When Does a Lender Become a Mortgagee in Possession?

Becoming a mortgagee in possession can result in liability

A mortgagee becomes a mortgagee in possession when it takes over the management and control of a property from the mortgagor. Because becoming a mortgagee in possession can result in liability, lenders must be cognizant of whether their actions regarding the property will be considered exerting control over the property.

In Woodlands Community Association Inc. v. Mitchell, the Appellate Division of the New Jersey Superior Court considered whether a lender’s assignee, which winterized and changed the locks on a foreclosed condominium unit, is considered a “mortgagee in possession” of that unit and, therefore, responsible for the payment of condominium fees and assessments. The appeals court ultimately concluded that “those discrete actions are not sufficient to render the lender’s assignee a mortgagee in possession of the unit.”

Facts of the Case

In March 2007, Adam Mitchell purchased a condominium unit in a property managed by the plaintiff, Woodlands Community Association, Inc. (Association), and executed a mortgage encumbering the unit. In July 2013, the mortgage was assigned to defendant, Nationstar Mortgage LLC (Nationstar). Mitchell defaulted on his obligations under the mortgage loan and vacated the unit. Nationstar subsequently replaced the locks on the unit and winterized the property.

Mitchell also owed substantial sums to the Association for the unpaid monthly fees and other condominium assessments. In April 2014, the Association filed a lawsuit against Mitchell seeking to recover the monthly maintenance association fees for general services it had provided to the property. Several months later, the Association amended its complaint to include Nationstar, alleging that Nationstar was responsible for the association fees because it was in possession of the property. Under Woodview Condo. Ass’n, Inc. v. Shanahan, 391 N.J. Super. 170, 173 (App. Div. 2007), if a mortgagee is determined to be in possession of the property, then the mortgagee is “liable for delinquent condominium common charges, which had accrued against the property’s legal owner, for services furnished during the mortgagee’s possession and control of the premises.” 

The trial court ruled that Nationstar was a mortgage lender in possession, and therefore, liable for the maintenance fees. The trial judge reasoned that no genuine issues of material fact existed as “[defendant held] the keys, and no one else can gain possession of the property without [defendant’s] consent. This constitutes exclusive control, which indicates the status of mortgagee in possession.” Nationstar appealed.

Court’s Decision

The Appellate Division reversed, holding that Nationstar was not a mortgagee in possession because it failed to exercise the necessary level of control and management over the property.

In reaching its decision in Woodlands Community Association Inc. v. Mitchell, the appeals court stated that whether a mortgagee or its assignee is in possession is determined on a case-by-case basis. In this case, it emphasized that Nationstar only engaged in the “minimal acts” of winterizing the unit and changing the locks. It further noted that the defendant “has not occupied the unit, is not collecting rents or any other profits, nor is it making repairs.” The court also rejected the Association’s argument that the sole act of changing the locks renders defendant a mortgagee in possession as the action demonstrated that no one else could enter the unit without the consent of

The court also rejected the Association’s argument that the sole act of changing the locks renders defendant a mortgagee in possession as the action demonstrated that no one else could enter the unit without the consent of the defendant, thus conferring upon it exclusive control. As explained by the panel:

The use of the word “possession” in the designation “mortgagee in possession” is somewhat misleading. See 30 New Jersey Practice, Mortgages § 21.10, at 132 (Myron C. Weinstein) (2d ed. 2000) (citing George E. Osborne, Handbook on the Law of Mortgages § 162 (2d ed. 1970)) (stating that dominion and control are more descriptive of a mortgagee in possession, not actual possession). Indicia of control and management include elements of possession, operation, maintenance, use, repair, and control of the property such as paying bills or collecting rents.

In this case, the court held that Nationstar “has not taken over the control and management of the unit nor exercised the requisite dominion over the property short of securing the unit.” In changing the locks and wintering the unit, Nationstar “has not availed itself of the benefits of the Association…but rather its actions in protecting its security serve to benefit the other homeowners,” the court explained. “Incidents of vandalism or an occurrence of frozen pipes in the vacant unit would likely lead to damage to adjoining properties,” the panel added. “Defendant here is not benefitting from the limited actions it has taken to secure its collateral; it is simply protecting its rights.”

Do you have any questions regarding when a lender becomes a mortgagee in possession? Would you like to discuss the matter further? If so, please contact me, Matthew Kane, at 201-806-3364.