There is hope if you fall behind. While Chapter 13 can be a great tool to stop foreclosure, consolidate debt and help you get back on track. There are a few tips to attack the foreclosure.
Recently, I read an article on the American Bar Association website, called Homing in on Foreclosure. Here are some techniques as set out by the author, Steven Seidenberg.
"GETTING BACK ON DEFENSE
Some practitioners say that for many homeowners, foreclosure is a form of surrender.
“Few people contest foreclosure,” says Robert C. Hill Jr., a sole practitioner in Fort Myers, Fla., who often represents mortgage lenders. “Only about 5 to 10 percent of borrowers show up, and they just tell the judge their tales of woe,” says Hill. “Some of those tales are very sad, but there’s nothing the judge can do.”
Yet the legal tide that has long favored lenders in foreclosure actions may be turning.
First and foremost, homeowners facing foreclosure actions should seek legal help, says Alan M. White, a professor at Valparaiso University School of Law in Indiana. “It is a shame to see people just walking away from their homes when there is a reasonable solution,” says White, who teaches consumer law. “There are still a lot of preventable foreclosures going on, and they would be stopped if more people sought legal counsel.”
Representing a homeowner who has defaulted on a mortgage is no easy task. The lawyer often must wade through a morass of loan documents, real estate pooling agreements, securitization documents, loan servicing agreements and other papers in order to determine who owes what to whom—and what each party’s legal obligations are. The lawyer must be familiar with mortgage foreclosure law, debt collection law, bankruptcy law and consumer protection law.
“It is a complicated practice,” says Charney.
Nevertheless, courts dealing with growing foreclosure caseloads have become more receptive to challenges to foreclosure actions. Timeworn defenses have gained new teeth while new tactics for resisting foreclosures are winning acceptance from courts. (In jurisdictions that permit nonjudicial foreclosures, homeowners must seek court orders enjoining them.)
Illustration by Stuart Bradford
“Increasingly, financial institutions are concerned that what used to be a traditional cookie-cutter foreclosure isn’t anymore,” says Traci H. Rollins, a partner in the West Palm Beach, Fla., office of Squire, Sanders & Dempsey who represents lenders. “Sometimes borrowers’ attorneys are raising new defenses. Sometimes they are raising the same defenses as before, but the courts are treating them differently.”
Rollins also sees judges having a more skeptical attitude toward lenders, which she attributes at least partly to widespread allegations of fraud in the financial industry. According to news reports, the FBI and the Internal Revenue Service formed a task force in January to investigate how subprime loans were handled by the mortgage industry and how those loans were bundled into securities.
“Courts are coming into cases with the expectation that perhaps the bank has done something wrong,” Rollins says. “If the borrower alleges predatory lending, the courts look at the case even more closely. And if the bank is labeled as a subprime lender, that’s like wearing a scarlet letter. It is presumed the bank has done something wrong.”
The result is that courts often will stop a foreclosure for even a tiny error in granting, servicing or foreclosing on the loan, Rollins says. “Alleged hyper-technical violations that courts wouldn’t countenance [a few years ago] are now being looked at more seriously because of the environment where it is believed that a lot of banks have done a lot of wrong things,” she says.
So now, a minor violation of the federal Truth in Lending Act—say, listing on the wrong line the fee for delivering closing documents by Express Mail—may have dire consequences for a foreclosure petition because courts are showing more willingness to use that kind of technical violation as grounds for dismissal.
“If the borrower received one copy of the disclosure statement instead of two copies, that would not have been taken seriously by the courts in the past,” says Rollins. “Now it is.”
If the court finds that the statute was violated, the borrower may rescind the loan, which would defeat the lender’s attempt to foreclose. All the borrower’s loan payments must be credited back to principal, and the borrower can then seek refinancing for the remaining principal. In addition, the borrower may obtain attorney fees and either actual damages or statutory damages of $2,000.
The courts also are taking a tougher stand on violations of the Fair Debt Collection Practices Act and the Real Estate Settlement Procedures Act, which mandates that borrowers must receive detailed information about the costs of obtaining a mortgage loan and closing on the purchase of a house.
In addition, 36 states—including California, Florida, Illinois, Michigan, Nevada and New York—have enacted statutes targeting subprime and predatory lending.
“They kick in if interest rates and/or points and fees exceed a certain level,” says White. “They regulate certain loan agreement provisions. Some require additional disclosures [to borrowers]. Some require borrowers to receive credit counseling prior to any foreclosure action. Typical remedies include damages or rescission.”
Then there are equitable defenses.
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“These are nontraditional, make-it-up-as-you-go equitable causes of action,” Rollins says. They make the argument that, since foreclosure is an equitable remedy, it should be denied to a plaintiff who has not pursued the claim in the spirit of fairness and right-dealing that is integral to equity principles.
“You are seeing more and more allegations that a bank targeted a group of people who had lower incomes and didn’t have a lot of education, or targeted immigrants who were less sophisticated about lending, and gave loans the bank knew weren’t suitable for them,” says Rollins.
Lawyers who represent borrowers say courts are becoming more receptive to equitable defenses. Rollins cites a case in which she is representing the plaintiff in a foreclosure. The borrower, says Rollins, “was recently able to survive dismissal of her claim for ‘wrongful failure to verify employment.’ She claimed that the lender, had it conducted due diligence, would have learned that she was not employed at the income level she indicated. The court was unaffected by the fact that she swore to her employment status under oath. Instead, the court held that this may be a viable defense to enforcement/foreclosure of her mortgage loan.”
Counsel for borrowers also have asserted, as an equitable defense, that plaintiffs failed to notify delinquent borrowers of their right to loan counseling under the National Housing Act.
TURNING THE TABLES
A recent court ruling has opened the way for attorneys to use one of the key mechanisms that created the mortgage lending mess as a weapon to help borrowers fight back against foreclosure actions.
On Oct. 31, 2007, Judge Christopher A. Boyko of the U.S. District Court for the Northern District of Ohio dismissed 14 separate foreclosure complaints because the plaintiffs failed to produce documentation confirming that they were the holders and owners of the mortgages on which they were seeking to foreclose.
In each case, Boyko noted, documents identified the original lending institutions, not the entities that later acquired the loans and were now seeking to foreclose, as the mortgagees. Moreover, the plaintiffs failed to produce documents showing that the loans were assigned to them.
Holding that the plaintiffs failed to establish federal court jurisdiction under Article III of the Constitution, Boyko dismissed their petitions. “This court acknowledges the right of banks, holding valid mortgages, to receive timely payments,” wrote Boyko in his order in In re Foreclosure Cases. “And, if they do not receive timely payments, banks have the right to properly file actions on the defaulted notes—seeking foreclosure on the property securing the notes. Yet, this court possesses the independent obligations to preserve the judicial integrity of the federal court and to jealously guard federal jurisdiction. Neither the fluidity of the secondary market, nor monetary or economic considerations of the parties, nor the convenience of the litigants supersede those obligations.”
Since Boyko’s ruling, more than 100 foreclosure actions have been dismissed in federal courts and some state courts because plaintiffs couldn’t prove they owned the mortgages on which they were seeking to foreclose. Lawyers say the ruling also has spawned some borrower class-action suits.
In the old days, when a mortgage created a long-term relationship between borrower and lender, it was easy for the lender to prove its interest in the loan. The bank that issued the loan would just produce the note, which it still held.
Securitization, however, changed all that.
In the late 1980s, banks started selling their home loans to other financial entities, which “pooled” large numbers of loans, put them into trusts and sold securities based on them. Purchasers of these collateralized debt obligations received regular payments on their investments as borrowers repaid their loans.
That meant loan originators no longer needed to wait years to get returns from their mortgages. Instead, they could sell the loans and make a quick profit. But loan originators also lost their incentive to ensure that borrowers could repay the loans. A default would be someone else’s concern.
Another consequence of securitization is that, because loan originators seldom hold mortgages anymore, a borrower who runs into trouble with mortgage payments is going to find it hard to identify someone in the chain of financial institutions who might be willing to help resolve the problem.
The originating lender has probably sold the loan, so it’s out of the picture. And it is extremely difficult to identify the new holder of the mortgage. That leaves the loan servicer, the company to which the borrower sends monthly mortgage payments.
But loan servicers haven’t seemed particularly interested in helping struggling borrowers—perhaps because they have a strong financial incentive to push loans into default.
Servicers typically are paid 25 basis points for servicing performing loans, but double that for servicing loans in default. The fee for servicing a loan with a $100,000 balance, for instance, is $250, but if the loan goes into default that fee would go up to $500. Moreover, once a loan goes into default, servicers can charge late fees, inspection fees and a variety of other fees.
“A $50 charge here, an $80 charge there may not seem like much individually, but it is a lot more than the servicer would get per month from a performing loan,” says O. Max Gardner III, a sole practitioner in Shelby, N.C., who concentrates in consumer bankruptcy law.
The consequence of this system is that entities involved in originating and securitizing loans frequently did not comply with the formalities of assigning the notes and physically transferring them. And now, trying to create a paper trail involves significant time and expense—if it’s possible at all. Judge Boyko’s ruling showed that such a dysfunctional system will likely come back to haunt the lending industry.
“You have to prove to the court that you have the original note and that you have lawfully obtained it via an unbroken chain of assignments,” Gardner says. “Those have turned out to be two very difficult obstacles for trustees to establish. Over 400 loan originators went out of business last year. I don’t see how you get an assignment from somebody that went out of business.” " View the entire article here.
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