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Real Estate Law

Notice vs. Acceleration - Unlocking the Mystery

Acceleration is one of the most elemental - and critical - concepts in the realm of mortgage foreclosures.  But how this is accomplished, and the relationship of acceleration to the concept of notice is sometimes elusive.  A quick primer spurred by issuance of a new case follows. [For the full story in detail, with citations, see 1 Bergman on New York Mortgage Foreclosures, Chap. 4, Default and Acceleration,LexisNexis Matthew Bender (rev. 2007).]
    The question of when notice need or need not be sent in order to accelerate the mortgage balance should be (and needs to be) a well understood concept.  A new case reminds us that not everyone gets the point and mortgage servicers in particular might not mind having the issue clarified from time to time. [The new case is Charter One Bank, FSB v. Leone, 45 A.D.3d 958, 845 NYS2d 513 (3d Dept. 2007)]
    The most focused way to illuminate the principles is to ask and answer questions. So, here goes.
    Suppose the lender holds a $400,000, 30-year mortgage with an interest rate of 7%. (Assume a residential mortgage, but solely for context.)  The monthly payment would be $2661.21 (without any applicable escrows).  The borrower then defaults in remitting the mortgage installments for January, February and March.  Putting aside typical late charges (in New York 2% of each missed payment) the borrower is in arrears for the sum of $7,983.63.
    For whatever reason, the lender, or servicer (or the investor) concludes that loss mitigation would be futile or that there are other compelling grounds to sever further relationship with this borrower.  Under such circumstances, the servicers would often be authorized to declare due to the entire balance of the loan - all of the principal and interest.  So instead of waiting 30 years to be paid $400,000, the mortgage holder can decide to demand it now - because of the defaults - thereby "accelerating" its payment.  In essence, the servicers says "we do not wish to accept monthly installments, we do not want the $7983.63 in arrears; instead we want the full $400,000, which we demand and declare due at this moment," all simple enough.
    The answer is "not really," and this is where there can be some confusion.
    In New York (and generally) acceleration is deemed to be some clear, overt act which manifests the election to immediately be paid in full.  This can be accomplished in two ways.  Commencing the foreclosure action by filing a (summons and) complaint where the complaint declares the acceleration servers the purpose.  The new case mentioned confirms this accepted rule.
    A second, and likely more common, method is to send a letter to the borrower accelerating - that is, declaring the full balance of the mortgage immediately due and payable.
    While this letter obviously serves as a notification, it is itself the declaration.  It is not as if some notice has to be sent first announcing that an acceleration will be forthcoming.  So long as properly worded (and it is easy) the letter is the act of accelerating.
    The new case touches on this point too, confirming that where a mortgage contains the usual acceleration provisions[1] "neither notice of default nor demand for payment is a pre-condition to beginning a foreclosure."
          All this was important in the case – and meaningful beyond that case – because the borrower argued that the plaintiff-mortgage holder neglected to provide notice of acceleration before beginning the action.  (Remember, the court rejected that argument because no prior notice is required – just the act of accelerating will suffice.)
          In New York, for example (and in most states), there is no obligation upon a mortgage holder to provide some notice of default or warning that acceleration is to be forthcoming. Neither statute nor case law imposes any such requirement.
          But the parties themselves can agree that such notice must be given. The contract between lender and borrower – the mortgage – can so provide.  The pervasively employed Fannie Mae/Freddie Mac uniform instrument does just that.  It requires a 30-day notice to cure as a prerequisite to acceleration.   Why this may not be such a good idea, as well as the varied nuances of this obligation, is also reviewed at length in 1 Bergman on New York Mortgage Foreclosures, Chap. 4, Default and Acceleration, LexisNexis Matthew Bender (rev. 2007).
          Acceleration is accomplished by letter or filing the pleadings with the court.  State law (New York and many others) does not require anything else or anything in advance.  If, however, the mortgage documents do mandate notice before there can be an acceleration – which is common because the Fannie/Freddie Mac form is written that way – then notice must be given prior to acceleration.

[1] It refers to the “statutory form” but that depth of detail is not helpful to this review.