit.
Finally, it should be noted that, few, if any, lenders actually pursue Deficiency Judgments, perhaps because it is simply not cost effective to do so. Should a Deficiency Judgment be obtained, the Defendant (whose credit rating has already been devastated by the foreclosure) may then simply file a Bankruptcy petition and have it discharged as an unsecured debt.