The mortgage foreclosure crisis in Florida: a 21st century solution.

AuthorJursinski, Kevin F.

The current national mortgage foreclosure crisis has been felt the hardest in communities throughout Florida. (1) The crash in Florida's real estate economy has been fueled by a staggering 400plus percent increase in foreclosures during the last three years. (2) Consequently, the court systems in many jurisdictions have been overwhelmed and have incurred significant expenses and backlogs. (3) It is estimated that the backlog of mortgage foreclosure cases in Florida results in added costs and lost property values of $9.9 billion dollars per year, as well as adversely affecting an estimated 120,219 permanent Florida jobs. (4) This crisis is anticipated to get worse, and a proactive solution is necessary to address the problem.

This article will review the purpose of foreclosures, the current status of foreclosures in Florida, the current process for addressing foreclosures, approaches being considered, and a proposed solution for the 21st century.

Purpose of Foreclosure

A mortgage foreclosure is an equitable remedy that seeks equitable relief from the court to foreclose the interest of the mortgagor and any and all parties claiming by, through, or under such mortgagor to enable the mortgagee not only to foreclose its interests, but also for the mortgagee to acquire title to the collateral securing the mortgage loan. (5) Nevertheless, the general rule in Florida is that a foreclosure must not be unconscionable or inequitable. (6) Mortgagees have a duty to act in good faith and equitably with its contracting parties. (7) This includes mitigation of damages and efforts to avoid exacerbating damages. (8) A mortgagee should not recover for the consequences of a mortgagor's act that are readily avoidable by the mortgagee. (9) Similar to a standard breach of contract action, an underlying purpose of the mortgage foreclosure is to put the nonbreaching party in the same position it would have been in without the breach. (10)

Status of the Current Foreclosure Crisis and Problems Ahead

The current real estate crisis was fueled by subprime loan defaults. (11) A recent study indicates that the current foreclosure crisis will be followed by yet another influx of foreclosures, arising out of defaulting adjustable rate mortgage loans. (12) The projections are that Alternative A mortgages and Option ARM mortgage defaults will mirror or exceed subprime mortgage defaults, which will result in a "second wave" of residential mortgage foreclosures. (13)

A "third wave" of foreclosures (14) will result from those people who decide to "strategically" allow a foreclosure to take place--essentially residential or commercial property owners who at one time had been able to make their mortgage payments but, due to a large reduction in the equity of their property, choose to "walk away" from their mortgage obligations. A recent study by Deutsche Bank indicates that by the year 2012, almost 50 percent of all residential properties nationwide will have a negative equity between the mortgage balance and the property values. (15) Current studies show that over 60 percent of the homes in Florida to be below or at negative equity at this time. (16) The Florida Foreclosure Task Force noted, "The flow of foreclosure cases and homes in the Florida pipeline to foreclosure filing shows only signs of increasing." (17)

This large volume of mortgage defaults has created delays in our court system and has resulted in foreclosures now typically taking between 12 and 18 months or more to wend their way through the court system. When a borrower defaults on his or her mortgage, the borrower faces not only a foreclosure against the borrower's property, but also a potential deficiency judgment after foreclosure. Where a deficiency exists, and in order to recover a deficiency, additional legal proceedings must be pursued following the foreclosure. In foreclosure actions generally, a deficiency or deficiency decree is determined by subtracting the fair market value (18) of the subject property on the date the mortgagee obtains title as determined by the court from the total amount due the mortgagee, generally in the form of a final judgment. (19) The burden of proving that fair market value is less than the debt is on the secured party. (20) A deficiency decree in a mortgage foreclosure action is left to sound judicial discretion, (21) which may reduce the deficiency established if equitable considerations warrant such reduction, and if the court offers reasons for justifying its reductions. (22)

Throughout the foreclosure process, a borrower is exposed to a larger deficiency amount due to the accrual of interest, taxes, insurance (current or "force placed"), as well as the cost of maintenance on the property due to such delays. For some, homeowner or condominium association dues may also accrue. Furthermore, the property may functionally depreciate since properties in foreclosure are not maintained to the same standard if the property was occupied (23) and may suffer from market depreciation during the extended foreclosure process due to a drop in residential home prices. Abandoned, foreclosed properties may likewise suffer devaluation by vandalism and theft. These factors result in the mortgage balance increasing and the value of the property decreasing, all contributing to a larger deficiency judgment exposure to the borrower, as well as real loss in collateral value to the lender.

In an apparent attempt to address the problem of statewide budgetary issues, the Florida Legislature increased filing fees for foreclosure actions. (24) While the clerk's filing fee on most civil actions remains at $400, foreclosures are charged a higher rate in a new three-tier system: $400 for foreclosure actions up to $50,000; $905 for foreclosure actions more than $50,000 but less than $250,000; and $1,905 for foreclosure actions more than $250,000. (25) These increased filing fees substantially increase the exposure to a deficiency judgment by those least able to pay (i.e., those individuals who are the subjects of the foreclosure actions) and immediately increased litigation costs to the lender without any viable plan in place to utilize these additional funds to address the statewide foreclosure crisis.

Court clerks statewide opposed the increased filing fees because they are not earmarked to be utilized by the individual clerks of court who are charged with collecting such increased fees. (26) Instead, the increased filing fees are mandated to be collected and paid to the State of Florida, the Department of Revenue, and the State Court Trust Fund. These additional filing fee charges ultimately penalize and act as a surcharge on the foreclosed homeowner, adding to the debt that the homeowner has to repay to the lender, either in the form of a larger deficiency judgment or larger liability for debt forgiveness. (27)

Programs Attempting to Address Foreclosure Issues

A number of current programs exist at the federal, state, and local levels to address the foreclosure crisis, but almost all of these programs are either outdated or have been less than effective in addressing the large number of foreclosures that exist today. For example, the federal government has promoted a mortgage modification program, "Making Home Affordable." (28) This program has recently been updated, but has fallen far short of its initial projected expectations of modifying seven to nine million mortgages. As of the writing of this article, less than 200,000 mortgage modifications have been undertaken with a much smaller number of modifications actually completed nationwide, evidencing the ineffectiveness of this program and its failure to be a viable solution to the foreclosure crisis. (29) Despite being the hardest hit economy of all 50 states, (30) Florida is the 50th state per capita in receiving federal TARP money and assistance. (31) Therefore, Florida must look at correcting its own foreclosure procedures and not look to federal intervention or assistance to "bail out" Florida from the foreclosure crisis.

Florida's Chief Financial Officer Alex Sink sponsored a series of statewide seminars to provide educational opportunities and information to those affected borrowers. (32) In addition, Gov. Charlie Crist formed a foreclosure task force, "H.O.P.E.," which studied the problems and identified some of the issues, but it is not clear if any of these recommendations have been implemented. (33) Thus far, neither of these programs has matured into a viable means for addressing the foreclosure dilemma.

A number of jurisdictions...

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