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April 14, 2011

Foreclosures Down, But Not for the Right Reasons

ForeclosureIStock.jpgAccording to RealtyTrac, foreclosures in the first three months of 2011 are trending down as compared to 2010. Foreclosures in January, Februrary, and March of 2011 are down by 27% as compared to foreclosures in the same months of 2010.

Unfortunately, most experts agree that this trend is not due to a healthier economy and housing market, but instead to bank backlogs in the foreclosure process. In 2010/2011 the media called attention to banks' shoddy foreclosure practices (for more on this see Nolo's article False Affidavits in Foreclosures: What the Robo-Signing Mess Means for Homeowners). Courts slapped banks for taking shortcuts on foreclosure paperwork and bypassing procedures meant to protect mortgage holders. Because some banks can no longer ram through foreclosures, a backlog has built, slowing the foreclosure rate.

By: Guest Blogger Kathleen Michon

April 12, 2011

Watch Out For the Newest Foreclosure Scam in California

Scams involving purported mortgage modifications and foreclosure assistance have abounded since the California foreclosure crisis in 2009. The California Department of Real Estate recently warned consumers about the newest version of these scams. (To learn more about foreclosure, check out Nolo's Real Estate & Rental Property area.)

In this scam, a "lawyer" invites homeowners to join a mass joinder or class action against a bank or mortgage company. The "lawyer" promises results such as stopping foreclosures, lowering mortgage payments, lowering principal balances, or eliminating mortgages altogether. "Clients" must pay a nonrefundable fee, often between $3,000 and $9,000 to join the litigation. The litigation is a sham, and the clients receive nothing.

Scammers often solicit victims by mass mail or advertise the "litigation" on the Internet. The solicitations often sound legitimate, and require clients to sign lengthy retainer agreements.

To learn more about this scam, and how to protect yourself, check out the California Department of Real Estate's consumer alert.

by Guest Blogger Kathleen Michon

March 5, 2011

MERS: The Elephant in the Foreclosure Room

If you are a homeowner, chances are that the current owner of your mortgage is an entity known as MERS (Mortgage Electronic Recording System). This is true even though you are making your payments to one of the major banks or a dedicated mortgage servicing company. Nobody borrows from MERS in the first instance but somewhere in the chain of title the likelihood is that MERS became (and continues to be) the owner despite a series of transfers to banks, trusts, and investment vehicles. In legal parlance, MERS will be identified in your mortgage documents as the "mortgagee of record," and will also be identified as the "nominee," or agent for the purpose of making future transfers to other entities. 

What Is MERS and How Does It Work?

Like a lot of what has transpired in the mortgage industry, it's hard to get a handle on how MERS works and what exactly is wrong with it. Fortunately, very-readable testimony offered by Professor Christopher Peterson before the House Judiciary Committee casts much light on the subject and is available for your reading pleasure.    

MERS is essentially a large electronic database of mortgages and mortgage transactions. It was invented in the mid 1990s as a legal device to replace the county land title recording system. It is MERS that made the real estate boom feasible by (supposedly) allowing electronic transfers of mortgage ownership among bank and investors in a variety of forms known as real estate trusts, securitized mortgage bonds, and other miscellaneous financial derivatives -- all backed by packages of mortgages consisting of various risk levels.

The lion's share of the financial entities dealing with mortgages were and are members of MERS, and under the MERS rules are also agents which are authorized to effect transfers to other members. These transfers have seldom been recorded in county land records offices -- since ownership never (supposedly) changed but rather remained with MERS. Thus, not only does MERS facilitate transfers of real estate interests, it saves the real estate and banking industries millions if not billions of dollars in recording fees by eliminating all those recording transactions that would otherwise have to be made, at an average pop of $35 per transaction. Avoiding these fees was a major reason that MERS was created in the first place.

Problems Created by the MERS System

The most profound problem that the courts and commentators have with MERS is that it purports to replace the way in which land transaction records have been created and stored since the beginning of the country -- all without  the benefit of authorizing legislation. Under the traditional (and legally authorized) method of keeping track of who owns what, any person is free to walk into a land records office and search the entire historical record of who bought and sold any particular piece of property. This is what is known as a "title search." Under the MERS system, however, no such search is possible. MERS Members are not required to report transfers to the database and so there is no real way to be sure about who owns what.

One Court Says: MERS Doesn't Deliver Clear Title

In In re Agard, a bankruptcy judge analyzed MERS for the purpose of deciding whether a bank seeking foreclosure could prove that it owned the promissory note accompanying the mortgage -- a prerequisite in bankruptcy court when asking the court for permission to proceed with the foreclosure. Previously, MERS had attempted to assign the mortgage and promissory note to the foreclosing bank and the question was whether it successfully did so. 

Although for procedural reasons the Court allowed the bank to proceed with the foreclosure, the Court went on to analyze the role of MERS in the chain of title for the debtors' home. It concluded that MERS, as currently structured, did not deliver clear title to the foreclosing bank. Although the court's analysis does not, strictly speaking, count as precedent because it wasn't necessary to the court's ultimate decision (that is, it was dicta only), it should still prove persuasive with other courts dealing with cases involving MERS ownership.  

MERS Announces Some Changes

Because of the various problems it faces in the Courts, MERS has recently announced that it is changing one of its membership rules (Rule 8) to require that members no longer foreclose in MERS name. MERS has also told its members that assignments out of MERS's name should be recorded in the county land records even if the state law doesn't require it. In short, MERS is on the defensive. These are welcome changes for the future, but the degree to which MERS past practices have placed clouds on current real estate titles remains to be seen. 


March 2, 2011

Bankruptcy and Foreclosure

The most common question I get these days is whether filing Chapter 7 or Chapter 13 bankruptcy will stop a foreclosure.

Chapter 7 Bankruptcy and Foreclosure

The simple answer is, Chapter 7 bankruptcy can keep you in your home for an additional two to three months, and that's about it. But, and it's a big "but," because you will be getting free shelter when you aren't paying your mortgage, a three month delay can be worth three times what you would be paying for a monthly rental, or a total of between $4,000 and $6,000 for the typical family.

To learn more about what happens to your home when you file for Chapter 7 bankruptcy, read Nolo's article Your Home in Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy and Foreclosure

If you file a Chapter 13 bankruptcy and can propose a feasible repayment plan, you may be able to stave off the foreclosure for up to five years. Just how long will depend on your income and basic living expenses, and how far behind you are on your payments.

Even if can't propose a feasible plan, you may be able to put off the foreclosure for a much longer time than would be the case under Chapter 7. The rub is that you will probably need an attorney to achieve this result. But because you aren't paying your mortgage you can divert some of your "shelter money" to hiring an attorney, who will typically charge between three and four thousand dollars to handle a Chapter 13 bankruptcy. While this may seem like a lot, it likely will be only two or three months worth of mortgage payment and you'll likely come out ahead in terms of the total amount saved by staying in your home payment free.

To learn more about what happens to your home in Chapter 13 bankruptcy, read Nolo's article Your Home in Chapter 13 Bankruptcy.

Chapter 13 bankruptcy can have other advantages over Chapter 7. Bankruptcy attorneys are starting to successfully use Chapter 13 procedures to challenge the very validity of the mortgage, which means you may have a shot either at never having to pay the mortgage or at least being able to negotiate lower principle and payment amounts. You also can use Chapter 13 to get rid of second mortgage liens when your home's value is not enough to provide security for the amount owed on the second mortgage (called mortgage lien strip-offs).

To learn more about the interplay between bankruptcy and foreclosure, read Nolo's article How Bankruptcy Can Help With Foreclosure.

February 7, 2011

Lawsuits Allege Banks Broke Promises to Homeowners Facing Foreclosure

Two recent lawsuits, in Washington and California, use "promissory estoppel" (a legal theory in contract cases) to get monetary damages from banks that broke their promises to homeowners facing foreclosure

The Washington Case: Promissory Estoppel as a Cause of Action

Abuses by mortgage banks and servicers committed while dealing with homeowners seeking foreclosure relief or mortgage modifications have been well documented. They are especially and eloquently detailed in a class action lawsuit filed on January 10, 2011 in the State of Washington. Reading the Introduction to the complaint (if not the whole document) will be well worth your while. 

Among the claims contained in the class action complaint is a type of breach of contract known as promissory estoppel. Promissory estoppel may seem like an impossible-to-understand example of legal jargon but i'ts actually relatively simple. It means that a party making a promise is prevented (estopped) from reneging on the promise. You can sue for promissory estoppel if 1) someone makes you a promise that is clear and unambiguous, 2) your reliance on the promise is reasonable and foreseeable, and 3) you suffered damages as a result of your reliance. 

You can't hold someone to a naked promise just by itself. In other words forget about suing your parents who failed to deliver on their promise to send you to Harvard. But if you go through all the motions of enrolling, signing a lease for your housing, and buying textbooks, and your parents had good reason to believe that you would act on their promise, you may have a winning case to recover, at the very least, your out-of-pocket expenses, and possibly even for other liabilities you incurred. 

In the class action complaint the promissory estoppel claim deals with a common practice in the mortgage industry. There the bank promised the named plaintiff a permanent mortgage modification if she completed a trial period during which the modified payments were to be paid to the bank. The plaintiff did, in fact, complete the trial period but the bank refused to give her the modification as promised. Here, the requirements for promissory estoppel were clearly met. The bank promised a permanent modification in exchange for three (or more) trial payments. The homeowner reasonably and foreseeably relied on the promise and made the payments. The bank reneged on the promise, and the homeowner suffered damages in that the trial payments would not have been made absent the promise.

You might wonder why this isn't a common-variety breach of contract case. For a contract to be enforceable both sides have to receive something of value (called consideration) in exchange for their agreement to perform the terms of the contract. Also, there has to be an offer and an acceptance. In the situation where the bank makes a promise to modify, it's arguable that only the homeowner is receiving consideration and so a valid contract has not been made. But the law, through the doctrine of promissory estoppel, eliminates the need for mutual consideration and will, under the appropriate circumstances, enforce the promise or award damages if it is not carried out.

Promissory Estoppel in a Recent California Foreclosure Case

The doctrine of promissory estoppel was recently applied to a mortgage workout situation in a California appellate court case titled Claudio Aceves v U.S. Bank (Court of Appeal, Second Appellate District, Div One (1/27/11)). Here Ms. Aceves fell behind on her mortgage and filed for Chapter 7 bankruptcy after the bank served a Notice of Default, a required step in the California foreclosure process. She decided to convert the case to chapter 13 bankruptcy and raise the necessary money to reinstate the loan and pay off the arrearage over the course of the chapter 13 plan. The bank told her they would work with her and that she needn't pursue her Chapter 13 remedy. Relying on this representation, Ms Aceves did not file Chapter 13 and also did not object when the bank filed a motion in her Chapter 7 case to lift the automatic stay (which legally enabled the bank to continue with its foreclosure remedy).

In fact the bank failed to enter into good faith negotiations and instead completed the foreclosure. Ms. Aceves sued the bank alleging a cause of action for promissory estoppel, among others. She argued that 1) the bank's promise to work with her in reinstating and modifying the loan was clear and unambiguous, 2) the bank in fact failed to negotiate the modification, 3) she relied on the bank's promise by forgoing bankruptcy protection under chapter 13 and failing to oppose the motion to lift the stay, 4) her reliance was reasonable and foreseeable, and 5) she suffered damages in the form of losing her house. 

The lower court dismissed the action but the court of appeals ruled that in fact Ms. Aceves had stated a claim for promissory estoppel and should be allowed to proceed with her lawsuit in the trial court. In making its ruling the court specifically found that "U.S. Bank never intended to work with Aceves to reinstate and modify the loan. The bank so promised only to convince Aceves to forgo further bankruptcy proceedings, thereby permitting the bank to lift the automatic stay and foreclose on the property."

As long as this case remains published (and isn't ordered de-published by the California Supreme Court) it provides great precedent if you decide to sue your mortgage lender or servicer for breaking its promises. If you can't find an affordable lawyer, you might consider doing your own state court lawsuit with the help of Nolo resources such as Represent Yourself in Court, by Paul Bergman and Sara Berman-Barrett, and Everybody's Guide to Small Claims Court, by Ralph Warner.

While you may be invited to join a class action, those types of cases usually are much more  beneficial to the lawyers bringing them than they are to the plaintiffs. If possible, you should consider going your own way. However, sometimes a class action is the only way to find a lawyer without parting with an arm or a leg and if that is your situation, and self-help is not an option, by all means sign up as a class action plaintiff. . 

January 31, 2011

Bankruptcy and Foreclosure: Fighting a Motion to Lift the Automatic Stay

Recently, homeowners are having more success in preventing mortgage lenders from continuing with a foreclosure (by lifting the "automatic stay") after the homeowner has filed for bankruptcy.

Bankruptcy's Automatic Stay

When you file bankruptcy your creditors must stop all activities related to collecting a debt, with a few exceptions (usually involving child support and taxes). The prohibition against collection activities is part of what's called the automatic stay, meaning that collection activity is stayed while your bankruptcy case is pending, and that this stay occurs automatically upon your filing. In some situations creditors can file a document known as a "motion to lift the automatic stay" which requests the bankruptcy court to give them permission to proceed with the desired activity listed in the motion.

The most common reasons for requesting that the court lift the stay are:

  • when a landlord is attempting to evict a tenant
  • when a mortgage lender is attempting to proceed with foreclosure activities, and
  • when a lender on a car note is seeking to repossess the car because of non-payment.

As a general rule the bankruptcy court will lift the stay as to a particular creditor when the bankruptcy filer (the debtor) has no equity in the property (for instance when premises are being rented) or when the creditor will suffer economic harm regarding the property at issue if the stay is not lifted (as in the case of a foreclosure or car repossession).

Change in How Courts Treat Motions to Lift the Stay in Foreclosures

Until recently, courts routinely granted motions to lift the automatic stay and there wasn't any reason for the bankruptcy debtor to show up at the scheduled hearing. However, in the last year or so, bankruptcy attorneys are having some degree of success in fighting motions brought by mortgage lenders on the ground that the lender can't establish who owns the mortgage and therefore has no legal right to ask the bankruptcy court for relief (this is called "lack of standing."). The main reason why ownership can't be established is that during the housing boom many mortgages were transformed into securities that could be sold on the bond market and then sold and resold so many times that proof of ownership became lost or unavailable.

What Happens if the Motion is Denied?

In a Chapter 7 bankruptcy, success in fighting a motion to lift the stay would typically mean a one or two month extra delay in implementing foreclosure proceedings (which without the stay being lifted couldn't proceed until you received your discharge). In a Chapter 13 bankruptcy, however, successfully fighting a motion to lift the stay might mean that the mortgage may not be enforceable at all--although the more common outcome is for the lender and homeowner to settle the dispute on terms greatly favorable to the homeowner. 

Other Ways to Raise Ownership Issues and Fight the Foreclosure

The ownership issues that can be raised in a hearing on the motion to lift the stay can also be raised in state court after you receive your Chapter 7 discharge. That is, if you are in a state where the foreclosures go through state court, you can use the failure to prove ownership as a defense that may stall your foreclosure indefinitely--or produce a favorable settlement. And if you live in a state where foreclosures occur outside of court (as in California and about half of the other states), you can file an action in the state court challenging the foreclosure on the same grounds, and with the same outcome. (To learn more about challenging foreclosure in state court, see Nolo's article False Affidavits in Foreclosure: What the Robo-Signing Mess Means for Homeowners.)

Because bankruptcy is a federal court, and because federal courts often have different "standing" rules than state courts, you may not have as much success in the state court as would be true in federal court.

Get Help From a Lawyer

Obviously this can all get pretty complex in a hurry and you would be well advised to shop for a lawyer who knows this stuff inside and out. But beware paying a lawyer (or anyone else) very much money up front to fight your foreclosure in state court. At the very least, negotiate a fee agreement with the lawyer that will give you a healthy refund if the case is not successful. And make sure the lawyer you choose knows the likelihood of your case being successful, however success is defined.

January 12, 2011

Massachusetts Court Refuses to Give Clear Title in Foreclosures

In earlier blogs I've mentioned some of the ways that homeowners can resist foreclosures. For at least a year some state and federal courts have favorably entertained homeowner arguments regarding shoddy paperwork, robo-signings, and the inability of those bringing the foreclosure action to "show me the note."

As I've noted these decisions I've cautioned that it's too early to know whether these decisions will be widely followed by other courts or whether these cases will be upheld--or tossed out--on appeal. This can be a problem when you are paying an attorney megabucks to advance your argument. Few of us want to sacrifice thousands of dollars to a lost cause.

Massachusetts Supreme Judicial Court Refuses to Give Clear Title to Improperly Foreclosed Homes

Suddenly things have changed a whole lot--for the better from the homeowners' perspective. Late last week the Massachusetts Supreme Judicial Court--the highest court in that state--unanimously decided that the foreclosures in the cases before it were improper because the all important notice of foreclosure was recorded and published before the banks bringing the foreclosures actually owned the mortgages by way of legal assignments from the original issuers of the mortgage.

In the Massachusetts cases, foreclosures had already occurred and the homeowners had moved out after the bank bought the property at the foreclosure auction. When the banks initiated the foreclosures, they had no proof of the chain of title showing that they now were the mortgage owners.  For example, in one of the cases the original mortgage traveled through six different institutions including the initial issuer and the foreclosing bank.

After the banks decided to clean up their act--and after the foreclosures--they recorded what they alleged was proof of ownership with the local land records office. They then filed actions requesting that a judge issue a "quiet title" order--an order stating that the banks had proven clear title to the properties. Much to the surprise of the banks, the court refused to award them clear title, given that the foreclosure was legally deficient. The fact that the banks tried to correct the record after the foreclosures could not retroactively legitimize the foreclosures themselves or the titles to the property taken by the bank as a result.

The banks appealed this decision to the Massachusetts Supreme Judicial Court, which affirmed the lower court and also ruled that the title held by the banks in the improperly foreclosed property was not clear title--that is, the banks had no legal claim on the property.

This Case Will Likely Affect Foreclosures Nationwide

The potential implications of this decision are staggering. It means, in essence, that an unknown number of homes that have been improperly foreclosed on by the nation's mortgage lenders have title problems that may be difficult or impossible to clear up. This can only result in a brand new real estate crash of gargantuan proportions.

How important is the Massachusetts case? The way law works in the United States, once a major state's highest court decides a new point of law, that decision quickly travels to other states where lawyers use it to achieve the same or similar result. Homeowners who are called on to invest in litigating their foreclosure will be much more willing to part with their money knowing that they have a Massachusetts Supreme Court arrow in their quiver. While every state's foreclosure laws are at least somewhat unique, the basic premise of the Massachusetts case will likely be upheld by most courts that consider it--that is, a bank can't legally foreclose on a mortgage if it can't prove it owns it, and a bank can't go back in time and undo an illegal foreclosure  by obtaining a judicial declaration of clear title.

But in many cases litigation may not be necessary. Banks throughout the country are now on notice that the houses they still own as a result of foreclosure might well be worthless in that they won't be able to prove ownership at the time the foreclosure was initiated and therefore won't be able to pass clear title to prospective purchasers. And future foreclosures may be impossible given the chaotic state of mortgage-related records caused by the mortgage securitization process and sloppy bank practices. The only value banks may be able to glean from their huge stock of houses--whether before or after foreclosure--is whatever they can negotiate with the current owners.

Banks also will likely face class actions brought by thousands or hundreds of thousands of former homeowners who have been illegally foreclosed on. Investors are also likely to sue the banks for illegally jeopardizing their investments, and while banks may be forced to cut fire sale deals with homeowners, investors are unlikely to settle for anything less than they think they are owed. Undecided at present is what will happen to illegally foreclosed homes that have been subsequently purchased by buyers who had no reason to doubt the validity of their title. Will the invalid foreclosure apply to their title or will a doctrine known as "bona fide purchaser for value" invest the buyer with clear title? One thing for sure, the title to these properties is not as secure as was once thought, and the value of these properties may plummet even further because of a possible shaky title.

In closing, I offer a brief quote by concurring Justice Cordy:

"I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that this legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it....."



October 20, 2010

Robo-signing Mess Means More Leverage for Homeowners in Foreclosure

It's been all over the news -- courts are halting foreclosures and banks are freezing their foreclosure processes due to allegations of "robo-signing." This mess creates negotiation opportunities for homeowners in foreclosure.

What is "Robo-signing"?

To get a foreclosure through court, the lender has to submit proof of ownership and default on the mortgage. This proof typically consists of copies of various documents and a written statement under oath (affidavit) that the documents are true and accurate. To make such a statement, the individual signing the affidavit must not only review the documents but also have some personal basis for believing them to be true. Not just anyone can sign.

It turns out that the major mortgage lenders have assigned the "statement under oath" task to clerks who not only don't review the documents but who have no personal knowledge of the facts set out in them. The media has called them "robo-signers." (Recently ran an  informative article about O. Max Gardner III, the lawyer who let the cat out of the bag.)

In other words, it looks like lots of court-ordered foreclosures have been based on false affidavits, and it's that fact that has led the major lenders to put a hold on foreclosures in states where foreclosures go through the courts.

Even in states where foreclosures happen out of court, affidavits of ownership and default in payments must typically be officially recorded before foreclosure proceedings can begin, and to the extent that these affidavits suffer from the same defect as those headed towards court, the foreclosures based on them are similarly faulty. The only real difference is that the homeowner must affirmatively sue the lender (in an action for injunctive relief) in order to have the judge rule on whether the paperwork is deficient.

What Happens if the Lender Can't Foreclose? 

For all practical purposes, the only way to enforce the terms of a mortgage is to foreclose on the property. It's true that in many states the lender can sue the homeowner for breach of contract if he or she falls behind on the payments, but the expense and uncertainty of that remedy pretty much dictates foreclosure as the lender's remedy of choice. In foreclosure the lender gains ownership of the property and the right to force the (now ex) homeowner to move out. If the homeowner decides to stop paying on the mortgage and the lender is unable to use the foreclosure remedy, the only remedy left is a lawsuit for money.

In California and a few other states, the first mortgage is what's known as a non-recourse loan, meaning the lender can't sue for breach of contract. And in those states where the lender could sue, the likelihood of collecting is small. Further, bankruptcy would wipe out the homeowners personal liability and the lender would have no remedy at all -- again, assuming that for one reason or another they can't foreclose.  

The bottom line: If the lender can't foreclose because of fraudulent affidavits, the lender may be up a creek.

Fraudulent Affidavits Means More Opportunities to Negotiate

The fact is, foreclosure paperwork in any given case may be faulty, and judges may be more inclined to reach this conclusion than previously -- based on the mounting evidence of robo-signing and banks' sloppy paperwork. To the extent that a homeowner facing foreclosure can create an aura of uncertainty around the required paperwork, he or she will have a great opportunity to negotiate a mortgage modification that includes a substantial reduction of principle to (or near) the value of the property.

If the lender refuses to come to some settlement with you and you can later convince a judge that proof of ownership is lacking, or that robo-signing occurred, the lender may be permanently deprived of the foreclosure remedy, which will mean the mortgage is effectively unenforceable. Given this threat, more and more lenders may be inclined to knock down the principal and reduce your payments to an affordable remedy. As the old saw goes, half a loaf is better than none.

Your ability to use potential problems with the mortgage and foreclosure processing in your negotiations will obviously be strengthened if you can point to the deficiencies, but it may be enough to simply allege the possibility of bad paperwork and let the lender decide whether they are able to prove the opposite. Also, it would probably be advantageous if you had an attorney negotiating for you, but to do that you'd have to raise some money for the attorney fees, which is often done by rerouting some or all of your mortgage payment to the attorney -- which can be a really good deal in the long run.

To learn more about fraudulent affidavits, and your options, see Nolo's article False Affidavits in Foreclosures: What the Robo-Signing Mess Means for Homeowners

Learn more about foreclosure and other options for struggling homeowners in Nolo's Foreclosure topic.

October 18, 2010

The Loan Modification Process Can Help Avoid a Charge of Strategic Default

Banks are beginning to punish homeowners who engage in "strategic default," and pushing for legislation to do the same. A strategic default is defined as not paying your mortgage when you can afford to do so, thereby letting your home fall into foreclosure. (For a more comprehensive discussion of strategic defaults and the steps banks and legislatures are taking to punish homeowners, see my previous blog post The Government and Banks May Punish Strategic Defaults.) 

An Ounce of Prevention:  The Loan Modification Process

One way that homeowners can reduce the risk of a strategic default accusation is to use the loan modification process.  (To learn about loan modifications, see Nolo's article Mortgage Modification and Refinancing Under the Homeowner Affordability and Stability Plan.)  Here's how it might help:

Because nonpayment when you have the ability to do so is the key aspect of a strategic default, your best protection against having this label applied to you is to make a diligent effort to obtain a loan modification. Of course if you don't really need a modification, the mere attempt to obtain one probably won't immunize you from being considered a strategic defaulter. But few people are that well off.

If your first mortgage is 31% (or more) of your gross income, you have a non-affordable mortgage under the Making Home Affordable guidelines, and failing to pay it should not be considered a strategic default on your part. And you may have additional reasons why you cannot afford your mortgage at the time you defaulted (for example, student loan repayment obligations, a second or third mortgage, or erratic periods of employment).

Defaulting After a Obtaining a Loan Modification Might Hurt You

On the other hand, If you do obtain a modification and then immediately default without a change in circumstance, you may be considered a strategic defaulter almost by definition. (However, obtaining a loan modification is no easy feat.  See my previous blog post More Money for Foreclosure Prevention: Will It Help?)

So, if your main goal in participating in a modification process is to avoid this label, success may be failure, and failure success. Such are the strange times we live in.

Document Everything

If you think that you might be considered a strategic defaulter, be sure to thoroughly document your modification efforts. Use email or the post to document all discussions with the bank or a HUD-approved housing counselor. If you receive a phone call from the bank or counselor, follow up with a confirmation letter and record the names and titles of everyone you talk with. Your goal is to be able to provide a ton of paperwork showing that you diligently sought a modification and your default was not made for "strategic" purposes.

October 6, 2010

Foreclosures on Hold Due to Fraudulent Affidavits

A number of major mortgage lenders have apparently put a freeze on pending and future foreclosure cases. The reason? Bank employees testified that they signed affidavits attesting to the truth of various foreclosure documents, but in fact had no personal knowledge of the facts to which they attested. Employees of Bank of America, JP Morgan Chase, and GMAC have all testified that they signed many thousands of affidavits a month, spending about 30 seconds on each affidavit, and that they hadn't a clue regarding the veracity of the affidavit or documents in question.

Class Actions, Criminal Prosecutions, and Problems for Owners of Foreclosed Properties?

Since this testimony implicates all past foreclosures that depended on similarly flawed affidavits, there may be humongous class actions about to hit the mortgage lending industry. Criminal prosecutions may also multiply faster than rabbits, since the practice of having these affidavits signed by unknowledgeable people is something that provably comes right from the top.

And what about people who have purchased homes that with a fraudulent foreclosure affidavit? Although some may have ownership issues in the future, many may be able to keep their new homes because of a legal doctrine that gives clear title to people who are "bona fide purchasers for value." On the other hand, foreclosed homes that are still owned by banks may now be up for grabs (and transferred back to the original owners) since the banks would have difficulty in making the bona fide purchaser for value argument. Finally, as these defects in title come to light it may be difficult for a new owner to claim bona fide purchaser for value status without having the foreclosure process subjected to an audit for fraud and ownership issues.

Challenging Foreclosures Based on Fraudulent Affidavits

There are three different judicial venues where foreclosures can be challenged. In about half the states, the foreclosures go through court - called "judicial foreclosures." Challenging a foreclosure based on a fraudulent affidavit is a relatively simple matter of raising the issue at the foreclosure trial. It is primarily the foreclosures in these states that have been frozen by the major lenders, since all judicial foreclosures require testimony under oath.

In the other half of the states, foreclosures are completed without going to court - called "non-judicial foreclosures." In order to challenging a foreclosure in one of these states, the homeowner would have to file an action in court to enjoin the foreclosure on the basis of suspect documentation. In many of these "non-judicial foreclosure" states, the foreclosure can't legally take place without recordation of appropriate documents accompanied by an affidavit attesting to their truth, so the ground for challenging the foreclosure would be similar to that used in judicial foreclosure states.

The third venue for challenging a foreclosure occurs in Chapter 13 bankruptcy. In Chapter 13 bankruptcy your mortgage lender must file a claim, and you are entitled to oppose this claim. Simply put, in Chapter 13 you can basically have the mortgage thrown out due to the inability of the mortgage owner to provide the requisite sworn testimony. And if a lender seeks permission from the judge to proceed with foreclosure, you can defeat the motion on the ground of fraudulent documents (or failure to prove ownership).

As all of this unfolds, new details will undoubtedly emerge calling into legal questions hundreds of thousands if not millions of mortgages. The negative effects this will have on the housing industry in particular, and the economy in general, are incalculable, but there is now little question that many homeowners will be able to escape their mortgage obligations for many more months than previously, if not forever.

To learn more about fraudulent affidavits, and your options, see Nolo's article False Affidavits in Foreclosures: What the Robo-Signing Mess Means for Homeowners

Learn more about foreclosure and other options for struggling homeowners in Nolo's Foreclosure topic.