The federal moratorium on foreclosure of federally financed loans ended July 31, 2021. And with uncertainty pervading about the coronavirus and its variants, homeowners may face challenging circumstances if they fall behind on home loan payments.
Historically, the legal process of foreclosure — one that requires a homeowner to return his or her house to a lender after defaulting on a mortgage — has tilted in favor of the banks and lenders.
More than 214,000 foreclosure cases were filed in the United States in 2020 — even with the federal government taking action to keep people in their homes during the COVID-19 pandemic.
Homeowners have been fighting back by stalling foreclosure proceedings or stopping them altogether. The legal strategy employed by these homeowners is known as foreclosure defense.
The goal of the foreclosure defense strategy is to prove that the bank does not have a right to foreclose. The chances of success often rests on an attorney’s ability to challenge how the mortgage industry operates. The strategy aims to take advantage of flaws in the system, and presumes illegal or unethical behavior on the part of lenders.
Attorney Ben Hillard of The Castle Group in Largo, Florida, has worked both sides of the foreclosure issue. He spent time in banking studying and approving loans (or not) before becoming an attorney and expert witness on the homeowner’s side.
“Back in 2007 to 2013, most of my effort for my clients was directed toward getting them off the hook for the upside-down loan,” he said, which means the value of the home is less than what is owed on it. “Lenders were lending into a bubble. As a bank analyst I can say that we knew it was coming, so I have to figure the banks had to know.
“Some people just simply defaulted and didn’t have a good reason other than they were upside down or between jobs. Their collateral would be the property. But in lending, the lenders are supposed to have equity in their position. They have experts and risk management people that should say there is enough cushion to make loan in order to make it work.
“The defense is to have the lender bear some responsibility.”
Victories by homeowners in state and federal courts have altered the foreclosure landscape, giving optimism to other homeowners. Because many of America’s large banks have acknowledged unorthodox, unaccepted or even illegal practices in mortgages, loan modifications and foreclosures, they inadvertently have given homeowners additional grounds to challenge a filing.
Mortgage Loan Modifications
There is one simple and best way to avoid foreclosure: modify the mortgage. This process is known as loan modification, and it’s as appealing as it sounds. This important and relatively uncomplicated approach, can solve a tough issue.
In loan modification, the homeowner convinces the lender to renegotiate the terms of the mortgage in order to make the payments more affordable.
A mortgage modification can include:
- A reduction or change in the interest rate.
- A reduction in the principal.
- A reduction or elimination of late fees and penalties for non-payment.
- A reduction in monthly payment.
- Forbearance, to temporarily stop making payments, or extend the time for making payments.
Loan modification is far and away the preferred method for both lender and borrower to deal with foreclosure.
“If you’re upside down, you should definitely apply for a loan modification,” Hillard said. “There may even be government money floating around that can help.”
A homeowner has a better chance of modification if they are upside down on the loan.
“If a person has tons of equity, the lender might not care as much,” Hillard said. “They figure they’re going to get every penny they’re owed through a sale once they take the property back.”
In real terms, imagine a home that was purchased for $150,000 and has increased in value (as many homes have) to $200,000. The homeowner put down a 10% down payment of $15,000, then signed for a $135,000 mortgage. Said homeowner stopped making payments with $130,000 left on the mortgage. The bank can file, take possession of the house and sell for $200,000, which pays off the loan. plus a profit.
Whereas if the home has decreased in value to $100,000 and the mortgage remaining is $130,000 (i.e. upside down) the bank would lose money by selling. Thus there is incentive for the bank to work out a loan modification.
Modification helps the homeowner make payments, and helps the bank regain at least some of the loan. The bank prefers the loan be kept active to ensure it receives continued payments, and the homeowner gets some relief from a debt that has become too much. This is the smartest and best avenue to pursue, but be sure that when a modification is agreed to, all payments are made in full and on a timely manner.
Foreclosure Defense Varies by State
Determining the best approach for foreclosure defense means understanding your state’s regulations and laws about foreclosure. Laws can vary by state.
Alaska and Kansas give homeowners the right to apply for loss mitigation, to pay off the loan to prevent a sale, and to excess money after a sale. Florida gives the right to get current on the loan and stop a foreclosure sale. Many states have the same or similar protections for the homeowner. It’s important to know homeowner rights in your state.
If the bank or lender does not follow state laws and procedures when bringing an action, that may be grounds to challenge the foreclosure. An attorney or credit counselor could help ensure all are acting properly.
Hillard said things also get risky when the loan is sold to a third-party that services the loan.
“Some lenders refused payments in order to shove people into foreclosure,” he said. “Sometimes the judiciary lets them get away with it. It depends on the state and the judge. Many loans are serviced by third parties, and they don’t give a crap. They’re getting paid regardless; they have no skin in the game. They don’t care if there’s equity or people are upside down. They just want to file.”
The major difference in state requirements depends on if your states use mortgages or deeds of trust when you purchase the home. Those are legal documents that merely transfer the property to the owner.
If you signed a mortgage, it generally means you live in a state that conducts judicial foreclosures, meaning that a lender has to sue in court in order to get a judgment to foreclose. If you signed a deed of trust, you live in a state that conducts non-judicial foreclosures, which means that a lender does not have to go to court to initiate a foreclosure action.
In a judicial state, homeowners have the advantage because they can require that the lender produce proof and perfection of claim (a legal term meaning all the information required), at the initial court hearing. In a non-judicial state, the lender does not have to prove anything because the state’s civil code gives it the right to foreclose after a notice of default has been sent. So in non-judicial states, a homeowner must file a civil action against the lender to compel it to provide proof of claim.
Regardless of whether you signed a mortgage or a deed of trust, you also signed a promissory note — a promise to pay back a specified loan over a set period of time.
The note goes directly to the lender and is held on its books as an asset for the amount of the promised repayment. The mortgage or deed of trust is a public record and, by law, must be recorded in a county or town office. Each time a promissory note is assigned, i.e. sold to another party, the note itself must be endorsed with the name of the note’s new owner. Each time a deed of trust or mortgage is assigned to another entity, that transaction must be recorded in the town or county records office.
A major strategy of foreclosure defense is to make a bank substantiate clear chains of title for a mortgage and a promissory note. If any link in either chain is questionable, it can nullify a lender’s ability to make a valid claim on a property.
Foreclosure Defense and Chain of Title
Here is where foreclosure defense can begin to chip away at a bank’s claim on your property. In order for a mortgage, deed of trust or promissory note to be valid, it must have what is known as “perfection” of the chain of title. In other words, there must be a clear, unambiguous record of ownership from the time you signed your papers at closing to the present moment. Any lapse in the chain of title causes a “defect” in the instrument, making it invalid.
In reality, lapses occur frequently. As mortgages and deeds began to routinely be bought and sold, the sheer magnitude of those transfers made it difficult, costly and time-consuming for institutions to record every transaction in a county records office. But in order to have some method of record-keeping, the banks created the Mortgage Electronic Registration System (MERS), a privately held company that tracks the servicing rights and ownership of the nation’s mortgages. The MERS holds more than 66 million American mortgages in its database.
When a foreclosure is imminent, MERS appoints a party to foreclose, based on its records of who owns the mortgage or deed of trust. Some courts have rejected the notion that MERS has the legal authority to assign title to a particular party in the first place. A court can decide MERS has no “standing,” meaning that the court does not recognize its right to initiate foreclosure since MERS does not have any financial interest in either the property or the promissory note.
And since MERS has essentially bypassed the county record-keeping system, the perfection of chain of title cannot be independently verified. This is where a foreclosure defense can gain traction, by questioning the perfection of the chain of title and challenging MERS’ legal authority to assign title.
Promissory Notes are Key to Foreclosure Defense
Some courts may also challenge MERS’ ability to transfer the promissory note, since it likely has been sold to a different entity, or in most cases, securitized (pooled with other loans) and sold to an unknown number of entities. In the U.S. Supreme Court case Carpenter v. Longan, it was ruled that where a promissory note goes, a deed of trust must follow. In other words, the deed and the note cannot be separated.
If your note has been securitized, it now belongs to someone other than the holder of your mortgage. This is known as bifurcation — the deed of trust points to one party, while the promissory note points to another. Thus, a foreclosure defense claims that since the relationship between the deed and the note has become defective, it renders the deed of trust unenforceable.
Your promissory note must also have a clear chain of title, according to the nation’s Uniform Commercial Code (UCC), the body of regulations that governs these types of financial instruments. But over and over again, borrowers have been able to demonstrate that subsequent assignments of promissory notes have gone unendorsed.
In fact, it has been standard practice for banks to leave the assignment blank when loans are sold and/or securitized and, customarily, the courts have allowed blank assignment to be an acceptable form of proof of ownership. However, when the Massachusetts Supreme Court in U.S. Bank v. Ibenez ruled that blank assignment is not sufficient to claim perfection, it provided another way in which a foreclosure can be challenged.
In their most egregious attempts to remedy these glaring omissions, some banks have actually tried to reverse-engineer chains of title, using fraudulent means such as:
- Robo-signing of documents.
- False notary signatures.
- Submission of questionable, inaccurate or patently counterfeit affidavits.
Exposure of these dishonest methods halted many foreclosures in their tracks and helped increase governmental scrutiny of banks’ foreclosure procedures.
The Mortgage Lender Made a Big Mistake
Everyone makes mistakes. So a lender could have made a mistake on your loan or documents. In fact, one of the main reasons more people are more successful challenging foreclosure is that lenders did make errors.
The Castle Group, where Hillard works, points out in frequently asked questions on its web site that a motion to dismiss can be filed if “the lender has not met the legal standards for a properly-drawn complaint.”
What can a homeowner and/or attorney look for to challenge in the process? If the lender …
- Did not follow state procedures (discussed above) on significant issues. A successful challenge on these grounds would force the bank to start over, which could provide valuable time to find a solution.
- The foreclosing entity cannot prove standing, i.e. that it owns the loan. The bank or lender has to produce the promissory note, and if the loan has been sold two or three times, that may not be easy.
- There was a significant mistake made in the servicing of the loan. A mistake on the amount you must pay to reinstate your mortgage is significant.
- The statute of limitations has passed. If the lender did not act within the proper timeframe between the point you stopped making payments and the action, the defense is strong.
- The lender used an improper affidavit or declaration.
You are on Active Duty Protected by the Servicemembers Civil Relief Act
Many states provide protection to active duty service members, as does the Servicemembers Civil Relief Act (see below). If service members who took out a mortgage before going on active duty, foreclosure actions must take place in court – unless the service member provides the lender a waiver.
The law means that a sale requires a court order before it can be sold. If the lender forecloses without a court order, the sale is invalid if done during the service time and up to one year after.
The protection comes because judicial processes are more expensive to lenders and take longer. That gives the military member time to sort through the process and find a solution.
Under the SCRA, nonjudicial foreclosures are simply not permitted. In addition to the federal law, most states provide additional protection for service members. There also are programs that provide financial assistance for active duty military and veterans.
Other Foreclosure Defense Strategies
Here are three other strategies designed to help homeowners fight foreclosure:
- Answer or affirmative defense. The Castle Group says an answer means the homeowner admits, denies or does not have knowledge of the allegations in the foreclosure defense. An affirmative defense admits the cause of the failing, but avoids all or some of the liability due to legitimate matters. Affirmative defense is a way of fighting and making the lender prove certain factors at trial.
- File for bankruptcy. In a Chapter 7 filing, you can declare your home an “unsecured asset” and wait for the lender to object. This puts the burden of proof on the lender to show a valid chain of assignment. In a Chapter 13 bankruptcy, you can file an Adversary Proceeding. This means you sue your lender to compel it to produce valid proof of claim. The Bankruptcy Code requires that your lender provide evidence of “perfected title.”
- Ensure the bank is a real party of interest. If it’s not, it doesn’t have the right to foreclose. For example, if your loan has been securitized, your original lender has already been paid. At that point, the debt should be considered settled. In order to prove that your original lender has profited from the securitization of your mortgage, it is advised that you obtain a securitization audit. The audit is completed by a third-party researcher who tracks down your loan, and then provides you with a court-admissible document showing that your loan has been securitized.
- Prove the promissory note no longer exists. A foreclosure defense can argue that once a loan has been securitized, or converted to stock, it is no longer a loan and cannot be converted back into a loan. That means that your promissory note no longer exists, as such. If true, then your mortgage or deed of trust is no longer securing anything. Instead of the bank insisting that you have breached the contract specified in the promissory note, foreclosure defense argues that the bank has actually destroyed that agreement itself. And if the agreement doesn’t exist, how can it be enforced?
- Show that the lender breached first, according to The Castle Group. This basically involves cases where a lender or third party does not accept payments.
While the foreclosure defense strategy is legal in nature, and can be handled differently by different courts, it should not be ignored when preparing a case.
The tactic of attacking a lender’s shoddy or illegal practices has proven to be the most successful foreclosure defense. Courts will not accept unlawful or unethical behavior, even from banks. If a homeowner can present clear instances of lost or missed paperwork, show that notes were misplaced or improperly endorsed, or prove that documents were forged, robo-signed, or reversed-engineered, the more likely a court will rule in his or her favor.
Hire a Reputable Bankruptcy
If you are considering a foreclosure defense, it is vital to consider hiring a competent and qualified lawyer. Any legal process is complex, and there are few concerns more important to your personal and mental well-being than keeping you and your family in your home. If you need a bankruptcy attorney to handle the case and speak for you, it may well be money well spent.
Hiring a lawyer may even produce benefits prior to going to court. A successful defense may delay the process, or even induce a lender to negotiate a loan modification that allows you to stay in your home. The lender would avoid legal fees, and you would reach the desired result of a loan modification.
Enroll in a Foreclosure Prevention
It’s tough to minimize how difficult foreclosure can be to an individual and/or a family. Thankfully, there are ways to address the issue before it reaches that point – and they involve being educated and informed about how to handle your mortgage and finances.
Financial organizations approved by the Department of Housing and Urban Development (HUD) offer programs and counseling services designed to help you through financial struggles: Among them are mortgage counseling services.
A foreclosure prevention program helps those who are at risk of losing their homes to foreclosure. HUD-approved counseling agencies can provide guidance and help in seeking loan modification, refinance, or even forbearance. Counseling also can help identify predatory lenders or other inappropriate behavior by lenders.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
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- Petrov, C. (2021, March 22). 15+ Foreclosure Statistics to Give You Hope in 2021. Retrieved from https://spendmenot.com/blog/foreclosure-statistics/
- Elias, D. (ND) Defenses to Foreclosure. Retrieved from https://www.nolo.com/legal-encyclopedia/defenses-foreclosure-29937.html
- Loftsgordon, A. (ND) Foreclosure Protections &the Military: When a Servicemember Gets a Mortgage Before Active Duty. Retrieved from https://www.nolo.com/legal-encyclopedia/foreclosure-protection-servicemembers-civil-relief-act.html
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