Florida is a lien theory state wherein when one obtains a mortgage from a bank, the bank retains a lien on the property, but has no right to possession of the property. This is contrary to a title theory state, wherein the bank, or mortgagee, receives title to the property through the mortgage. If the mortgagor, or person who obtained the home loan, defaults on the loan, the mortgagor has the immediate right to possession of the property.
When borrowing money in Florida to purchase a home, the borrower signs a promissory note which is the promise to pay the debt. The note states the interest rate, repayment schedule, and other terms.
A mortgage is the contract between the bank and the homeowner which pledges the property as security for payment of the debt. The property is the collateral for the loan. A mortgage must be in writing, provide the legal description of the property, and be signed by both parties, amongst other things.
The mortgage and promissory note contain important terms concerning what happens if the borrower defaults on the payment under the mortgage. For instance, with an acceleration clause, if the borrower misses a payment, the lender has the right to call due all remaining payments immediately, something which would probably be very difficult for a borrower to achieve.
Further, an alienation clause provides that if the borrower transfers his or her interest in the property, the full balance is due and payable to the lender. In practice, however, the bank will not always do this, though they might have the right to depending on the circumstances of the case.
An escalator clause allows the lender to increase the interest rate on the loan if the borrower defaults. A prepayment clause allows the borrower to pay off the full loan early, without penalty. There are a variety of different types of ways to pay your mortgage. The first is a fixed rate mortgage where the interest rate is fixed for the term of the loan, such as for 30 years.
Another type of mortgage is the term mortgage where the borrower makes only interest payments on the loan and then later pays the full amount at the end of the term – known as a balloon payment.
An adjustable rate mortgage (ARM) is where the interest rate is tied to some type of financial index so that the interest rate on the loan increases or decreases in step with the index. If the interest rate rises, the borrower’s has to make higher mortgage payments. If the interest rate falls, the borrower’s payments are less.
ARMs can lead to an unfortunate event, well known now in Florida and other parts of the country, called negative amortization. When the interest on an ARM rises too fast, what the borrower is paying may be less than what is owed on the interest payment. The unpaid interest is then added back onto the loan balance, causing the loan balance to rise and the interest charged on the new higher balance to rise as well, or negatively amortize.
When a borrower fails to timely pay their loan and is in default, the lender has the right to file a foreclosure action against the borrower in circuit court. The lender will file a Complaint outlining how the borrower failed to pay the lender as agreed. A copy of the mortgage and the promissory note will likely be attached to the Complaint. Thereafter, the borrower has twenty (20) days to file either a Motion to Dismiss the Complaint or an Answer to the Complaint outlining why the borrower is not in default and why the lender did not have the right to file the foreclosure. The borrower’s attorney can also prepare Affirmative Defenses to the action for foreclosure. At the same time the borrower can also demand that the lender provide proof of the amounts owed to the lender under what is called Discovery.
Discovery consists of Requests for the lender to produce documents concerning the case, Requests for Admissions from the lender concerning certain aspects of the case, and Interrogatories, or questions that the lender is required to Answer under oath. Finally, the borrower can conduct depositions or in person interviews under oath with relevant workers for the lender in order to gain evidence to be used in its defense of the case.
Once the evidence is collected, if the lender believes that there are no material issues of fact that require a trial, they will file a Motion for Summary Judgment, which essentially outlines to the judge why a trial is not necessary. If the borrower successfully overcomes Summary Judgment, the case will proceed toward the judge’s trial docket.
In the meantime, the borrower will have been negotiating with the lender in an attempt to modify the loan terms. In Florida, given how the market has dropped, many homes are not worth the amount owed to the lender. In this case, the lender will argue to obtain a reduction in the principal amount owed to the lender to get the loan more in accordance with the current fair market value of the home. The interest rate, past due fees and other terms can also be negotiated with the lender.
Another option is for the borrower to attempt to obtain a buyer for the property who is willing to buy the property for less than what is owed to the lender – called a Short Sale. In a Short Sale the lender, in an attempt to avoid the litigation and to avoid owning a property they will have to maintain (real estate owned), will need to agree to the amount it is willing to accept in a short sale. An important issue in a short sale is assuring that the lender cannot later come after the borrower to collect a deficiency judgment, or the difference between what is owed to the lender and the amount the home was sold for.
Another alternative, is to merely negotiate with the bank to give them back the property in an attempt to avoid a later lawsuit for the deficiency judgment. This is known as a deed in lieu of foreclosure. Also, currently in Florida, lenders are accepting the deed to the property and agreeing to allow the borrower to remain in the home – known as a deed for lease.