Every now and then you might read about a homeowner who defaulted on his or her mortgage and ended up getting their house for FREE. This past Sunday is no exception. In the August 18, 2013 edition of the Palm Beach Post, Staff Writer Kimberly Miller’s headline article is titled “How to get your house for free: Rare but possible.” This well written, in-depth article begins with the following sentence:
“Florida’s five-year deadline to foreclose on a home is ticking on thousands of aging cases statewide, giving lucky borrowers a shot at a free house and catching banks with muddled files unaware.”
While the title to the article is catchy, Ms. Miller very quickly points out that “a very specific set of circumstances must be in play for a homeowner to walk away a jack pot winner.” Actually, you’re likely to have a better chance of being hit by lightning… over and over again. To be the recipient of such a windfall, you’ll need a very perfect storm. Let’s take a deeper look into the circumstances minimally needed to set such a stage.
At its core, the mortgage and note between the lender-bank and its borrower is a contract. Whenever there is a breach of contract, only a limited period of time exists for the non-defaulting party to file a lawsuit against the party that caused the breach. Section 95.11, Florida Statutes, provides that an action to foreclose a mortgage and an action based on a breach of contract obligation, or liability founded on a written instrument must be commenced within five years from the date the non-defaulting party knew, or should have known, of the activity that gave rise to the default. In the context of a borrower who defaults on their mortgage payments, the lender has five years to bring their lawsuit to foreclose their mortgage and note against the defaulting borrower. In the most simplistic terms possible, the “note” is defined as a contract that holds the borrower responsible for the monies borrowed, while the “mortgage” is defined as the contract that allows the lender to recover the collateral, in this case, the house, from the defaulting borrower (and most times from any other party who acquires the property prior to the conclusion of the lender’s foreclosure action).
The lender actually has five years from the date the last payment is due to foreclose their mortgage. How then does the occasional lender find themselves in the opposite position of being foreclosed out of foreclosing their own defaulting borrower? It’s actually quite simple.
The majority of all mortgages contain a provision that allows the lender to accelerate all the remaining payments in the event of a borrowers default. As a knee-jerk reaction to a borrower’s failure to make timely payments, prior to initiating the foreclosure lawsuit, the lender will often accelerate all remaining payments. For example, if a borrower entered into a 30 year loan on January 1, 2000, the lender would have until January 1, 2035 to finally file a lawsuit to foreclose their mortgage and note. However (and this is a big “however”), if the borrower stopped making his or her mortgage payments on January 1, 2010, and, as a result, the lender accelerated all of the remaining sums due, then the lender would only have five years (through January 1, 2015) in which to bring its foreclosure lawsuit. In that scenario, if the lender did not file its foreclosure lawsuit by January 1, 2015, then “all the glitters” might just turn into gold after all.
As a result of the 2007 real estate market collapse, thousands of borrowers ended up defaulting in their loan payments. In response, lenders accelerated all remaining payments and initiated foreclosure lawsuits. Only afterwards did many lenders get caught with their proverbial pants down when they realized they did not have the necessary documents to foreclose their loans. Meanwhile, as the Steve Miller Band would sing in their noted song, “Fly Like an Eagle”… “time keeps on slippin’, slippin’, slippin’ into the future.” Before you know it, five years has passed since the time of the lender’s decision to accelerate its mortgage and then… OOPS!