Florida Real Estate Financing and Foreclosure
Law Offices of Michael D. Stewart
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
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
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.
Copyright Law Offices of Michael D. Stewart, 2012