Thousands of homeowners whose mortgage loans are severely delinquent, years behind in some cases, may be allowed to stay in their homes without paying another cent toward the mortgage loan due to legal technicalities, according to an article recently published by the New York Times.
The issue has been particularly hot in judicial foreclosure states such as Florida and New Jersey, where the foreclosure process must pass through the courts and signed by a judge to be completed.
The courts in judicial states amassed a huge backlog of foreclosure cases at the height of the financial crisis from 2008 through 2011, and many of those cases remain on the docket. The exact number is difficult to ascertain, as is the number of homeowners who remain in their homes after defaulting – some of whom stay for years after defaulting. Bank of America alone said it had initiated about foreclosure proceedings on about 20,000 residential homes in the last five years, and the bank estimates that about 90 percent of those homes are still occupied.
The courts in judicial states are in most cases citing the statute of limitations in their rulings that the lenders cannot take possession of homes in cases where borrowers are years delinquent; for example, in New Jersey, the statute of limitations is six years. While Judge Michael Kaplan of the Bankruptcy Court in Trenton affirmed a longstanding position he and others had taken during the foreclosure crisis that "No one gets a free house," he said his court had retreated from that position in November "with a measure of disquiet and chagrin" after dismissing a borrower's case in November 2014. It remains to be seen whether the dismissal of that case will set a precedent as courts in judicial states seek to clear their backlogs of foreclosure cases amid the consistently declining foreclosure volume four to five years after the crisis peaked.
"I believe that the Judge was taking the position that if the foreclosure action was ended and the loan de-accelerated and then re-accelerated that there would not be an issue before him and but for the insistence on the acceleration date, he was constrained," wrote attorney Steven Eisenberg of the firm Stern & Eisnberg, which practices in Pennsylvania, New York, and New Jersey, in a review of the case. "The stipulated facts presented by the parties leave little room for anything else or any other argument (none was present)."
Eisenberg suggested in his review a way to avoid a ruling in which the borrower walks away from court with a "free" house.
"From a practical review, I think it suggestions that to avoid such an outcome, the best practice is that in the event of a dismissal of a matter in New Jersey where the NOI (note of issue) is greater than four to five years old that the dismissal will be accomplished by a deceleration of the loan and will be addressed by a re-acceleration after dismissal," he said. "The practical result will be to allow a borrower a new right to reinstate and a new cure period. If you are not near the 20 year default statute under (c) (or the 36 year statute under (b)) then allowing the additional time for a re-breach would appear to be an allowed way to avoid the potential of such a bizarre ruling."
Eisenberg also said if such a ruling happens to occur, it does not preclude the mortgage holder from initiating further foreclosure proceedings. The underlying case decided last year in New Jersey is currently under appeal.
Reports say the courts are not the only source of delays for completing foreclosures. The governments have reportedly made 69 changes to its modifications programs over the years, which have in many cases forced lenders and servicers to change its offerings to borrowers. The lenders and servicers themselves have also contributed to the situation through poor recordkeeping and overall dysfunction.
Completed foreclosures, which are a true measure of homes lost to foreclosure, have totaled approximately 5.5 million nationwide since the height of the financial crisis in September 2008 and have totaled approximately 7 million since homeownership peaked in the second quarter of 2004, according to CoreLogic's January 2015 National Foreclosure Report.