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American Bar Association - Defending Liberty, Pursuing Justice

winter 2009

Vol. 15, No. 1

Consumer Fraud



Foreclosure Negotiation and Defense

Clients threatened with foreclosure may arrive in the attorney’s office due to a variety of circumstances. Whether the core issue is an interest rate reset, loss of job, medical catastrophe, or marital dissolution, the clients’ circumstances will usually worsen if they lose their shelter due to foreclosure. The effective advocate has many tools that can keep the home from being taken.

The attorney must first determine how far along the foreclosure has progressed. Although it’s best to be retained before formal foreclosure proceedings have begun, clients often don’t get to us that quickly. Even though completed sales can be set aside when a lack of due process is shown, an early foreclosure defense can keep the foreclosure from even beginning.

Twenty-six states and the District of Columbia allow mortgagees to conduct a “non-judicial” foreclosure sale without filing suit against the mortgagor. The remaining 24 states require a court action, usually with formal service of process. Even in jurisdictions that allow nonjudicial foreclosure, minimum notice to the mortgagor is required.

If no foreclosure has been started, the advocate can help the client seek forbearance, loan modification, or other “loss mitigation” measures, so called because working with the borrower can avoid the larger loss that the mortgagee will incur upon foreclosure. In late 2008 many large mortgage banks and servicers announced expanded programs to attempt to help borrowers work out mortgage defaults. A notice of representation, power of attorney, or similar document will be required before the servicer can discuss the account of a represented consumer with the advocate, while the borrower’s current financial statement will be needed before any workout is offered. These forms are often available at the servicer’s Web site. Getting and submitting the attorney authorization and financial statement in advance will save valuable time.

Many loan servicers continue with preforeclosure and foreclosure processes even as they discuss loss mitigation measures with the borrowers. It is essential to monitor public records as appropriate and to respond immediately to demand letters, foreclosure complaints, notices of sale, and other documents received by the borrower while workout negotiations are underway. Forebearance agreements are often conditioned on payments by the borrower to cure the default, set by the servicer to be due with a few days notice. The client who is having mortgage payments returned by the servicer or who is otherwise not making payments will have much more flexibility in a workout if unmade payments are escrowed during negotiations.

Defenses and Counterclaims

The loan closing file and other documents reflecting the servicing of the loan may reflect defenses and counterclaims and should be obtained from the client at the outset. Additional information may be obtained from the mortgage servicer by means of a “qualified written request” under the Real Estate and Settlement Procedures Act. Absence or inaccuracy of the required “truth in lending” disclosures is one closing error that may give the client rescission rights. It is also essential to read the mortgage and check the public records—an improper property description, unrecorded mortgage, or mortgage lacking signatures of all property owners can evoke borrower defenses or counterclaims.

Dishonesty or fraud at closing may give rise to borrower defenses. However, the advocate should be wary of bona fide purchaser claims, parole evidence doctrines, and other mortgagee defenses to borrower claims of impropriety at loan origination. Other borrower defenses may stem from the terms of the contracts themselves, such as the lack of required notices that are conditions precedent to default and acceleration. Servicer errors in accounting are not uncommon—the loan history ledger should be reviewed for unapplied payments and wrongfully assessed fees and charges.

In judicial foreclosure jurisdictions most borrower defenses can be raised as affirmative defenses and counterclaims. Local discovery procedures may be faster and more efficient than the use of qualified written requests to obtain loan history and other documents from the mortgagee or servicer. Judicial foreclosures are also subject to justiciability and standing defenses. Courts in several states have held that a mortgagee must demonstrate through a proper assignment chain that it has standing to bring a foreclosure proceeding.

Borrower defenses in jurisdictions that allow nonjudicial foreclosures must be asserted in independent lawsuits, often seeking an injunction. Filing for injunctive relief before a foreclosure sale has been held, with the recordation of a lis pendens if appropriate, is the best way to avoid a bona fide purchaser at sale asserting intervening rights. However, improprieties in the foreclosure process may permit setting aside even a completed sale.

Restructuring Debt

The client who is unable to negotiate a useful loan modification with the loan servicer or to obtain a judicial rescission or modification may benefit from a restructuring of the debt in bankruptcy court. The most common vehicle for bankruptcy restructuring of a mortgage is a Chapter 13 proceeding in which the debtor pays a portion of the arrearage each month over a period of three to five years, as part of a monthly payment to the bankruptcy trustee, which will also include the ongoing mortgage payment, trustee commissions, and payments to other creditors. Chapter 13 is subject to limitations on total debt, but a debtor who exceeds those caps may be able to catch up the mortgage arrearage in a Chapter 11 reorganization. Current bankruptcy law only permits the cure of a homeowner’s delinquent payments—the principal balance, loan term, or interest rate of an obligation secured by the debtor’s primary residence may not be modified. This limitation may be lifted in the next congressional session. Consumer advocates should monitor legislative developments carefully in 2009 as there may be good news for financially stressed clients.

Most Common Form of Foreclosure

States requiring court foreclosure actionStates allowing sale without court case
Connecticut, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, South Dakota, Vermont, Virgin Islands, WisconsinAlabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Georgia, Guam, Hawaii, Idaho, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wyoming

Wendell Finner is the principal of Wendell Finner, P.A. in Jacksonville Beach, Florida, where he is an advocate for consumers who owe money. Contact him at wendell@beacheslaw.com.

© Copyright 2009, American Bar Association.