I would strongly suggest that you consult with a real estate attorney who is experienced in mortgage modifications and mortgage foreclosure. If your lender/servicer is one of the big ones - Bank of America, Wells Fargo, Citibank just to name a few - they are currently working under a settlement agreement with the Florida Attorney General. It sounds like the conduct you are describing is a direct violation of that agreement.
Have you found a buyer for your property yet? If so, when does your transaction close? If your short sale does not close within 20 days, I would highly recommend that you hire an attorney to enter an appearance and defend the foreclosure on your behalf to allow your short sale to be completed.
From your question, it seems that your foreclosure action is still pending. As such, even though it has been more than 5 years since you last made a payment, the lender's action is still viable. If the current foreclosure action is eventually dismissed, if the lender re-files the action, you can defend the new foreclosure based upon the fact that the action was filed beyond the 5 year statute of limitations for actions on a contract, which includes actions to collect on a promissory note....
I would certainly like to see better language in your short sale approval letter like " Bank agrees to accept no less than $5,000 as a settlement in full satisfaction of the debt and agrees to waive the right to pursue any deficiency balance". You should ask them to include similar language to "waive the right to pursue any deficiency balance."
I agree with Ms. Golant - the determination of whether a statute of limitations has run on the enforcement of a promissory note and mortgage is very fact specific. While the statute of limitations period is 5 years, the trick is determining on what date that 5 year period starts to run.
Attorney Golant is correct - you have described a blank endorsement. Many, if not most promissory notes are transferred by blank endorsement. The biggest issue with blank endorsements is the lack of a date to show the date it was affixed to the note which is a very important issue that Plaintiffs have trouble in proving.
When a third party purchases a property at the foreclosure sale for more than the amount of the first mortgagee's final judgment, all other interested parties must file an application for the surplus within 60 days. A evidentiary hearing is held and, if there is more than one applicant, the court determines who receives the funds. See Section 45.032, Florida Statutes.