Jane (not her real name) purchased a nonperforming loan where the borrower had not paid in years. She purchased it for a huge discount from the collateral value and immediately had her servicer try to work through the collection waterfall (see our previous article). When they got to the point of foreclosing, however, they learned that it was too late to foreclose on the property. How could this be?
Like most legal actions, there is a “Statute of Limitations” on how long you have to initiate foreclosure proceedings. For instance, in the State of Florida, you have only five years from the date of default to initiate the foreclosure proceeding. If you don’t, you will likely lose the ability to foreclose on that property. Each state has different rules regarding the statute of limitations on foreclosures. Buying a note without understanding the collection history of the note could lead to a tremendous loss.
Servicers are supposed to monitor these time lines for you, but you can not leave it to them. You have to look into the collection and payment histories very carefully when you are performing your due diligence on the loan. Understand what rules apply to the state where the property is located in. Ensure that you have a complete record of collection efforts from all previous servicers and owners to make sure that you are still in compliance. When you purchase a note, you assume responsibility for what past owners and servicers have or haven’t done with respect to the loan.
The time to ensure that you aren’t buying an uncollectable loan is when you are doing your due diligence. Many times, when you buy the loan, that’s it! You’re stuck with it for better or for worse.