Just when you thought we were out of the housing crisis weeds of ’07—think again. Apparently when an abundance of people buy homes they can’t afford and predictably fall behind on their payments, the judicial foreclosure process becomes log-jammed. Enter our latest housing crisis nemesis: the statute of limitations.
Lenders must generally file a foreclosure action prior to the expiration of the state specific statute of limitations. This means that once a borrower has defaulted on their mortgage payments and the lender has accelerated the debt, the lender has a statutorily defined time period in which it may bring an action in foreclosure. But what if the initial foreclosure action, filed within the limitations period, is dismissed for technical reasons? Must the lender file the second foreclosure action within the same limitations time period that began running on the date of the original default and acceleration? Some New Jersey and Florida courts think so, which can be a terrifying result.
The latest case out of Florida, Deutsche Bank v. Beauvais, held that the dismissal of the foreclosure action “did not by itself negate…the lender’s acceleration of the debt in the initial action.” Thus, even though the initial foreclosure action was dismissed by the court, the clock continued to run on the lender, and a second foreclosure action needed to be filed before the expiration of the statute of limitations from the date of the original default. In New Jersey’s In re Washington (where the statute of limitations is six years), the initial foreclosure action was filed in 2007 and not dismissed until July of 2013—only months prior to the expiration of the state’s limitations period. The court noted that neither the borrower nor the lender took any action under the mortgage instruments to de-accelerate the maturity date, and therefore held that the second foreclosure action needed to be filed before the expiration of the original limitations period. Of course, in both of these cases the second foreclosure action was filed after the expiration of the limitations period, the cases were dismissed and the lenders were left without recourse to collect their debt. Apparently persistence in anything is now rewarded—even for delinquency.
Later this year, the Florida Supreme Court is set to revisit a factually analogous case in U.S. Bank v. Bartram, which originally held, contrary to Beauvais, that the dismissal of the original action automatically de-accelerated the loan, thereby resetting the limitations period. The court reasoned that each monthly payment is a separate installment, each of which may constitute a separate breach if payment is not made. Thus, a dismissal would simply “put the parties back in the same contractual relationship with the same continuing obligations.” In other words, any subsequent nonpayment after dismissal would be a new default and justify a new statute of limitations period. Twenty-eight other states, including New York, have similar limitation periods as Florida and New Jersey. States with judicial foreclosure and a back log are likely to confront comparable issues soon, and may look to the ultimate decision in Bartram for guidance.
Whichever way the Florida Supreme Court decides the issue, lenders may have another option. Depending on the state’s specific statute of limitations, a missed monthly payment after an initial dismissal may justify a new limitations period. While some courts have been hesitant to reset the statute of limitations based on a technical dismissal of the initial foreclosure action alone, a dismissal coupled with an additional action by a lender might suffice. For example, if a lender chooses to restructure the loan with the borrower, and the borrower subsequently defaults on the restructured loan, the lender would again have the right to accelerate the restructured loan and bring an action in foreclosure—such action being subject to a new statute of limitations period. Likewise, a court may be persuaded that a unilateral action by a lender to waive the original default and de-accelerate the loan might also justify a new limitations period—a conceptual timeout on the limitations clock. Thus, the borrower would again be obligated to make monthly payments in accordance with the original maturity date, and a subsequent nonpayment could be viewed as a new and separate default in some jurisdictions. Lenders should have a discussion with their special servicers and foreclosure attorneys to stay up to date on the latest developments in various jurisdictions and to craft appropriate and timely disposition strategies. In the meantime, we’ll let you know when the ’07 housing crisis finally stops creating complicated issues. Wouldn’t that be a post worth reading?