The Many Options in Foreclosure

The economy has created the need for a new specialty amongst lawyers – Foreclosure Defense. With foreclosure filings up a staggering 338% in 2008 over the prior year (and with 13,196 cases filed in the first three months of 2009 alone), it is no surprise. You might wonder if there is any way to defend someone who can no longer afford to pay their mortgage. After all, if you can’t make your monthly payments, how many options could you have?

Well, you have a lot more options than you might think. I’ve found that in the flurry of lending that went on in 2004 to 2007, there were some major errors made on the part of the lenders. Since these lending errors might release the borrower from his obligation to pay – or may render the property free of a mortgage, checking to see if there is a defense to a mortgage, rather than just assuming that nothing can be done, is important. But beyond defending a foreclosure, the mere fact that the case is filed, opens up a number of different solutions for the homeowner.

1: Buy Time for a Short Sale

Sometimes people want to have the time to seek a short sale or a loan modification. Given the time frames for getting approval of a short sale or loan modification, sometimes ten months is just not enough. However, for the sake of a homeowner’s credit, it is often worth trying to stave off the entry of a default judgment to accomplish a short sale or loan modification. It may or may not have an impact on one’s credit to have judgment entered. If it is worth it to the homeowner not to have judgment entered and the homeowner is seeking alternatives, it is often not difficult to hold off the entry of judgment for an additional thirty to ninety days.

2 : Defend Against Foreclosure

When a client comes to see me about a foreclosure defense, I always ask them to provide me with their closing documents. In order to determine if there were any mistakes made in the lending process, I have to know the specifics of the loan. Not surprisingly, during the flurry of lending that went on during the sub prime lending years, things were done hastily and carelessly. I have found these circumstances have led to a wide range of scenarios.

In some instances the loan has not been properly documented, allowing my clients to defend the foreclosure and have the lender seek compensation from the Title Company that insured the loan, and keep their property free and clear. On the other end of the spectrum are instances where my client allowed incorrect information to be included on their loan application, making any defense impossible. I will not defend a foreclosure where the possibility of my client being charged with fraud – even if it was unintentional – is substantial.

Another defense to a foreclosure is that the mortgage document and the Note do not match, that is, the parties who signed the note are not the same parties or party who gave the mortgage or owned the property. If the property is owned by a company, the Note and Mortgage must be signed by an Officer – in his corporate capacity – not as an individual, even if the individual is guaranteeing the debt. The principal may sign a guarantee, but the Note and Mortgage must match. Because there can be legitimate defenses to a foreclosure, I always ask the lender to provide me with the closing documents before I will file an Answer to the Foreclosure Complaint, in case there is an opportunity to file a Motion to Dismiss instead.

3 : Other Options

Forbearance – In a forbearance agreement the Lender agrees to allow the homeowner to pay off the arrearage in payments along with keeping current with each new monthly payment. The Lender will decide over what time period they will carry the arrearage out over. A forbearance agreement can be entered into even if a foreclosure suit is pending – the Lender will just advise their attorney to stop the proceeding to see if the homeowner can successfully fulfill the agreement.

Chapter 13 Bankruptcy – In a Chapter 13 the Debtor is generally given 24 months to cure a mortgage arrearage and can also address other outstanding debt. The foreclosure suit is stayed or enjoined without any further action on the part of the homeowner other than filing the chapter 13. As long as the homeowner makes his current mortgage and chapter 13 payments, he will be allowed to cure the arrearage and manage outstanding debt.

Loan modification – A loan modification will address the loan by lowering the rate, thus lowering the payment and recapitalizing the arrearage. This too can be done while the foreclosure is pending and generally the Lender will stay the proceedings themselves, without the need for the homeowner to appear in Court. Loan modifications will be the subject of my next newsletter.

Having a foreclosure filed against you is scary. Armed with information on your alternatives should help to navigate through the options. The worse thing you could do is nothing – unless it’s used as a strategy.

© Copyright Erica Crohn Minchella, 2009