Anatomy of a Mortgage Foreclosure in Florida
(and how Chapter 13 Bankruptcy can stop it)
I.O.U. and the mortgage. When you borrow money to buy a home, you sign an I.O.U. (also called a "promissory note") and agree to repay the loan in steady monthly installment payments. To protect the lender (the bank) you are required to "give the bank a mortgage" on the property. The mortgage connects the promissory note to your home and says to the bank "If I don't pay you back on time you can have my home auctioned off to repay the loan." A loan backed up by a mortgage is called a mortgage loan. Sometimes it is called a "home equity loan."
First mortgage and a second mortgages. What is the difference between a first mortgage and a second mortgage? It's like an ice cream parlor. On a busy day, you go in and take a number. If you are first, your number says #1. A line forms behind you as others pull numbers 2, 3 and 4. When the lady behind the counter is ready, she calls "Now serving number one" and you step forward. You have certain rights that that point. You are entitled to first pick of everything. If you have enough money, you could presumably buy all the ice cream in the store. So, you have the right to be completely satisfied before anyone behind you gets anything. OK, let's say you buy some ice cream and leave. Now the customer holding #2 steps up (he is now #1, in a sense) and he has the same kinds of rights you had. Morgages are like that. The first mortgage has a right to auction off your home if you don't pay and will receive all the money necessary to pay back his loan before the second mortgage gets any money at all. More about this later.
I have first dibs! When a banker makes a mortgage loan, he is all smiles but at the same time he is secretly worried you might fail to repay ("default" on) the loan. The mortgage gives him comfort, because as we said before, if you default he can force a public auction of your home ("foreclose on the mortgage") and apply the proceeds to your debt. However, when he "takes a mortgage" on your home the banker has an obligation to warn all other potential banks and lenders that they should understand he has "first dibs" to auction your home before they do (the way a wedding band warns away other suitors). You can see why this rule is necessary. If no one had any idea whether a particular piece of land had a mortgage on it or not, you might have 5 different banks all thinking they had the same first right to auction the property. If those rights were in fact equal, the first bank to loan money would have to share the auction proceeds with the other banks and that would result in the first bank not getting enough to cover his loan. In that kind of world, bank home loans would be more risky and the interest rates would go sky high.
The recording system. Our nation is better off with low home loan interest rates, so we need a system (a wedding band) for warning other banks that a particular piece of land already has a mortgage against it. We do have a warning system and is called "recording." When a bank makes a mortgage loan, the document called a mortgage is signed by the borrower. The mortgage plainly says that the homeowner (who is also the borrower) offers his home to sold for the benefit of the lending Bank if he should default on the loan. After the mortgage is signed, it is delivered to the Clerk of the Court in the county where the land is located. The Clerk of Court then takes a microfilm picture of the mortgage and adds it to his book of microfilm pictures from other transactions. Each picture is assigned to the next page of the book and when that book, for example Book 35, is full, the clerk starts a new, succeeding book, like Book. Thus, a mortgage might appear at "Book 435 Page 93 of the Official Records of Alachua County, Florida" You may have seen the clerk's Book and Page numbers stamped in purple ink on a mortgage. In making the photograph and adding it to his book, we say the Clerk has "recorded" the mortgage.
Check the recording department before you lend. Now, suppose there is a man named Homeowner who borrows $100,000 from Friendly Bank of Florida to buy a home worth exactly $100,000.. Years later, after lots of payments, the balance is down to $75,000. Homeowner then has a mid-life crises and wants to borrow $20,000 to go on a world cruise, so he goes to another bank called Greenbacks Bank for a "home equity loan." Greenbacks Bank gets an appraisal on the home and it shows $100,000 value. If there were no other mortgages on the home, then this would look like a great loan and Greenbacks Bank's loan officer is anxious to make it. But, as a precaution, Greenbacks sends a worker down to the Clerk of Court's office, and he begins to look through the records. Lo and behold, the worker finds the Friendly Bank mortgage which has been recorded at Book 435 Page 93 and the worker reports this fact back to the loan officer at Greenbacks. The Greenbacks loan officer then calls over to Friendly Bank of Florida and inquires as to how much of the $100,000 original loan is still owed. Friendly Bank reports that the "payoff" on the loan is only $75,000 since $25,000 has been repaid. The Greenbacks loan officer is not now quite as happy, but he is not totally discouraged either. His bank is not going to be first in line "at the ice cream parlor" but only second in line. Still, there seems to be plenty of ice cream for everyone (translation: the $100,000 value of the home is enough to cover both Friendly Bank's payoff of $75,000 plus the $20,000 Greenbacks is considering loaning). Greenbacks Bank officer decides to go ahead and make the $20,000 loan, but not at the same low interest rate he would have offered had there been no other mortgage. The Greenbacks Bank officer then has Homeowner sign another mortgage. At the top of the mortgage document, it doesn't say "First Mortgage" or "Second Mortgage" it just says "Mortgage" or (same thing) "Home Equity Mortgage." The signed mortgage is delivered to the clerk's office where it is photocopied and assigned to Book 562 Page 398.
Yet another mortgage loan. A month later homeowner returns from the world cruise. Now he is dissatisfied with the taste of water from his kitchen sink and decides he wants a water purification system -- a fancy one costing $6,000. So he goes down to Benevolent Finance Company, a small loan company, and requests a $6,000 loan. The loan officer there wants to protect his loan with a mortgage and does the same research as Greenbacks Bank did. This time, he finds two recorded mortgages, and his inquiries result in the information that Homeowner owes Friendly Bank $75,000 and Greenbacks Bank $20,000. The home is only worth $100,000 and there is already $75,000 + $20,000 = $95,000 in mortgages against the property. While that is not enough to fully cover his loan, Benevolent's loan officer is a daring man and makes the $6,000 loan, but he charges a stiff rate of interest on the promissory note. He, like the other loan officers before him, has Homeowner sign a mortgage. The mortgage, entitled simply "mortgage" is recorded at the clerk's office at Book 562 Page 659.
Who's on first? OK, the stage is now set. We say in law that Friendly Bank of Florida, having "recorded" first, holds "a first mortgage." Greenbacks, having recorded second, holds "a second mortgage." Benevolent Finance Company holds "a third mortgage." We can tell from the Book and Page numbers who recorded first, second, and third. So as you can see, the terms first, second, third, even fourth mortgages and so on actually relate to the order in which (still unpaid) mortgages were recorded. Taking it one step further, you can see that once Friendly Bank of Florida is paid off and its mortgage cancelled ("satisfied"), the Greenbacks mortgage will move up from being a second mortgage to a first mortgage and Benevolent's mortgage will become a second mortgage instead of the third mortgage it once was.
A Reversal of Fortunes -- Default. Back to our story. No sooner is the water purification system installed than homeowner's boss fires him due to downsizing. Homeowner starts missing payments and eventually he gets a letter from Friendly Bank of Florida advising that because he has missed 3 payments, Friendly Bank has "elected to accelerate the time for repayment" of the loan and the bank is calling the entire loan due. The letter goes on to say "Please remit the sum of $75,788 including principal, interest, and late fees immediately, or we will foreclose." In a panic, Homeowner borrows $1,500 from his brother-in-law and rushes down to Friendly Bank and offers to get caught up on the 3 payments plus later fees. To his horror, the Friendly Bank vice president declines the money, saying, "Sorry, we have accelerated your loan, please pay the whole thing."
Acceleration. What has happened here, and what is acceleration? You could say that Homeowner's "right" (if you want to call it that) to repay Friendly Bank in small monthly installments depended upon his making the payments on time like clockwork. When homeowner broke the agreement by missing 3 payments, the bank was no longer obligated to accept "monthly" payments. The bank had the right to demand all of its money -- right now! The decision to demand full and immediate payment of whole loan balance after default is called "acceleration." And, barring a few technical defenses, there is nothing in the law that can force the bank to change its mind, that is to "de-accelerate" -- except for Federal Bankruptcy Law.
I'll see you in court -- Foreclosure. Homeowner is unable, of course, to pay the whole loan balance. The next thing he knows, a deputy sheriff is at the door handing ("serving") him a thick stack of paper. The top sheet says "Summons" and the stack underneath says "Complaint for Mortgage Forclosure." The case goes to court. Bank Foreclosure is one of the slower court cases. It is not like landlord tenant eviction cases, which go pretty quickly. Nor is it as quick as small claims cases. Under Florida foreclosure law, it is usually impossible to force the auction of the home sooner that about 65 days from the date the complaint is filed if the homeowner puts up even the slightest resistance. If the bank's attorney is sharp and lucky, it is possible to trim a home foreclosure to 45 days, but it is not common. The end result of the litigation is most likely a hearing on the bank's Motion for Summary Judgment (which the bank will probably win) which in turn results on a Final Summary Judgment doing two important things: #1 the Judgment states to the penny exactly how much Homeowner owes Friendly Bank of Florida, including principal, interest, late fees, court costs, and attorney's fees and #2 schedules a date and time for a public auction of Homeowner's house. Right up until the auction, the Homeowner could come in and pay the full judgment amount, but realistically that is not going to happen.
Junior and Senior Mortgages. What about the second and third mortgages? That is, Greenbacks Bank's $20,000 mortgage loan and Benevolent's $6,000 third mortgage loan? Both these lenders are lower on the totem pole ("junior") than the first mortgage lender Friendly (whose mortgage is "senior"). Well, what happens is this: Both Greenbacks Bank and Benevolent Finance Company get a visit from the deputy sheriff about the same time that Homeowner gets his visit. Both junior lenders are handed a Summons and a Complaint for Mortgage Foreclosure. The importance is this: these two mortgage holders are being warned by the court that when the public auction takes place, all the money is going to go to Friendly Bank before any of it is available for Greenbacks or Benevolent. In fact, both for Greenbacks and Benevolent are made parties to the foreclosure litigation. Friendly Bank is the plaintiff, everyone else, including Homeowner, Greenbacks, and Benevolent is thrown into the category called "defendants."
Public auction. To understand the pecking order, let's fast forward to the public auction. At the exact time and date as mandated by the Court in the Final Judgment, the Clerk of Court stands outside the clerk's office (in some counties literally "on the steps of the courthouse") and states to whomever is present that Homeowner's property is now up for auction, and "What is my bid"? Let's say that the Judgment states that Friendly Bank is owed $78,200 total. The rules are that any and all money bid up to $78,200 is going to be turned over by the Clerk to Friendly Bank after the auction. So if the high bid is only $65,000, all that $65,000 will be turned over to Friendly Bank. What would be the situation then? Friendly bank was owed $78,200 and has received back only $65,000, so it is short by $78,200 - $65,000 = $13,200. We say in law that Friendly Bank has a mortgage "deficiency" of $13,200. In that event, Friendly is entitled to go back to the foreclosure court and ask for a "deficiency decree" of $13,200, in effect a plain old money judgment for $13,200.
Credit bid. The law wants as much bidding as possible at these public auctions. The higher the bid, the more money the bank gets back and the smaller the deficiency decree will be left for the hapless homeowner. So the rule is that everybody can bid -- including the plaintiff Friendly Bank of Florida. In the event Friendly Bank is the high bidder at $65,000, it wouldn't make any sense to force Friendly to bring $65,000 in cash to the auction and pay it over to the clerk because the clerk would just hand it right back to the Friendly Bank as the auction proceeds. So, we pretend that Friendly Bank has "monopoly game money" in the total amount of its $78,200 judgment -- Friendly Bank can bid up to $78,200 (the amount of its judgment) without having to present cash in the event it wins the auction with the high bid. In law, we say that Friendly bank can "credit bid" up to $78,200 because it would just receive this money back from the clerk if Friendly is the high bidder. But if Friendly wants to bid more that $78,200, it will have to bring actual cash to the extent its bid exceeds $78,200. For example, if Friendly bank wants to bid $79,000, it will have to use its entire $78,200 credit bid plus pay $800 in cash.
High bidder is the new owner. For now, let's say that the bidding goes up and up but stops when Friendly Bank bids $65,000. What happens? Ten days after the auction, the Clerk of Court gives a Deed to the property -- making Friendly Bank the new owner. Homeowner is kicked off the property, by the sheriff if need be, and Friendly Bank will go about the task of selling the house on the open market. Perhaps a fresh coat of paint and some much needed yard work will help increase the price. The house eventually sells, and Friendly Bank keeps the money, applying the proceeds to the loan balance. If the foreclosure home sells for $100,000, Friendly Bank will not only get its money back, but make a tidy profit as well.
Example -- High bid is a little higher than the first mortgage. Now flash back to the auction and put yourself in the shoes of the loan officer from Greenbacks Bank. The bidding is going up, but loan officer is sweating profusely. Greenbacks bank knows that the first $78,200 is going to go to Friendly Bank. If the bidding does not go over $78,200, then Friendly Bank will get the house and -- there will be no more collateral for the Greenbacks Bank loan. Ouch. What Greenbacks thought was a good mortgage loan will change. Greenbacks will be left with an essentially unsecured loan, the same as a signature loan, and it may be uncollectible. Greenbacks Bank would then be out $20,000. Luckily, the bidding does not stop at $65,000 this time. A private investor senses a chance to get a $100,000 house at a bargain price and bids $85,000. No one bids higher. Private investor pays the $85,000 to the Clerk. What does the Clerk do? She pays Friendly Bank $78,200 as stated in the judgment, leaving $85,000-$78,200 = $6,800. Since Greenbacks hold the second mortgage, that $6,800 is paid to Greenbacks Bank. But Greenbacks was owed $20,000 and only got paid $6,800. Tough. Greenbacks can go back to the foreclosure court and get a "deficiency decree" for $20,000- $6,800= $13,200, but that is not much satisfaction and may never be collected.
Example --Second mortgage holder jumps in the bidding. Foreseeing that Greenbacks Bank will be holding the bag for $13,200 if the bidding stops at $85,000, the sweating loan officer decides to jump in on the bidding. Like Friendly Bank, Greenbacks bank has some monopoly game money of its own, but it s a little different. Since Greenbacks is owed $20,000, it has $20,000 in monopoly money, or a "credit bid" but it can use its credit bid only after it ponies up $78,200 in real cash. What this means is that if Greenbacks is the successful high bidder at, say, $90,000, it will have to pay to the clerk $78,200 in cash, then use up $11,200 of its credit bid (for which it would not have to pay real cash.) Why is this? Because if Greenbacks Bank actually brings down to the Clerk a wheelbarrow full of $90,000 in cash, and hands it all to the clerk for the winning bid, the clerk will hand the first $78,200 to Friendly Bank, and then hand $11,200 back to the second mortgage holder -- Greenbacks Bank. So why make Greenbacks bring down more than $78,200? We don't, we let them credit bid the amount of their loan after the full amount of the first mortgage is paid.
Have you been served? Do you now see the analogy of the ice cream parlor to the mortgages? The ice cream is the amount of the high bid at the auction of the property. The customer holding paper slip #1 is the first mortgage holder. Customer #1 is entitled to be fully satisfied before customer #2 (the second mortgage holder) is entitled to anything. And if Customer #1 takes all the ice cream, then Customer #2 gets nothing at all. And so on for the third mortgage holder.
Example -- Second mortgage holder bids. If Greenbacks Bank is the high bidder at $90,000, it will have to bring $78,200 of cash from its own bank vault and pay it to the Clerk. Now what is Greenback's position in all this? It loaned $20,000 to Homeowner and now it has another $78,200 invested in this stupid transaction! Greenback's total investment is now $98,200. Soon the clerk will issue a deed to the house to Greenbacks Bank. Greenbacks dearly hopes to be able to sell the house for $100,000. If and this is a big IF, -- if Greenbacks is able to sell the house for $100,000, then it would be lucky and recoup its $98,200, and even have a small profit boot. Whew! That was close, but all's well that ends well. Sadly, this is unlikely, since Greenbacks will probably have to sell the house through a broker to realize the full $100,000 value of the house, and the broker will charge maybe 6% of the sale, or $6,000. Plus, potential buyers regard the property as a "bank repo home" and are hoping to get a real bargain. So there is no chance with these numbers for Greenbacks to break even. It looks like Greenbacks will take a loss, the only question is how much.
Example-- The third mortgage holder "eschews the opportunity" (quoting Howard Cosell, Monday Night Football) to bid. Lastly, look at poor Benevolent Finance Company. The only way Benevolent can get its money back is if some snowbird from New Jersey comes to the auction and thinks "Wow just this house would go for $250,000 in MY neighborhood" and bids $120,000. In that event, Friendly Bank would get its $78,200; Friendly would get $20,000, Benevolent would get its $6,000, and there would even be money left over, which would be given to Mr. Homeowner. But this won't happen, because people from New Jersey are too smart to pay $120,000 for a $100,000 house, no matter where they find it. So the end result is that Benevolent is unlikely to get a red cent from the foreclosure.
Homeowner's income reappears! But Wait! There is remarkable news! Just before the public auction takes place, Mr. Homeowner finds another job, a good one paying him about what his last job was paying. He realizes that he could resume making all his regular mortgage payments, and he won't have to keep borrowing from his brother-in-law to do it! Delighted, he faxes this information to all three lenders. "Let me get caught up on my mortgage loans -- I have a job again!" Greenbacks Bank, seeing some pretty ugly handwriting on the wall if this thing goes to public auction, responds that it would be willing to work something out if Friendly Bank will too. Benevolent Finance Company, in an even more precarious situation, is heartened by the news and says "Sure, sure, we're ready to cooperate, will Friendly let you get caught up?" Then the bad news -- Friendly Bank of Florida is adamant. They have accelerated the debt, they want it all paid now, no ifs ands or buts. They don't want payments and they don't want to deal -- full steam ahead with the public auction next week!
A Chapter 13 Bankruptcy Petition Stops the Forelcosure. This is where bankruptcy comes in to save the day. Chapter 13 Bankruptcy is the correct medicine for this foreclosure case. Mr. Homeowner goes to a bankruptcy lawyer who explains that Chapter 13 let him save his home. How? By using the awesome power of federal law to force Friendly Bank of Florida to "de-accelerate" the mortgage loan and allow Homeowner to catch up on the missing payments. To save the home from foreclosure Florida law requires the Chapter 13 bankruptcy petition to be filed before the public auction. Technically, the deadline is "the filing of the Certificate of Sale by the clerk of court,", but since this happens almost immediately after the auction, for practical purposes, once the auction has taken place, it is too late to save the house through Chapter 13. A side note -- the law in Florida used to be that the deadline was when the clerk issued the deed 10 days after the auction, but that law got changed and the deadline was shortened to the filing of the certificate of sale. The moment a Chapter 13 Petition is filed with a U.S. Bankruptcy Court, the foreclosure stops in its tracks! Even if the petition is filed minutes before the auction sale, that is good enough to prevent the auction from taking place.
Curing the Arrearage in Bankruptcy. Mortgage rescue is fairly straightforward in a Chapter 13. You start off by filing your chapter 13 case before the auction. Then you act as though everything was fine and you resume making your regular mortgage payments to all the mortgage holders on your home. (They have to accept the payments, even if they have accelerated the loans.) Resuming payments keeps you from falling even further behind. Now, as to the amount you are behind on all your house mortgages, you total up all the missing payments and late fees and attorneys fees and that total is called "the arrearage" -- it's the total you are behind. Most Chapter 13 Plans are for 36 months (though they can be stretched to as much as 60 months.) You simply divided the total arrearage by the number of months in the plan. If the total arrearage is $3,600 and it is a 36 month plan, then you would pay, besides your regular monthly mortgage payments, $100 extra towards the arrearage. At the end of 36 months you would have paid in 36 times $100 = $3,600, which gets you caught up on the missing payments. As a result, at the end of the 36 month chapter 13 Plan, you are totally back in sync (the arrearage has been "cured") on your mortgage payments and you are totally current. Everyone is happy.
