Miami Attorney Predicts 'Bit of a Mess' Once Home Foreclosure Moratorium Is Lifted

Foreclosures on homes with federally backed mortgages can’t be filed, but things could get chaotic for borrowers, lenders and courts when the moratorium is lifted, a Miami attorney predicts.

A deluge of new court filings could be expected to create an instant backlog unseen since the financial crisis, and the mortgage amount that had been on hold will become due, said Victor Petrescu, a partner at Levine Kellogg Lehman Schneider + Grossman.

He  represents lenders ready to file about 10 residential foreclosures and keeps a close eye on government protections adopted in response to the coronavirus pandemic.

Among those who could find themselves in the worst position are unemployed and underemployed  borrowers who were unable to hammer out mortgage forbearance with their lender.

“All these borrowers who are now faced with impending foreclosure, some will try to sell their house for less than what it’s worth,” Petrescu said. “We are heading for a bit of a mess.”

Petrescu offered his insights to the Daily Business Review on what’s coming if and when foreclosures get the green light.

There have been numerous federal, state and local orders suspending foreclosures and evictions, and they have been modified and extended several times. What still remains in effect for foreclosures? 

Florida imposed a moratorium that covered foreclosures but it expired Oct. 1. The Centers for Disease Control and Prevention imposed its own protection, but it’s against evictions of renters whose income was impacted because of the pandemic and doesn’t cover foreclosures on residential mortgages.

The moratorium on commercial real estate mortgage foreclosures has been lifted, so these cases are moving ahead, but there’s a federal protection still in place for residential mortgages, Petrescu said.

The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, extended its protection until Jan. 31 only for federally backed loans. It’s unclear whether the deadline will be extended, but it covers a lot of homeowners as “easily” 85% of U.S. home mortgages are backed by Fannie or Freddie, he added.

“The lender can’t start a foreclosure action, but that does not absolve the borrower from the payments,” Petrescu said. “There’s no forgiveness on that. The debt isn’t being erased.”

This means once foreclosures are allowed, lenders will rush to the courthouse, and some borrowers could be expected to sell their homes for less than they’re worth with serious implications for the housing market, Petrescu said.

Give an idea of what’s going to happen next year, assuming the moratorium isn’t extended. How will things play out? 

“There’s going to be a huge deluge of these cases. I have cases right now on hold that we can’t file a foreclosure action on. Once they are filed, there’s plenty of others because payments still are coming due. Borrowers are still defaulting on their mortgages,” Petrescu said. “There will be just a bigger and bigger backlog.”

If the suspension expires Jan. 31, he expects about nine months’ worth of foreclosure cases to be filed within a month.

“It’s obviously going to clog court systems. Judges are going to have to figure out ways to resolve these cases,” Petrescu said.

Can you liken the impending backlog of foreclosure cases to what happened in the Great Recession, or how will things play out differently? 

Things will be more streamlined this time because the courts and attorneys already went through a foreclosure deluge during the Great Recession.

More than that, a lot of the legal issues and questions that came out from the foreclosures then were sorted out and answered, so there will be greater clarity and fewer hurdles in the process this time, Petrescu said.

“Now we have Florida Supreme Court opinions and issues that were hotly contested. Those have been really clarified under Florida law,” he said. “This time there’s a lot more clarity on a lot of the laws surrounding foreclosures. The process itself should be much more streamlined as there aren’t many gray areas.”

As you said, one of the issues is that the moratorium is a temporary protection and doesn’t erase obligations. Are lenders going to think harder about working out forbearances with borrowers?

Some are thinking about it and specifically about spreading out the accumulated debt, essentially raising the principal, but it won’t work for all borrowers.

“Once a borrower misses too many payments, it becomes less and less viable. They just get so behind on loan payments,” Petrescu said. “Those remedies only work for borrowers in a certain position.”

It’s difficult to restructure a loan to allow for forbearance if a borrower still doesn’t generate enough income to pay or can pay only a little.