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Why co-op foreclosure is so dangerous

I previously wrote about the timeline for homeowners who have fallen behind on their mortgage. If you’d like to take a look at that, click here.

This post is about people who own co-ops. If you’ve fallen behind on your co-op loan, that earlier post is irrelevant to you. You have a far different timeline, and it’s way more serious for you.

Here are two recent co-op stories that are totally true. The first involves a man who owns a relatively modest co-op apartment in a modest building in the Bronx. His mortgage payment is relatively small, but his maintenance payments have continued to go up every year since he bought the apartment 12 years ago. The maintenance payments are now about 4 times what his mortgage payment is. Even with the increasing maintenance payments, the man was able to keep making his payments. But then, he got sick. He was no longer able to work a full schedule and his income went down drastically. He kept making his small mortgage payment, but he fell behind in his maintenance payments. Now, the co-op board didn’t do anything about it for a while, but eventually they threatened their own foreclosure unless the maintenance arrears were fully paid. Either the man would have to make payment or the bank would have to make payment for him. The man wasn’t able to make the maintenance payment, so the bank had to step in and make the payment for him. The problem with that is that failure to pay your maintenance is a condition of default under the mortgage, and that leads to foreclosure.

Fortunately (or unfortunately, depending on how you look at things) for the man, his disability qualifies him for additional public assistance programs that will pay the money he owes to the bank on his behalf and will help him make his maintenance payment going forward.

Even though he should be fine once his paperwork goes through, the man was forced to go to court to try to stop the sale. The court had to make the decision to allow the bank to proceed or to stop the sale to give the man a chance to apply for assistance. I’ve seen decisions go both ways on this, so if you think you might be in this kind of situation, it’s better to start earlier rather than later on coming up with a solution.

The next story involves a wealthy woman who lives in a co-op in Manhattan worth about $3 million. She makes about $500,000 per year. Her mortgage payment is about $10,000 per month and her maintenance is another $3,000 per month. These sound like big numbers to most people, and they absolutely are. You might be asking why a person who makes so much money is having trouble making her mortgage payment, and you would be right to ask. The answer is that I don’t know. She got into a repayment plan and didn’t make the first payment. The bank sent her a letter saying that she’s in default, and by the next month she would make two payments. Eventually she just stopped paying, though. Her particular situation is that she is in sales. Obviously she’s in a high-end field and she’s quite successful. The problem is that she gets only a small salary and receives most of her income in commissions, and those commissions are paid only twice a year. She’s totally flush in January and July, but by April and November, she’s broke. She’s currently facing down a foreclosure auction and is trying to stop it.

So what makes a co-op foreclosure different from a regular foreclosure? The time. Here’s a basic overview. You fail to pay your mortgage one month. By the 15th of the next month, the bank is sending out a 90 day notice. This 90 day notice is similar to the one sent on regular foreclosure cases. Once the 90 days elapses (and 120 days after your missed payment), the bank will refer the matter to an attorney to schedule a foreclosure sale. There’s no summons and complaint; there’s no settlement conferences. The foreclosure attorney will order a title search, and assuming everything is in order, the auction will be scheduled for about a month later. A notice of sale will be published for three consecutive weeks and on the fourth week, there will be an auction. That’s it. The new owner will close on the shares and start an eviction to throw you out of your apartment.

That’s because co-ops aren’t real property like the way a house is or land is. They’re shares in a corporation that happen to correspond to an apartment. You don’t have title to real property; you own shares. You have a proprietary lease, not a deed. The law allows a secured creditor on shares of stock to take those shares of stock back quickly. That is your problem.

So, when you hear that you have a long time in New York City to try to work out your mortgage issues, it’s true – except if you own a co-op. That’s why you need to take quick, decisive action when you fall behind on your mortgage or your maintenance.

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