Florida has remained in the top three of states with the highest foreclosure rate since the housing market collapsed in late 2007. Even scarier for distressed homeowners is the fact that Florida is a recourse state, permitting lenders to seek deficiency judgments for unsatisfied debts. A “deficiency” is the difference between the amount owed by the borrower and the foreclosure sales price. This occurs when a home is foreclosed on and the total outstanding balance owed on the mortgage, or in some cases multiple mortgages, exceeds the sale price at the foreclosure. This is commonly referred to as being “underwater” or “upside down.”
In Florida, lenders also have the right to pursue a deficiency after a short sale. In those circumstances, the bank may go after the borrower for the amount the bank comes up short after the sale. A deficiency judgment may be avoided only if the borrower has negotiated prior to the short sale that the lender will waive any rights to a deficiency. If this has not occurred, the borrower is still vulnerable to a deficiency judgment.
The Florida Fair Foreclosure Act
On June 7, 2013, Governor Rick Scott signed HB 87, The Florida Fair Foreclosure Act into law. The Act makes significant changes to how residential foreclosures and short sales must be conducted in Florida.
One of the most important changes to the process is the change in the Statute of Limitations for bringing actions for deficiency judgments. A Statute of Limitation creates a finite period of time within which a person may bring a lawsuit. If a lawsuit is brought outside of that time period, the suit may be dismissed, as the claim is forever barred. Before the Act was passed, the Statutes of Limitation allowed a party to bring an action for a deficiency judgment at any point up to five years from the date a certificate of sale was issued by the Clerk following a foreclosure sale. After its passing, that time limit has shrunk to one year for deficiencies created by foreclosure sales or deeds in lieu of foreclosure. However, this change is limited to actions commenced on or after July 1, 2013.
Although actions brought before that date are still subject to the old statute, there is an upside for homeowners facing potential deficiency judgments. Any action put into motion before July 1, 2013 only remains valid until July 1, 2014. For example, if the five-year time period will expire after July 1, 2014 under the old law, the new law shortens the lender’s right to pursue a deficiency judgment to July 1, 2014.
Revised statue of limitations
Oddly enough, the revised Statute of Limitation does not explicitly address short sales; however, it may be construed as included under that one-year threshold. There is room for interpretation and litigation as the Act specifically limits the amount the lender can recover in a deficiency judgment from a short sale. In the case of an owner-occupied residential dwelling, the recoverable amount is limited to the difference between the remaining debt from the short sale and the fair market value of the property at the time of sale. The new statute also limits attorneys fees and costs the lender can charge when collecting the deficiencies.