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By Attorney Stephen Elias
Many people think Chapter 13 bankruptcy is the only way to save a home from foreclosure. But you may be able to delay or stop the foreclosure if you have defenses to paying the mortgage or if the lender has not properly followed state foreclosure procedures. If you think you might have a defense to foreclosure, contact a lawyer immediately.
Possible Foreclosure Defenses
1. Interest rate that violates state or federal law. Some states limit how much interest can be charged on a loan. Federal law prohibits lenders from making deceptive or false representations about the loan and from charging high closing costs and fees. If your interest is very high or your lender didn’t tell you the truth about the terms of your loan, consult a lawyer.
2. Violations of the federal Truth in Lending law. The federal Truth in Lending law, and an amendment known as the Home Ownership and Equity Protection Act (HOEPA), require the lender to give you certain information about your loan before you sign the papers. If the lender failed to provide this information, you may be able to cancel (rescind) the mortgage. But this doesn’t apply to loans you used to purchase your home.
3. Home improvement fraud. If you got ripped off by a home improvement contractor, you may be able to cancel a loan used to pay for that work.
4. Failure to follow foreclosure procedures. Each state requires lenders to follow specific procedures when foreclosing on a home. If the lender doesn’t follow these rules (for example, by not giving proper notice of the foreclosure or failing to inform you of certain rights), you may be able to delay the foreclosure.
5. Failure to prove ownership. Part of what fueled the housing bubble was a process known as securitization, in which mortgages were bundled together, rated as to their collective risk, and then sold and resold on a secondary market, like any other securities. Because this whole process is carried out electronically, agreements transferring ownership to the different players (assignments) are rarely reduced to writing and signed by the parties. Even if they are, the paper often doesn’t catch up to the ultimate owner who decides to pull the plug on a mortgage and initiate foreclosure proceedings. In federal court (where some foreclosures occur) and in some state courts, the foreclosure may be dismissed or put on hold if the foreclosing party can’t prove that it’s the rightful owner of the property.
6. Invalid foreclosure affidavits because of “robosigning.” In depositions taken in 2010 by attorneys fighting foreclosures, some bank officials admitted to signing thousands of affidavits every week in foreclosure cases. In these affidavits, the bank officials asserted that certain facts were based on their personal knowledge of the foreclosure case and file. Turns out, the bank officials had no such knowledge. Known as robosigning, this practice negates the validity of the affidavit and provides homeowners with a means to challenge the foreclosure. The robosigning defense is typically used in Chapter 13 bankruptcies (as part of a procedure to challenge the legitimacy of a threatened foreclosure) and in those states that run their foreclosures through the courts.
7. False notarization of mortgage and foreclosure documents. Another practice that has been brought to light in foreclosure-fighting litigation is mass-notarization of documents without following the notary rules such as obtaining identification of the signer. This practice, like robosigning, invalidates the supposedly notarized document and can be used to challenge the mortgage itself as well as foreclosure-related documents requiring valid notarization.
8. Mortgages in the MERS system. MERS, which stands for Mortgage Electronic Registration Systems, was created by investment banks in order to keep track of mortgage transactions. Some courts are questioning foreclosures based on mortgages in the MERS system. Here’s the background.
Up until recent years, a bank providing a mortgage to a homebuyer would record the mortgage with the local land records office. The complete title to the property was located in that office’s records and every time the property exchanged hands, an attorney or a title company would perform a title search to make sure that the title being transferred conferred “clear title” to the new owner.
Around the turn of this century, however, this all radically changed. Instead of holding on to the mortgage, the local bank issuing the mortgage would sell it to one of the large federal mortgage clearinghouses known as Fannie Mae and Freddie Mac. Those entities would in turn utilize investment banks, such as Goldman Sachs and Lehman Bros., to package and market the mortgages to investment trusts as “securitized mortgage-backed bonds.” Instead of using the local land records to keep track of these transactions, the investment banks created MERS.
Now, in many cases, the original mortgage lender designates MERS as the mortgagee of record and as an agent authorized to assign the mortgage to others. Under this scheme, virtually all transactions are kept track of by computer and are part of one big MERS family (virtually all players in the mortgage market are MERS members). With MERS, registration with the local land records office has become a thing of the past, making it no longer possible to do the old fashioned type of title search in the land record offices.
For technical reasons, the MERS system has recently faced a variety of legal challenges. Some courts have ruled that mortgage assignments made under the MERS umbrella are invalid, and refused to allow the bank ending up with the mortgage to foreclose due to its inability to prove ownership of the mortgage.
Excerpted from How to File for Chapter 7 Bankruptcy, by Attorney Stephen Elias, Albin Renauer, J.D., & Robin Leonard, J.D. (Nolo).