A recent decision from the New York Supreme Court in Manhattan (published on February 14, 2013) is troubling for buyers of defaulted mortgage loans secured by New York real estate, and we want to bring it to your attention.

The decision held that, when prosecuting a New York mortgage foreclosure action, the foreclosing lender's motion for summary judgment must be supported by an affidavit from a person with personal knowledge of the default.  If the default occurred prior to the foreclosing lender's purchase of the mortgage, the foreclosing lender must obtain an affidavit from a knowledgeable representative of the lender that held the loan when the default actually occurred.

While we believe that this decision is incorrect on the law and, for that reason, likely to be overturned if appealed, it is currently part of the law in New York and will presumably be cited by borrowers' counsel when defending mortgage foreclosure actions.

Our recommendation for future purchasers of defaulted mortgages is to protect themselves by requiring from secondary market sellers as part of the closing documents an affidavit from a loan officer with personal knowledge of the default that can be filed in the foreclosure action. If the loan has already been purchased, an alternative is to request the affidavit from the selling lender pursuant to the "further assurances" or a similar cooperation clause in the loan sale documentation.

The facts in the case (FTBK Investor II v. Joshua Management, 810164/11, Supreme Court, Manhattan, Justice Paul Wooten) are:

WaMu originated a mortgage loan secured by 2866 Frederick Douglass Blvd. in Harlem in 2005 and, after WaMu was seized by the government in 2008, the FDIC sold the loan to Chase. The borrower stopped making mortgage payments in December 2010 and Chase started a foreclosure action in May 2011. The loan was sold by Chase in Fall 2011 to an investor, which then sold it to FTBK Investor II. FTBK was substituted in for Chase as plaintiff in the foreclosure action and then moved for summary judgment. When a managing member of FTBK submitted an affidavit in support of the motion, the Court ruled that the affiant "only reviewed the loan documents created by Chase long after the alleged default took place and has no personal knowledge of the circumstances surrounding the default" and, therefore, required FTBK to submit an affidavit from Chase.

Since the easiest way for FTBK to proceed with its foreclosure would be to obtain an affidavit from Chase, it is unclear whether this decision will be appealed, but we certainly hope that it is. Not only is the decision in our opinion wrong on the law, but it also runs contrary to the common practice in today's secondary mortgage market, where secondary NPL buyers rarely have personal knowledge of existing loan defaults. We wonder if this case will be expanded to require "personal knowledge" in the case of a maturity default, which in our view is clear on its face.  Also unclear is whether mezzanine borrowers' counsel will try to expand this opinion for use in litigation brought to challenge UCC foreclosure actions. Even though UCC foreclosures are not judicial proceedings, a predicate to the commencement of the UCC foreclosure is the occurrence of a loan default, and it is not hard to imagine creative litigation counsel crafting arguments that if a foreclosing mezzanine lender lacks personal knowledge of the default giving rise to the foreclosure, it lacks standing to commence the UCC foreclosure.