Mortgage Orb - Renee Marie Smith - 07 November 2016
BLOG VIEW: One of the recurring homeowner inquiries addressed over my 20 years as a Florida real estate attorney and distressed housing industry specialist is an Internet rumor that delinquent homeowners can win their homes loan-free if a lender fails to file a foreclosure action within five years from the first defaulted mortgage payment.
Recently, the Florida Supreme Court put to rest this rumor with an opinion issued Nov. 3 on the Lewis Brooke Bartram vs. U.S. Bank National Association etc. et al case. The case facts are not in dispute. The parties agreed that the homeowner stopped making mortgage payments, the foreclosure case was involuntarily dismissed, five years had passed since the homeowner paid his mortgage, and the trial court awarded the homeowner the property lien-free because the lender failed to comply with the five-year statute of limitations on defaulted notes.
The Supreme Court ruling upheld the Appellate Court opinion, which overturned the trial court. The Supreme Court opined that even though the first foreclosure case had been involuntarily dismissed, the statute of limitations on defaulted notes did not run after five years from the homeowner’s initial default on his mortgage payment because each missed payment created a new foreclosure cause of action. In legal terms, res judicata (a matter that has been adjudicated by a competent court and may not be pursued further by the same parties) did not occur as to prevent the lender from filing a new cause of action on delinquent payments made after the dismissal. Therefore, more importantly, in my opinion, the statute of limitations would never run preventing a lender from filing foreclosure until five years after the expiration of all payments due under the mortgage note. This ruling is consistent with Federal Court rulings on similar cases.
The reasoning of the court interpreted a mortgage note to be unique because the note’s acceleration clause language creates a new obligation between mortgagor and lender on each payment as it comes due instead just one obligation under a note to repay. Further, a dismissal of a foreclosure action does not extinguish the note’s acceleration clause that entitles the lender to call the full note indebtedness on future installment payments due, nor does the dismissal remove or diminish the amount due from the mortgagor on the note. The dismissal only extinguishes the lender’s entitlement to state a cause of action on the defaulted payments up to the time of the dismissal.
Put simply, a dismissal under Florida Rules of Procedure 1.420 (b) is not a judgment against the lender on the merits of the mortgage note but a “reset” placing the parties back to where they were prior to the foreclosure complaint being filed. Therefore, the statute of limitations only impacts the issues that were dismissed and not reclaimed within five years, not a mortgagor’s ongoing obligation to pay under the terms of the mortgage note.
I agree with the court’s position and have told my clients for years not to rely on the statute of limitations argument for delinquent notes to prevent residential mortgage foreclosure. My position has been that it is an inequitable result for courts to impose an extreme penalty of lien stripping for failure to initialize a valid foreclosure action within the statute of limitations, thus creating unjust enrichment of a homeowner who had agreed to the terms of the note.
Such strict interpretation of the law would destabilize the lending markets and create increased burdens on an already restricted lending culture. Thus, ultimately, a strict interpretation of the statute of limitations on notes and the application of res judicata, as to apply to ongoing mortgage note payments, would reduce homeownership and diminish the residential housing market industry because limited lender recourse on recouping defaulted assets would reduce incentive to underwrite home loans.
The court’s opinion is consistent with mine in that it opined in the ends of justice strict interpretation of the statute is not required in the case of mortgages if the note language builds in protections for both parties to result in a more equitable resolution of claims.
Because it so often happens, what does this mean to the Florida residential housing market? I believe this ruling will have a major impact on Florida’s defaulted loan collection industry, and in combination with an anticipated post-2016 election interest rate increase, we will see increased residential market instability in Florida.
Lenders or the third-party collection companies that bought defaulted loan portfolios will seek to recover from homeowners through new foreclosure filings. These filings, coupled with loan modifications approved during the mortgage meltdown, which are adjusting to new 2017 rate increases, will force homeowners, once again, to address over-leveraged homes. This is very concerning, as the Troubled Asset Relief Program funds have been exhausted, The Mortgage Forgiveness Debt Relief Act of 2007 has expired, and lenders have reduced or closed their loss mitigation departments. Even before this ruling, Florida remained in the top five foreclosure markets in the country, and now, with limited resources for home retention, foreclosures will increase as lenders confidently file foreclosure on older defaulted notes.
In the last decade, the activity in the legislation and court adjudication for the mortgage industry has been sweeping, and we will continue to see the impacts of rulings for years to come, but I believe this result takes us in a positive step toward stabilizing the Florida lending market and finally completing the resolution of backlogged, defaulted mortgage loan properties that continue to plague Florida. In the alternative, Florida will continue to see high foreclosure rates through 2020 as the backlog is addressed.