As the backlog of judicial foreclosure cases grew substantially in recent years in states such as New York, New Jersey, and Florida, many homeowners found their cases dragging on for years or even ignored altogether by their mortgage lenders. As the statute of limitations began to run on foreclosure actions, some homeowners found themselves in a unique position, as the mortgage lenders no longer had the right to seek foreclosure despite the fact that the homeowner had not paid a mortgage for six years or more. Essentially, the homeowner could remain in the house for free.
In response to the influx of statute-of-limitation cases, New Jersey Bankruptcy Judge Michael Kaplan reportedly stated,

“No one gets a free house.”

However, that same judge “retreat[ed]” from that position when he dismissed a foreclosure case because the statute of limitations had run. In that case, Washington v. Specialized Loan Servicing, LLC (In re Washington), 2014 Bankr. LEXIS 4649 (Nov. 5, 2014),³ after providing the required Notice of Default to the borrower without additional payments, the mortgage lender had accelerated the mortgage debt as of July 1, 2007, because of default, which caused the statute of limitations to start to run. The lender then waited until 2014 to file a foreclosure complaint, which was beyond the six-year statute of limitations. The court held the mortgage lender to the acceleration date and dismissed the foreclosure action, thereby awarding the defendant with a home free from mortgage obligations.
The above case demonstrates that the “free house” result can occur in judicial foreclosure matters. However, the running of the statute of limitations may not be the only situation in which a homeowner may walk away with a house and no mortgage payment. The following will explore what happens when a homeowner mounts a successful defense in a judicial foreclosure.

When Banks Do Not Meet Their Burden

Like any type of judicial action, there are several methods of defense for a homeowner defendant facing a foreclosure action. For example, a defendant may challenge that any of the following basic requirements for a foreclosure are met:

• The homeowner signed the mortgage and the note
• The lender owns the mortgage and note
• The homeowner owes on the mortgage and has defaulted on the debt
• The lender properly accelerated the debt

While the above requirements seem relatively straightforward, you would be surprised how many lenders cannot provide these simple pieces of evidence to mount a foreclosure. For a variety of reasons, lenders and mortgage servicers make errors and omissions in the documentation of mortgage loans and cannot provide even the most basic proof of mortgage or note ownership. Many homeowners defend against foreclosure actions based on inadequate proof of ownership or documentation to support a prima facie foreclosure claim, and the courts may dismiss the foreclosure cases as a result.

Res Judicata and How Courts Avoid Giving Away “Free Homes”

The legal concept of res judicata dictates that once a matter is resolved by the court and is not subject to appeal, the losing party is precluded from bringing a claim for reconsideration in either the same or a different court. Res judicata generally applies once a matter is dismissed by the court “with prejudice.” A court will often dismiss a matter with prejudice in the following situations:

• The party had a full and fair opportunity to support their claim and failed to do so.
• The court wants to impose sanction on a party for failure to prosecute, failure to meet deadlines, or other deficiencies in their legal procedure.
• One could assume that if a mortgage company filed a foreclosure and could not meet the prima facie case by proving ownership of the mortgage or note, the court would be inclined to dismiss the case with prejudice in favor of the defendant because of a failure to support a claim, as a sanction, or both.

However, courts overseeing foreclosures have proved wary of doing so, as this would result from the seemingly unjust result of a free home for the defendant. Therefore, many courts simply dismiss such cases without prejudice, which allows the mortgage company to refile a foreclosure action in the future and drag out the process even more for the homeowner.

Should Res Judicata Apply in Favor of Homeowners?

The position that homeowners who fail to pay their mortgages do not deserve a free and clear home is a justifiable one. This is especially true for mortgage holders who make every payment on time for 30 years or more and may even set a poor example for future homeowners. From this point of view, it can be understood that courts are circumspect when faced with awarding homeowners who have defaulted their homes.
On the other hand, homeowners are often seen as the “little guys” in comparison to giant mortgage companies that can harass and abuse mortgage borrowers. In addition, because an outright win against these corporations is relatively rare in foreclosures, many people celebrate a successful foreclosure defense as a victory for all homeowners who may have been taken advantage of before and during the housing and foreclosure crisis. This camp generally believes that an award of a free house is deserved and that the mortgage company is only responsible for its own losses.
The true answer may be more practical than each of the above rather instinctual positions. Some arguments in support of res judicata in foreclosure cases include:

• The threat of res judicata and a free pass on the mortgage can give homeowners additional leverage when attempting to negotiate a loan modification or alternative loss-mitigation solution.
• It may combat the theory of many mortgage lenders that a foreclosure always takes fewer resources than a loan modification.
• It can encourage banks to wait to file a foreclosure action until they have all necessary paperwork ready and to keep necessary records regarding mortgage loans.

All of the above can give banks the incentive to help with a more efficient judicial foreclosure process, which thereby can reduce the overall time frame of a foreclosure case and even the backlog on New York courts as well as other judicial foreclosure states.

Consult with an Experienced Long Island Foreclosure Defense Attorney Today

While most defendants do not approach a foreclosure case with the intention of obtaining a free home, there are many ways a skilled New York foreclosure defense attorney can help you try to remain in your home and find an alternative to foreclosure. We will also ensure that the mortgage company is held fully accountable for any errors on its part that may have affected your case or omissions that do not satisfy the legal requirements of a foreclosure action.
At the Law Office of Ronald D. Weiss, PC, we have represented the rights of many homeowners throughout New York and know how to best apply laws set out by statute and court decisions to benefit you in your foreclosure case. If your home is in jeopardy, call us today at 631-271-3737 to discuss how we can help.
¹https://www.nycourts.gov/courthelp/GoingToCourt/SOLchart.shtml
²https://www.nytimes.com/2015/03/30/business/foreclosure-to-home-free-as-5-year-clock-expires.html
³Washington v. Specialized Loan Servicing, LLC (In re Washington), 2014 Bankr. LEXIS 4649 (Nov. 5, 2014).
⁴http://www.courts.state.ny.us/Reporter/3dseries/2005/2005_08266.htm
⁵https://www.law.cornell.edu/rules/frcp/rule_41
⁶Restatement (Second) of Judgments ch. 1, at 6 (Am. Law. Inst. 1982)
⁷Washington v. Specialized Loan Servicing, LLC (In re Washington), No. 14-14573-TBA, 2014 WL 5714586
⁸ Bank of Am., N.A. v. Greenleaf, No. BRIDC-RE-11-109 (Me. Super. Ct. 2014).
⁹Homeward Residential, Inc. v. Gregor, No. RE11108, 2014 WL 7802864, at *3 (Me. Super. Ct. Aug. 15, 2014)
¹⁰http://www.yalelawjournal.org/comment/in-defense-of-free-houses
¹¹http://dlj.law.duke.edu/article/the-paper-chase-securitization-foreclosure-and-the-uncertainty-of-mortgage-title/
¹²http://www.ushakrisna.com/jfe110801.pdf
¹³Victoria V. Corder, Homeowners and Bondholders as Unlikely Allies: Allocating the Costs of Securitization in Foreclosure, 30 No. 5 Banking & Fin. Services Pol’y Rep. 19, 24 (2011)
¹⁴http://www.yalelawjournal.org/comment/in-defense-of-free-houses