Have You Been Sued for Foreclosure for an Old 2nd Mortgage?

Many Florida homeowners have more than one mortgage on their property. Sometimes these are separate loans, such as taking out a home equity line of credit. Other times the second mortgage was taken out with the first mortgage in order to purchase the home.

During the Great Recession, many homeowners found themselves unable to pay off any of their mortgage loans. Indeed, many of these mortgages were now considered “underwater,” i.e., the remaining balance on the loan was less than the market value of the property. As a result, many lenders decided to charge off their second mortgages, as there would have been no point in foreclosing.

In many cases, homeowners were led to believe that they no longer had to repay their second mortgages. Years passed and they heard nothing from the lender–no statements, no collection calls, nothing. Yet in the past few years, these same homeowners are now facing foreclosure lawsuits from companies that claimed to have bought the charged-off second mortgages. These “zombie” second mortgages have thus seemingly risen from the grave.

If you have been sued–or threatened with a lawsuit–over one of these zombie second mortgages, you are probably shocked and unsure of what steps to take next. Could someone really take your house over a second mortgage that was seemingly abandoned a decade ago? The answer to this question will depend on a number of factors. But here are a few general things to keep in mind when it comes to these kinds of foreclosure lawsuits involving second mortgages.

Why Are These Cases Coming Up Now?

At first glance, you might be wondering why anyone would bother trying to foreclose on these loans after years of inactivity. The short answer is that when these second mortgages were written off, they were largely purchased by debt buyers for pennies on the dollar. These buyers held onto the second mortgages until property values rebounded to pre-Great Recession levels. The important thing to keep in mind is that in many cases, the company that is suing you has little if any connection to your original mortgage lender. They are simply opportunists looking to turn a quick buck.

Can You Actually Foreclose on a Second Mortgage?

In short, yes. The holder of a second mortgage can file a lawsuit to foreclose on the property, even if the borrower is current on their first mortgage.

What If Several Years Have Passed Since I Defaulted on the Second Mortgage?

This is where the law gets complicated. In Florida, a lender or loan servicer must foreclose by filing a lawsuit against the borrower. There is no “nonjudicial” foreclosure option as there are in some other states. And like many civil lawsuits, there is a deadline for the lender or servicer to file their lawsuit. This is known as the statute of limitations.

In Florida, the statute of limitations for judicial foreclosure is five years. This means five years from the date the borrower defaulted. The actual date of default, however, can vary based on a number of factors. In many cases, every single missed payment on the second mortgage is considered a separate default. So the party holding a second mortgage can wait until just before the five-year anniversary of the last missed payment to initiate a foreclosure.

But this also means that if more than five years have elapsed, as we have seen with many of these zombie second mortgages, then any foreclosure lawsuit must be barred. In addition, as the homeowner you can actually pursue legal action against a lender or servicing company that tries to sue you after the statute of limitations has expired. Even threatening a time-barred foreclosure can violate the Federal Debt Collection Practices Act (FDCPA).

Can I Make the Lender or Servicer Prove the Second Mortgage Is Valid?

Because most zombie second mortgages are no longer in the hands of the original lender, it can be difficult for the party seeking foreclosure to actually prove they have the right to enforce the loan. Many debt buyers do not take the time to properly document the second mortgages they purchased, which after all were considered near-worthless assets at the time. This means it is often possible for a homeowner to defeat a potential second mortgage foreclosure lawsuit by arguing the plaintiff lacks the legal “authority” to foreclose in the first place.

Additionally, there are certain federal laws that require a party holding a second mortgage loan to actually serve it. The Truth in Lending Act (TILA) requires that anyone acquiring or receiving assignment of a second mortgage loan must inform the borrower of the transfer of ownership within 30 days. TILA also requires the loan’s current owner to provide periodic statements to the borrower. In other words, the second mortgage holder is not allowed to sit on a loan for years without comment and then “surprise” the owner with a foreclosure lawsuit.

Should I File for Bankruptcy If I’m Faced with a Zombie Second Mortgage Foreclosure?

Bankruptcy should always be viewed as a last resort. In many cases, you may be able to defeat a foreclosure lawsuit for the reasons discussed above. Even if the second mortgage is still valid and enforceable, you can still attempt to negotiate a settlement with the loan’s current owner. Indeed, Loan Lawyers have assisted many clients in getting debt buyers to accept less than what they are owed, even obtaining a waiver of any potential interest charges.

However, filing for bankruptcy is a potential legal tool that may also need to be considered. Filing for a Chapter 13 bankruptcy imposes an automatic stay on any foreclosure lawsuits. This can buy you time to negotiate with the second mortgage holder–or possibly challenge the validity of their claims before the bankruptcy court. And if your home is still considered underwater, the bankruptcy court can “strip off” the second loan and discharge it as an unsecured debt.

Do I Need to Speak with a Florida Foreclosure Defense Attorney?

If you are faced with a threatened or filed foreclosure lawsuit from an old second mortgage holder, you need to take the matter seriously. It is not a good idea to try and deal with the lender or debt collector on your own. You should work with an experienced Fort Lauderdale foreclosure defense lawyer who can review your case and advise you of your options. Contact Loan Lawyers today at (954) 523-4357 to schedule a free initial consultation.