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Contesting the Amount Owed to the Lender in a Foreclosure Action is an Under-Utilized and a Useful Strategy for the Defending Property Owner

After the Motion for Summary Judgment / Order of Reference which appoints a Referee, the goal of the plaintiff is to have the Referee calculate the amount owed to the plaintiff in a Referee Report which will be part of the Motion for a Judgment of Foreclosure and Sale and probably accepted by the Court if it grants such motion. The goal of the defendant during the period of time between the two main motions in the foreclosure is to challenge the amounts calculated in the Referee Report. The defendant can challenge such amount during a Referee Hearing, if one is held, or in opposition to the Notice of Computation. There are many components to the calculations in the Referee Report and many items that could potentially be contested in terms of their amounts. The challenge to the amounts owed to the lender in terms of interest, taxes, insurance, costs, legal fees and expenses is detailed, subtle and requires detailed knowledge of foreclosure and how they usually work. Because lenders, referees and the courts often under estimate the extent of the issues that are present in contesting the amount owed to the lender in a foreclosure action, this is a fertile and under appreciated area of foreclosure defense litigation for the foreclosure defendant and their counsel.

• Why Is the Amount Owed in a Foreclosure Proceeding Important?
• What is a Referee Report?
• What is a  Referee Hearing?
• What is a  Notice of Computation?
• How Can We Dispute the Amount Owed?
• How Can Our Office Help You with the Referee Report and/or the Notice of Computation and Otherwise Challenging the Amount Owed in the Foreclosure Proceeding?

1.  Why Is the Amount Owed in a Foreclosure Proceeding  Important?

The amount owed in a foreclosure proceeding is important for several reasons. Firstly, if the value of the property exceeds the amount owed, the defendant may be able to recover some of the equity lost in the foreclosure in a surplus proceeding as long as there are not competing claims to the excess funds. Secondly, although in most foreclosures the amount owed for the mortgage exceeds the value of the property, the amount owed to the lender is considered a calculation that is supposed to be accurate, and therefore subject to review, regardless of the fact that it may not ultimately make a difference for the property owner. Thirdly, the calculation of the amount owed to the lender is often filled with amounts that could be controversial and disputed, especially when the mortgage was in default and/or in litigation for a considerable amount of time and some of the time and legal fees of the plaintiff were not used well or efficiently. But, fourthly and most important, in every legal proceeding where where a judgment needs to entered the amount and the calculation of the judgment is vitally important in the working of the court system in order to arrive at a legal amount owed that appears fair, accurate and proportionate with the alleged damages or injury of the plaintiff. It is this fourth element that helps us the most in representing the defendant, because there are many elements of the amount owed to the plaintiff that can be challenged by skilled defendant’s counsel, creating issues that may give the defendant needed time and leverage in the foreclosure, besides an opportunity to significantly reduce the amount owed to the plaintiff.

In a foreclosure case the court needs to ultimately determine the amount of the judgment owed to the plaintiff. The court and the referee appointed by the court, need to know the principal balance (balance due on the date of the initial default), the reinstatement amount (the cure amount, which if paid would make the borrower current), the payoff amount (the full amount owed, that if paid in full, would make the borrower owe nothing else to the lender) and the breakdowns of the components in each category. The amount owed to the lender is composed of the balance remaining on the loan combined with past due interest not realized by the plaintiff, real estate taxes paid by the plaintiff, property insurance expenses incurred by the plaintiff, attorney fees and costs paid by the plaintiff, property inspection fees and other expenses paid by the plaintiff. 

2.  What is a Referee Report?

The Referee Report is a summary of the calculations of the amounts owed to the lender, as approved by the court appointed Referee, who was appointed by the court in the Order of Reference. The Referee Report usually contains the following calculations:

a) TIMING – The start date for the calculations is the default date and the end date is the date of the report;
b) BALANCE – The principal balance on the date of the date of default;
c) INTEREST – The amount of interest due, based on the default date and the rate of interest;
d) TAXES – The amount of real estate taxes allegedly due after the default date paid by the lender;
e) INSURANCE– The amount of insurance allegedly due after the default date paid by the lender;
f) MAINTENANCE EXPENSES – Inspection costs, appraisal costs, maintenance costs and/or other expenses incurred by the lender to preserve and/or supervise the property;
g) LEGAL EXPENSES – Attorney fees, legal expense costs and filing fees; and/or
h) OTHER– Other amounts owed to the lender minus any credits due to the defendant for amounts in suspense accounts.

The Referee Report adds the above amounts from the date of the default to the date of the Referee Report. The total amount when the above components are added is the amount alleged to be due to the lender. 

One of the reasons the Court appoints in the Order of Reference a referee is for the referee, as a neutral party appointed for that purpose, to calculate the amount owed to the lender. Given that the lender is a self interested party, the court views the referee as a more suitable party to conduct the calculations of the amounts owed. The reality is that often the amounts in the referee report are amounts that are derived and calculated by the lender and its attorneys and the job of the referee (who is often a retired judge, magistrate or other “elder statesman” type of person formerly connected and trusted by the court system) often is one of overseeing, reviewing and approving a report actually prepared by the lender or its attorneys. Because of this oversight process, the plaintiff’s attorneys are often reasonable in the fees they assert, however the referee’s report is still filled with potential issues. 

3.  What is a Referee Hearing?

However, because of the contested nature of the foreclosure proceeding, the defendant and/or the defendant’s attorneys are supposed to be given notice of the the referee’s report and an opportunity to give input or to voice objections to elements of the report. While the plaintiff’s attorneys do seek entry of the referee report as part of their Motion for a Judgment of Foreclosure and Sale, by the time the referee report is part of that motion, it is hard to make adjustments to the report. The traditional method of getting the feedback of the defendant or their counsel was to hold a Referee Hearing where the referee would invite the parties to hear their comments regarding the proposed calculations with the Referee Hearing as an opportunity to seek reconciliation of the numbers as to the amounts owed. The defendant and/or their counsel could raised issues as to parts of the proposed calculations and seek adjustments of the amounts owed to the lender. Once there is such reconciliation, the lender could more easily proceed with its Motion for a Judgment of Foreclosure and Sale, knowing that they have resolved potential issues pertaining to amounts owed to the lender. Often despite the invitation, the defendant and/or their counsel declines to indicate a desire to attend the Referee Hearing. However, this is usually a mistake for the defendant and it is far wiser for the defendant’s counsel to always attend the Referee Hearing and always challenge the numbers presented.

The problem is the in recent years, it has become a norm not to actually hold the referees hearing and for the plaintiff, the referee and the court to find more convenient and faster ways to move the foreclosure proceeding along, without actually holding a referee hearing. While the CPLR does require a Referee Hearing, judges have diluted this requirement to situations where there is a clear need to review the amounts owed. The thinking has become that these hearings are largely unnecessary and will create unnecessary delays in the foreclosure proceeding. Therefore, some judges in the Order of Reference (which may be part of the Summary Judgement Order), specifically state that a referee hearing will not be necessary. The thinking is that the defendant can object to the report as part of the Motion for a Judgment of Foreclosure and Sale. But the report is rarely adjusted when it is contested as part of the Motion for Judgment of Foreclosure and Sale and the Court only has two choices, to grant the Motion for Judgment of Foreclosure and Sale despite objections to the contested amounts alleged to be owed or alternatively deny the Motion for a Judgment of Foreclosure and Sale based on the disputed amounts. The courts, technically can, but in reality rarely go backwards and order a Referee Hearing after the Motion for a Judgment of Foreclosure and Sale is opposed based on the calculations being problematical.

4.  What is a Notice of Computation?

Another way for the plaintiff to avoid the Referee Hearing has been in recent years to send a Notice of Computation, which is a notice that gives the defendant and/or their counsel only approximately two weeks to object to the attached calculations and Referee’s Report, thereby putting the burden on the defendant to quickly document and memorialize their issues with the Referee’s Report. The reality that even a timely objection to the Notice of Computation does not often result in the scheduling of a Referee Hearing. The current thinking by the plaintiff, referee and court, is that objections are not serious and therefore avoiding a Referee Hearing seems to be the trend with these parties. However, this thinking is incorrect in many cases and a timely and meritorious objection to the Notice of Computation which is ignored by the plaintiff, referee and court could become an appealable issue.

5.  How Can We Dispute the Amount Owed?

Because there is often a great underestimation by the plaintiff, the referee and the court of the many issues that arise in calculating the amount owed to the lender, there is an opening for a skilled foreclosure defense attorney to attack the amounts alleged as owed in the Referee Report. Defendant’s counsel should object when ever it can, in order to preserve its rights in contesting the amounts calculated as allegedly owed. Defendant’s counsel should always challenge the amounts and seek a Referee Hearing and a new Referee Report. 

The bases of the defendant’s objections to the calculations are based on many of the assumptions underlying these calculations, as follows:

a) TIMING – The start date for the calculations which is the default date is sometimes inconsistent in some foreclosures due to post-default payments by the defendant in trial modifications, chapter 13 or 11 bankruptcy cases and/or other situations where the defendant made and the plaintiff accepted post-default monies from the defendant. The end date which is the date of the report is sometimes long past resulting in the report being old and stale and the plaintiff sometimes extrapolating to add additional amounts to the amount in the Judgment of Foreclosure and Sale. Portions of the timeline may also be declared to be based on delay, inefficiency, denied motions, and past dismissed actions and therefore arguably periods of time where we argue that the the plaintiff, rather than the defendant, should pay for wasted time due to plaintiff’s own inefficiency and delays. Such wasted efforts/time could justify a reduction of interest, taxes, insurance, legal expenses and other expenses. 
b) BALANCE  – The principal balance may change if the date of default may effectively change if there were post default payments by the defendant that were were accepted by the plaintiff in a trial modification or chapter 13 or 11 bankruptcy case and/or in other situations where the defendant made and the plaintiff accepted post-default monies from the defendant. 
c) INTEREST – The amount of interest due, is based on the default date, which we saw could potentially change in some cases. The interest amount is also based on the rate of interest calculated for the amounts due, which appears in the loan documents to be a standard rate, but could potentially be a fluctuating/increasing/changing interest rate in a modification agreement with stepped up interest rate levels and/or an adjustable mortgage and/or with a higher default rate with different levels of interest based on the years assessed, and could also increase based upon a higher default rate. 
d) TAXES – The amount of real estate taxes can change if there is inconsistency with the default date. However, the question here is really what can be documented as actually paid by the lender, given that sometimes the defendant for some years, after the alleged default, continues to pay real estate taxes. A breakdown of the the real estate taxes by year with proof of what was paid by the plaintiff is therefore needed. A discount of these to the extent they were during periods of delay and inefficiency due to the plaintiff. 
e) INSURANCE – The amount of homeowner’s or property insurance can change if there is inconsistency with the default date. However, the question here is really what can be documented as actually paid by the lender, given that sometimes the defendant for some years, after the alleged default, continues to pay property insurance. A breakdown of the the property insurance by year with proof of what was paid by the plaintiff is therefore needed. A discount of these to the extent they were during periods of delay and inefficiency due to the plaintiff. 
f) MAINTENANCE EXPENSES – A breakdown with proof of what was paid by plaintiff is also needed for inspection costs, appraisal costs, maintenance costs and/or other expenses incurred by the lender to preserve and/or supervise the property. A discount of these to the extent they were during periods of delay and inefficiency due to the plaintiff. 
g) LEGAL EXPENSES – A breakdown and proof for attorney fees, legal expense costs and filing fees showing specific tasks to be able to assess what legal expenses moved the matter forward and which were wasteful and should be carried by the plaintiff, rather than by the defendant;
h) OTHER – Other amounts owed to the lender minus any credits due to the defendant for amounts in suspense accounts. These too need a breakdown and allocation as to which were inefficient and wasteful.

6.  How Can Our Office Help You with the Referee Report and/or the Notice of Computation and Otherwise Challenging the Amount Owed in the Foreclosure Proceeding?

Challenging the amounts owed in the Referee Report and/or Notice of Computation is difficult in that it requires deep and detailed knowledge of how the plaintiff has prosecuted its foreclosure action and where there was inefficiency or delay that is attributable to the plaintiff and not to the defendant. Changing default dates, changing rates of interest, potential post-default payments, and the absence of a breakdown and proof of payments are all subtle points that need to each be detected, investigated and researched so as to arrive at a challenge to the the amounts asserted by the plaintiff. To accomplish these goals successfully the defendant needs strong legal representation by skilled foreclosure defense lawyers. Call us for a free legal consultation at 631-271-3737 and let us show you how we can help represent you in challenging the amounts owed to the plaintiff.