FORECLOSURE PREVENTION & AVOIDANCE
We sincerely regret your present financial position, which may not have been your fault or under your control, however whatever the circumstances were, it may cause the loss of your home, property and investment. The most important factor you should keep in mind is the Mortgage Holders/Lender is in the money business, not the Real Estate Business. They do not want your home, they want your money. With over 1 million Bank owned properties in the U.S. and a potential 3-4 million in the next 2 years, the last thing a Mortgage Holder wants or needs is another home and a non-performing loan on their books.
With over 7 Trillion Dollars in depreciated equity nationwide, and the fact that the Mortgage Holders are now responsible for the real estate taxes and insurances on a yearly basis, they do not want your home.
There are numerous ways to avoid foreclosure:
LEGAL SELF-DEFENSE
As a Defendant, and probably a victim of a mortgage fraud, misrepresentations by greedy mortgage brokers and scams, you have the right and the obligation to question the validity and accuracy of your mortgage foreclosure. That is what this booklet is all about, defending yourself. However, most people lack the basic knowledge and information needed to do this. We are here to give you general information that the mortgage companies and attorneys don’t want you to know. Only you or your attorney can mount a defense in Court, we merely provide you the information to assist you or your attorney by providing generic discovery questions, responses, and forms to aid you in your defense. This is not intended to be a substitute for an attorney, merely an extra tool to lower your costs and protect your rights by questioning the mortgage company and their attorneys. The necessary forms and pleadings are available on the website—foreclosureself-defense.com. (copy & paste to your browser)
THE BEST DEFENSE IS A GOOD OFFENSE
The defenses listed below, and additionally defenses are all inclusive in the pleadings contained on the above website
Defenses to Foreclosure
Challenge a foreclosure by bringing a defense such as unconscionability or lender mistake.
Until recently, successful defenses against foreclosure were relatively rare. But that is changing rapidly – more homeowners are successfully challenging foreclosure actions.
This sea change is due, in large part, to the unearthing of more and more evidence that the real estate industry has been rife with fraudulent and predatory lending practices. Because of this evidence, courts that once rubber-stamped foreclosure actions are now beginning to shift their sympathies towards homeowners.
Homeowners are taking advantage of this change in judicial attitude, and challenging foreclosure actions in many different ways. Here’s a review of some of the most common defenses to foreclosure, and how to raise them in court.
How to Raise a Defense to Foreclosure
In order to raise a defense to the foreclosure action, you must bring the issue before a judge. This is automatic in about half the states, where foreclosures are typically accomplished through civil lawsuits and judicial foreclosure orders.
In the other states, foreclosures typically take place outside of court (these are called non-judicial foreclosures) and you have no automatic means to mount a legal challenge. To have your defenses ruled on by a judge in these states, you have to file a lawsuit alleging that the foreclosure is illegal for some reason and asking the court to put the foreclosure on hold — pending the court’s review of the case.
Common Foreclosure Defenses
As courts are increasingly sympathetic to challenges to foreclosure actions, homeowners across the country are raising many different types of defenses. Below is a description of the most common of these.
The Terms of the Mortgage Are Unconscionable
Over the years, attorneys have used a branch of law called “equity” to come up with a panoply of approaches to defending against foreclosure. The equity branch of law focuses on fairness in situations where a legal statute doesn’t provide adequate relief. It usually isn’t enough to simply claim that the foreclosure is unfair; rather, you have to come up with a specific justification for your position that has previously been recognized by the courts.
One such justification is a principle known as unconscionability — that is, the terms of your mortgage, or the circumstances surrounding it, are so unfair that they “shock the conscience of the judge.” In one case where this defense was successful the borrower spoke very little English, was pressured to agree to a loan that he obviously couldn’t repay, was not represented by an attorney, and was unaware of the harsh terms attached to the loan (such as an unaffordable balloon payment ).
You Are on Active Military Duty
If you’re on active military duty, the Service members Civil Relief Act (SCRA) provides you with special protections. Most importantly, if you took out your mortgage before you were on active duty, your foreclosure must take place in court even if foreclosures in your state customarily occur outside of court. If a foreclosure is initiated while you’re on active duty, you can automatically receive a nine-month postponement of the proceeding by requesting it from the court in writing.
The Foreclosing Party Didn’t Follow State Procedures
In some cases, the foreclosing party doesn’t follow state procedural requirements for bringing a foreclosure action (for example, it fails to properly serve on you a Notice of Default required by state law). If this happens, you may be able to challenge the foreclosure. If your challenge is successful, the court will issue an order requiring the foreclosing party to start over.
Virtually all judges will overlook errors that are inconsequential, such as the misspelling of a name. Similarly, if the foreclosing party’s error doesn’t actually cause you any harm, it may not be worth fighting over. More serious violations will get a more serious response from the court.
The Foreclosing Party Can’t Prove It Owns the Mortgage
In federal courts (where some large lenders prefer to bring their foreclosure actions), only the mortgage holder (the owner or someone acting on the owner’s behalf) may bring the action. If your mortgage, like many, has been sold and bought by many different banks, lenders, and investors, proving just who owns it can be difficult for the last holder in the chain.
Though state courts are usually looser than federal courts about who can bring a foreclosure action, appropriate documentation of who owns the mortgage must nevertheless be presented, and this is often difficult for the foreclosing party to do.
The Mortgage Servicer Made a Serious Mistake
Mortgage servicers (entities who contract with banks and other lenders to receive and disburse mortgage payments and enforce the terms of the mortgage) make mistakes all the time when they’re dealing with borrowers. A study by law professor Katherine M. Porter showed that in 1,700 Chapter 13 bankruptcy cases, a majority of the claims submitted by mortgage owners had errors. ( Misbehavior and Mistake in Bankruptcy Mortgage Claims, Texas Law Review 2008.)
You may be able to challenge the foreclosure based on mistakes such as:
- crediting your payments to the wrong party (so you weren’t, in fact, delinquent to the extent asserted by the foreclosing party)
- imposing excessive fees or fees not authorized by the lender or owner, or
- substantially overstating the amount you must pay to reinstate your mortgage.
Mistakes on the amount you must pay to reinstate your mortgage are especially serious. This is because an overstated amount may deprive you of the main remedy available to keep your home. For example, if the mortgage holder says you owe $4,500 to reinstate (perhaps because it imposes unreasonable costs and fees), when in fact you owe only $3,000, you may not have been able to take advantage of reinstatement (say you could have afforded $3,000, but not $4,500).
The Original Lender Engaged in Unfair Lending Practices
You may be able to fight your foreclosure by proving that your lender violated a federal or state law designed to protect borrowers from illegal lending practices. Two federal laws protect against unfair lending practices associated with residential mortgages and loans: the Truth in Lending Act (TILA) and an amendment to TILA commonly termed the Home Ownership and Equity Protection Act (HOEPA). TILA applies to all loans. HOEPA only applies to “high cost” loans – certain loans that have an unusually high interest rate or that come with unusually high up-front processing fees.
Lenders violate TILA when they don’t make certain disclosures in the mortgage documents, including the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and more.
In the case of loans covered by HOEPA, lenders must comply with various notice provisions and are prohibited from using certain mortgage terms, such as balloon payments in loans with terms of less than five years.
The right to rescind the loan. TILA and HOEPA provide a number of remedies for the borrower if these laws are violated. However, the key remedy in foreclosure actions is the borrower’s ability to retroactively cancel or rescind the loan. This is referred to as the right to an “extended rescission.” Unfortunately, the right to an extended rescission under these federal laws applies only if the loan is a second or third mortgage that you used for purposes other than buying or building your home (for instance you used it to pay off your unsecured credit card debt). Also, the violation must be considered “material” (that is, significant or substantial).
State-law remedies for “high-cost” loans. A few states have special protections for people facing foreclosure on “high-cost” mortgages. If your state is one of these, and the lender has violated any of its provisions, you might be able to raise that violation as a defense in your foreclosure case.
TALK TO YOUR MORTGAGE COMPANY- This is the most important thing to do first. DO NOT AVOID THEIR CALLS AND LETTERS. If you avoid them, that leaves them no alternative but to turn over your loan to their attorneys. Always remember, Mortgage companies want your money, not your house. They are in the money business, not the Real Estate business. They will make more money by keeping your loan active than foreclosing on your property and having to pay an attorney to foreclose, maintain the property, pay taxes and insurances, liens and municipal fines, if any, repairs, and pay a real estate commission to sell it.
LOAN MODIFICATION – There are many “scams” regarding loan modifications, don’t be fooled. These companies are not regulated by the government or state, and chances are you may lose whatever money you paid them and your home. The only persons permitted to do a loan modification is either you or your attorney. Unless the modification company is attorney owned and operated from your state, be very careful. A loan modification can take various forms, i.e. adjusting the interest rate, varying the length or term of the loan, or re-amortize the new balance so you can pay the additional debt back over time. It is important to realize and accept the fact that a loan modification is for your benefit, not the mortgage company, therefore the mortgage holder has sole discretion as to the acceptance and terms /conditions contained in a loan modification. Be careful when performing your own modification that you do not give up or waive your affirmative defenses, this is one of the many disadvantages involved that the mortgage company attempts on the unsuspecting and uninformed consumers. The lenders usually require significant personal financial information from homeowners as well as supporting documents. Negotiating a loan modification with your lender can be a frustrating and arduous process. The assistance of an attorney and/or a professional is strongly recommended in this area. Many people think that re-writing your loan is the best answer when they are trying to resist a sheriff’s sale. This is sometimes good advise; if you have equity in your property and if you re-write your loan before your credit score is devastated from the delinquent payments. The problem is that a large per cent of homeowners do not fall into this category. Most homeowners who have been evicted have terrible credit and no assets. This means that the majority of homeowners who are facing legal action are wasting valuable time trying get a new loan.
A loan modification is when the terms of your existing loan are adjusted to create a more affordable monthly payment. In essence, it is just like a refinance, but your credit and equity are not a major determining factor like a refinance. Most of the time, the interest rate is down-sized and the time of the debt is re-figured to a 30-year fixed rate. It is possible that the total debt amount is even adjusted down to reach the target monthly installment figure.
Sometimes simply inquiring from your banker for a mortgage modification will work. But more likely, you will need to hire a professional negotiator to help you out. When you talk with a professional, make sure you do not pay money up front; or if you do, it goes into an escrow account until the case is resolved. If there is nothing they can accomplish for you, you should not have to pay for their work! Check them out and be careful not to get cheated. New laws are in place to shield homeowners, but crooks will always be there to take your money if you let them.
When contacting your banker, you will have to turn in a loss mitigation package when seeking your debt modification. This will help them research your qualifications. This is the time when a professional will be helpful, since receiving a denial can be irreversible. It is crucial to give them a loan workout package that is complete and can be approved the right away. You may be asked to provide proof of income, as you did when you obtained the original loan. Whether or not things have changed with your income is one of the things that the lenders will be watching.
SHORT SALES- A “short sale” is when the mortgage holder allows you to sell the property to an independent party at less than you currently owe on the mortgage(s). This option is also for your benefit, therefore the mortgage holder has full discretion in permitting you to do so. One of the possible disadvantages to this option is that the mortgage holder can issue a 1099 form to the IRS based on the difference of the amount owed and the amount the mortgage company actual receives, making you responsible for the taxes of that amount. The mortgage company does have discretion, however, to not issue a 1099 for the deficiency, but that detail should be worked out prior to any sale by either you or a real estate agent. If the appraisal of your home has lowered and you are “upside down” in your debt, then you should consider if owning your property is even the best decision. As I said earlier, you may qualify for a loan modification with a principal reduction, but unloading the property may be a better choice. When you are upside down in your mortgage, a short sale can be a smart move. A short sale is when the property is sold for less than the payoff amount and the bank forgives the difference.
Why is it that the bank will refuse multiple offers at a given price but then accept $50,000 – 100,000 less (or worse) once the property turns into a foreclosure.
The only response came from Rick Sharga of RealtyTrac. He indicated that it had to do with accounting practices and not common sense. It is my interpretation that the existing practices had allowed an asset to maintain some “face value” such that the asset still looks valuable on the books and accepting a short sale would diminish the perceived accounting value – at least until the asset was removed from one set of books and was added to some other, where it eventually gets foreclosed upon. Rick said that going to the “Mark to Market” accounting practice would reduce this problem. I imagine this is because the asset would always be marked to its true value (give or take) such that there is no incentive to maintain falsely inflated books and deny a short sale.
Short sales are not always easy, because your bank will move slowly to this solution and may pursue a deficiency judgment after the property sells. It is vital to get your short sale agreement in writing and to make sure they waive their right to pursue this deficiency judgment at a later date. We never recommend property owners attempting a short sale all by themselves. Professional short sale negotiators are available at no charge (to the homeowner), so take advantage and make sure your rights are protected.
When it is all said and done, it is important to know that you have options and letting your property go to foreclosure is never a wise choice. Your credit will be ruined for years to come and buying a new house will be virtually impossible until you have recovered. Do not be afraid to ask for help or seek a professional to assist you through these hard time.
DEED IN LIEU- This is when you turn over the deed to your property to the Mortgage Company and move out. Some Mortgage Holders will forgive any debts associated with the property, however, most can and may file and receive a deficiency judgment against you for any money owed. Before considering this option, speak to your Mortgage Company and ask for there written package on this solution, and always have it reviewed by an attorney before signing and returning it to them. One of the possible disadvantages to this option is that the mortgage holder can issue a 1099 form to the IRS(based on unearned income) based on the difference of the amount owed and the amount the mortgage company actual receives, making you responsible for the taxes of that amount. While there are numerous options available to homeowners, sometimes the best solution is to give up the property and get a fresh start. In these cases, a deed in lieu of foreclosure can be a much more viable option.
With a deed in lieu, you are handing over the deed to your property instead of going through the foreclosure process. This means you will no longer own the home at all and will no longer be responsible for the mortgage payments. The deed in lieu process has to be completely voluntary on the part of both the homeowner and the lender. Many lenders require the owners to write/sign a statement indicating they are participating in this procedure voluntarily.
Why would you even want to consider this option? The primary reason is that once the process is completed, you are completely released from any debt associated with that particular loan. You will not have any mortgage payments or back payments hanging over your head. Also, deed in lieu is not a foreclosure so there’s not the same negative connotation associated with foreclosing on a loan. Even your credit does not suffer nearly as much with this procedure as it does with actual foreclosure.
You may even get much better terms through the deed in lieu than you would with foreclosure. Many people aren’t aware that when they foreclose on the house, they could still be held responsible for any liens or other mortgages. You do not have that issue with the deed in lieu of foreclosure.
This is also better for the lender. Foreclosures are costly and can take quite a bit of time to be completely processed. During that time, some people will take advantage and will destroy the property. This means that the lender loses out on the full mortgage and also has to pay for repairs.
There are two primary forms associated with the deed in lieu of foreclosure: the Agreement in Lieu of Foreclosure, and a form of the deed.
The Agreement in Lieu of Foreclosure is the actual document which details the terms and conditions of the deed in lieu. It identifies exactly what is being transferred to the lender. This document will be signed by both parties involved.
The other document involved is the deed. The deed could be in the form of a Warranty deed, a quit claim deed, or a grant deed depending on your state and county. All of these versions are essentially the title to the property stating who actually owns the property. This form will ultimately go to the lender. The homeowner will also get a form which officially says the mortgage debt is canceled. This proves that you no longer have to make any payments on the property, and the transfer of the deed shows that you no longer have any ownership interest in the house.
You will also receive some sort of waiver to the right of deficiency judgment. This is a vital piece of paper for the homeowner. This waiver means that the lender can not come back and try to get you to pay for any monetary difference if they have to sell the house for less than was owed. After you have received your formal cancellation notice and the waiver of right of deficiency judgment, you might still be liable for taxes. This will depend entirely upon your state and the circumstances of the sale. It would be best to consult with a tax professional to find out all the details.
In some states, when a property changes hands the original owner is responsible for paying the deed tax. This tax is figured by using the difference of the current market value of the home minus the mortgage balance and any liens on the property. You probably will not have to pay income tax on the property to the US government though. Through the end of 2009, the Mortgage Debt Forgiveness Tax Relief Act states that property changes through deeds in lieu of foreclosure do not have to pay federal income tax.
However, there are a few stipulations to this act. The home must have been your main residence for at least 730 days. This time doesn’t have to be concurrent. The deed in lieu has to have been processed between 2007 and 2009. The debt relief cannot equal more than $2 million. The forgiven debt money has to be used either on that property or for paying off other debts — you cannot simply pocket any money gained from this process.
Yes, facing the loss of your home can be emotionally stressful, but it does not have to completely ruin your financial future. By utilizing alternative methods such as the deed in lieu, you can come out much better than with a foreclosure.
For homeowners who have a mortgage through the Department of Housing and Urban Development (HUD) insured by the Federal Housing Administration (FHA), there may be additional options to obtain a deed in lieu of foreclosure to avoid the worst consequences of losing a home. The requirements for this program and how homeowners can find out if they qualify are surprisingly simple in theory.
All homeowners who have their loan insured by the FHA are able to contact HUD at the first sign of falling behind in payments. HUD provides various services to borrowers who are in danger of defaulting on a mortgage, such as free counseling and assistance with negotiating with a bank for a short sale. The deed in lieu program, although lesser-known, is another option. The assistance that HUD provides in these cases is encouraging a mortgage company to accept a deed in lieu. But homeowners are not just able to call and have HUD automatically help them. There are three main requirements that homeowners facing foreclosure must meet in order for HUD to encourage the lender the accept the proposed deed.
First, borrowers must have become late on their mortgage due to no fault of their own. This may be from a job loss or transfer, serious illness, death in the family, or other involuntary financial hardship. Most homeowners will be able to meet this requirement quite easily in the current economic climate, but this is also designed to prevent against fraud or abuse of the system.
The second requirement homeowners must meet is that they will be unlikely to recover financially to the point of being able to make the mortgage payment again. Even with payment assistance or a forbearance agreement, some borrowers would be unable just to pay the regular monthly bill. A deed in lieu of foreclosure may definitely be appropriate in such cases.
The last requirement is the most difficult for borrowers to meet. It states that no junior liens may be present on the property or that the homeowners must pay them off within twenty (20) days of the request for the deed in lieu. For many borrowers with 80/20 loans or Home Equity Lines of Credit (HELOCs), a deed in lieu with HUD’s assistance may be impossible to qualify for under this condition.
For every other borrower with a loan through the FHA who can meet these three requirements and desires government assistance with a deed in lieu of foreclosure, they can contact HUD directly. Of course, they will also want to work on other solutions to foreclosure, because HUD will only encourage the bank to accept the deed in lieu — they will not force the lender to accept it. A deed in lieu is usually a last resort for homeowners who can not save their homes any other way but do not just want to abandon it. Banks are not usually very open to this option, but with the encouragement of HUD and the persistence of the borrowers, they may decide it is in the best interests of everyone involved to end the foreclosure early and accept the deed in lieu of foreclosure.
FOREBEARANCE/REPAYMENT PLANS- If you already missed two or three payments and owe a couple of thousand dollars in legal fees, the lender may still try to arrange a repayment schedule. Most reputable Mortgage companies have a “Loss Mitigation Dept”. You may contact them and they can offer you various plans and options to repay any arrears on your present mortgage loan. Ask for their “Financial Workout Package” or whatever your particular mortgage company refers to it as. The disadvantages of this option is the mortgage company usually requires up to 50% of your arrears as an initial down payment and the remainder paid out over a period of time, usually 12 to 18 months, therefore, increasing your monthly mortgage payments dramatically.
GOVERNMENT OPTIONS- Many City, County and in some cases, the Federal Government can offer you various options to avoid foreclosure, i.e. short-term loans or grants. HUD offers a program which is called “A Partial Payment Plan”, if you have an FHA backed loan which will pay-off your arrears (overdue mortgage payments) and give you a no interest 30 year loan for the amount they pay to the mortgage holder on your behalf. This a little known option, but a very desirable one if you qualify and obtain it. Part of the recent stimulus package has several options to aid the homeowner, i.e. HAMP. Please check will your local government agaencies.
SALE- This is also a viable option, should you choose this route. However, you must consider various financial, emotional, and personal issues. Will the children have to switch schools and make new friends, the expense and emotional drain of moving and making new friends and neighbors, utility deposits/transfers. Most important, will the net selling price of the home be sufficient to cover the mortgage debt, liens, judgments and any other associated costs. Will you make enough of a profit to afford the move and new housing? Now you will be paying rent instead of building equity and credit. Another serious consideration with this option is the fact that it is currently a “Buyers Market”. If you chose to list your property in the conventional way, placed on the MLS by a real estate agent, you may not receive any offers or offers in the distant future. During the foreclosure process, time is not on your side.
REINSTATEMENT- Contact the Mortgage company and request “reinstatement figures” ( DO NOT USE THE TERM PAY-OFF FIGURES). The mortgage company, usually within 10 days, will send you a letter outlining all arrears that are due and owing to them. If you have the full amount at that time, regardless of where you obtained it, you merely send them certified funds in the correct amount and the foreclosure action will be dismissed.
REFINANCING- This is the option all your “expert” friends will tell you to do. “They saw it on TV.” No, it does not lower your monthly payments, it raises them. It turns unsecured debts into secured debts, i.e. mortgages. If you had a problem with the old mortgage payments, what makes you think things will be better with a larger payment at an increase interest rate? Be careful and always ask for a Good Faith Estimate sheet before signing anything. Also make sure that the mortgage broker/bank stays within the guidelines of the estimate.
BANKRUPTCY- If you can afford your normal monthly mortgage payment, but can’t afford to make up the delinquent amount and legal fees because your lender offered a harsh and non-viable repayment plan, you may want to consider filing Chapter 13 bankruptcy. Doing so temporarily halts the foreclosure process and can force the mortgage lender to accept a more friendly repayment plan. This is a last resort, and will still negatively affect your credit.
NEW GOVERNMENT REGULATIONS
With all of the new federal regulations and laws that are coming out to help people in foreclosure and save the mortgage lending industry from itself, it can be difficult both for lending professionals and consumers to keep up. The following is a short update of new rules and laws being put into place by lawmakers and various federal agencies.
In July 2008, the Federal Reserve created a new category of mortgage loans in response to the subprime meltdown. These new mortgages are termed “higher-priced loans,” and describe characteristics of the type of lending product that had been referred to as subprime mortgages. These new regulations went into effect on October 1, 2009.
The new Federal Reserve regulations dealing with higher-priced loans include protections for borrowers from lenders who make loans without regard to the ability to pay back the money borrowed, as well as prepayment penalties lasting longer than two years, and mortgages without escrow accounts set up.
Also, lenders are prohibited from engaging in a pattern of making loans to homeowners without taking into consideration their ability to repay the mortgage. Obviously, the lenders knew that they would be covered by the federal government if they made loans that would never be paid back, and the Fed is now attempting to limit this practice after the banks have received their initial bailouts.
The Department of Housing and Urban Development (HUD) has also released new regulations regarding the Good Faith Estimate (GFE) and HUD-1 settlement statement that are used in almost all real estate transactions. The new rules are designed to give more accurate disclosures to borrowers and make the paperwork more uniform.
The Good Faith Estimate will now be a standardized form, and lenders or mortgage brokers will be required to disclose the actual costs of the loan to borrowers. Previously, estimates were allowed to be used, but were often low-balled to make the loan look less expensive than it really was. As it got time to close the loan, the estimated fees would dramatically increase.
The HUD-1 settlement statement will also be standardized so that line numbers on the Good Faith Estimate match line numbers on the HUD-1. Loan term information will also now be included on the HUD-1, as well as detailed disclosures of escrow account requirements. A final page of the settlement statement will show how costs have changed from the initial GFE to the final closing.
As the housing crisis continues to get worse, we can all expect more regulations will be released, requiring more paperwork and disclosures to homeowners. Unfortunately, too few borrowers read and understand these disclosures in the first place, and the cost of following such laws are simply passed from the lenders onto the borrowers. It will still be up to homeowners themselves to make absolutely certain they understand how their mortgage product will affect their financial lives.
