If a property owner dies with an outstanding mortgage that is in default, the lender will likely seek to foreclose on the property. However, it must take certain steps that vary depending on the type of mortgage, what relief is sought and whether the deceased had a will disposing of the property. The lender must name the appropriate “necessary parties” in the foreclosure proceeding or risk delays, added expenses and possible dismissal of the action in court. Executors, beneficiaries and family members as well as banks should understand these rules.

How is mortgaged property inherited after the owner dies? 

Real property passes to distributees (those entitled to the property if there is no will) or beneficiaries (parties named in the will) automatically by operation of law upon the death of the owner. This means that the executor or administrator is not required to execute a deed transferring the property from the decedent’s estate to the beneficiaries. However, the property remains subject to the debts of the decedent, so the transfer does not eliminate the mortgage. In addition, the property is subject to any claims against the estate such that the executor/administrator could sell the real property if needed to generate funds to pay the estate’s debts (ex. taxes owed).

Who must be named in the foreclosure action? 

New York’s Real Property and Procedures Law (RPAPL § 1311) defines the necessary parties in a mortgage foreclosure action to include “every person having an estate or interest in possession, or otherwise, in the property as tenant in fee, for life, by the courtesy, or for years, and every person entitled to the reversion, remainder, or inheritance of the real property…”

A key question is whether the decedent’s estate must be named in the foreclosure action or whether only the distributees/beneficiaries who inherit the property must be named as defendants. The answer depends on the type of mortgage and relief sought by the lender.

There are two types of mortgages. A recourse mortgage allows the lender to obtain a money judgment against the borrower individually if the property’s value is insufficient to repay the debt owed; while in a nonrecourse mortgage, the lender is limited to recovering the value of the property.

In the case of a recourse mortgage, if the foreclosing lender seeks a money judgment, known as a deficiency judgment, the estate must be named as a party, along with the distributees/beneficiaries. This is because the deficiency judgment is the responsibility of the estate, while the foreclosure of the property affects the interests of the distributees/beneficiaries who inherited the property. However, where the mortgage is nonrecourse or it is a recourse mortgage, but no deficiency judgment is sought, the estate is not a necessary party because the only relief sought by the lender is to sell the property, which has automatically vested in the beneficiaries. In that case, all distributees/beneficiaries must be named in the foreclosure action, but the estate is not named.

What happens if the property owner dies without a will?

There is an exception to the rules described above. Where a decedent died intestate (without a will), and the lender cannot clearly establish that it has named all distributees as defendants, the court may declare that the estate is a necessary party in order to ensure all distributees have received notice of the foreclosure action and have an opportunity to protect their interests.

What are the consequences of failing to name necessary parties in the foreclosure action? 

If all the necessary parties were not named in the action, the case will not be automatically dismissed. However, the court will likely issue an order directing that the estate be joined as a party to the action. 

If you are an executor or beneficiary, it is important to understand your rights and obligations with respect to property owned by the decedent. Contact us for a consultation regarding your matter.