Elements of A Home Loan
A home loan consists of an exchange of funds from a lender for a promise to repay it with interest from the borrower. The borrower signs a note and a security instrument at closing and the closing officer disburses the funds to the borrower or a previous lender. In judicial foreclosure states the security instrument is a mortgage; in a non-judicial foreclosure state, the security instrument is a deed of trust which constitutes a confessed judgment in the event of failure to make timely payments. In the security instrument the borrower agrees to insure and maintain the property so its value does not decline from negligent care, and to pay the cost of collecting the debt, including foreclosure. The parties also agree to notify one another in the event of a breach and provide opportunity to correct it before foreclosing or taking legal action. Thus, the security instrument guarantees that the borrower will pay off the debt or that sale of the property will pay it off. The note and security instrument also allow the owner of the note to sell or assign it to another person. The note and the security instrument are legally inseparable even though written on separate documents, and the security instrument depends on the note for its legal effect. Whoever owns beneficial interest in the note also owns the security instrument.
Elements of a Foreclosure
A foreclosure constitutes claim by the owner of beneficial interest in the note that the borrower breached the terms of the note or the security instrument. By foreclosing, the creditor seeks to accelerate the note, making it immediately payable in full. He then seeks to force a sale of the security property or take possession of it if the borrower does not pay the balance due forthwith.
Deed of Trust states provide a non-judicial means to foreclose. Lien theory states require a superior trial court to order the foreclosure. As a consequence of the foreclosure, the trustee or court orders a sale of the real estate and application of the proceeds to discharge the debt. For loans in which the borrower owes more than the value of the real estate (an “underwater loan”), the borrower will end up owing money unless the law provides otherwise, as it does in some states. In that case the court or trustee will order the borrower to pay the deficiency.
Can I Defend Against Foreclosure?
Technically, yes; practically, NO. If you failed to make timely, accurate loan payments, sooner or later the creditor will initiate a foreclosure process against you. Then what excuse can you use to make the creditor back off or forgive you? Can you use “The dog ate my mortgage payment” excuse? Hardly.
A foreclosure will virtually always go through to completion if the borrower breached a valid note and did not obtain a forbearance agreement. All attorneys know or should know this. And yet, many attorneys convince the borrower facing foreclosure to hire them to defend against the foreclosure merely to delay the inevitable loss of the collateral property. These lawyers typically charge several hundred dollars a month or upwards of $20,000 for that defense, knowing the borrower will ultimately lose the house. Do you consider that ethical? Mortgage Attack does not. See the Attorneys topic for more on this
The Best Defense is a Good Offense
Creditors have proven the effectiveness of the attack methodology in their zeal to make borrowers comply with the terms of the loan. Do they beg and plead with the borrower, “PLEASE pay us on time, Pretty Please??!” NO. They come at you with a deadly serious attack. They say “Bring your loan current or we will foreclose.” Then they initiate a foreclosure procedure, the court or trustee orders a sale of your home, and the new owner gets the court to order you to move out. It’s an effective technique, attacking the borrower.
For the foregoing reasons, Mortgage Attack does not advocate focusing on foreclosure defense for breach of a valid note.
Many borrowers do not realize that they can use the creditor’s attack technique on their appraiser, loan broker, loan officer, lender, creditor, title company, servicer, or anyone else who injured them in the loan transaction.
If you have suffered injuries from such people, you should not put up with them. Mortgage Attack recommends attacking the lender or others involved in the loan transaction for their behaviors that made the note void or voidable, and for any other injuries to the borrower that might justify a set-off from the amount owed, or compensation in the form of damages. See the Attack topic for this process.
Failing Foreclosure Defenses
Traditional foreclosure defenses nearly always fail, even after dragging it our though legal action. Such defenses include securitization arguments, robosigning, lack of standing because of broken chain of ownership of beneficial interest in the note, expired statute of limitations on the foreclosure effort, vapor money theory, unknown owner of the note, missing original note, lack of consummation because of table funding, and other absurdities. See the Articles topic for details. Remember that Foreclosures proceed in equity, and once the judge or trustee ascertains that the borrower has breached the note and a security instrument allows consequent foreclosure, he has the legal duty to enforce the mortgage by ordering the sale of the property in order to raise funds to discharge the debt.
Some Defenses Are Valid
Please do not mistake Mortgage Attack’s disdain for FOCUS on the defense as an attack on affirmative defenses generally. Mortgage Attack believes it makes sense to use affirmative defenses to set back the foreclosure effort, provided the borrower mounts an attack on the lender or other injurious parties regarding appraisal or mortgage fraud, and to file complaints, counter-complaints, and cross-complaints against the injurious parties in an effort to win damages awards from them. It makes little sense to defend unless one can also attack. The saying is true: “the best defense is a good offense.”
Test Your Understanding
Here’s a simple test for you. Look at this list of items and decide which should become defenses alone, which should become causes of action in a some form of complaint seeking damages, and which have no merit:
- Appraisal Fraud – An appraiser’s intentional over-valuation of the property in order to win future business or receive kickbacks.
- Breach of Contract – Violating a term of the contract such as interfering with the borrower’s ability to pay timely or charging the borrower premium fees in order to provide kickbacks to the mortgage broker.
- Damage to Credit Reputation – Erosion of credit scores because of errors or misreporting by the lender or holder of the note.
- Equal Credit Opportunity Act (ECOA) – Bait-and-switch tactics by the lender/broker that increased the cost of the loan inordinately, particular because of the borrower’s race, gender, religion, language impediment, etc.
- Failure to Establish Conditions Precedent – Servicer or lender fails to perform important functions required by law or contract prior to taking hurtful actions.
- Fair Debt Collection Practices Act (FDCPA) – Debt collectors abusing borrowers through harassment, filing wrongful credit reports to credit reporting agencies, etc.
- Federal Housing Administration (FHA) Pre-Foreclosure Requirements – Servicer failing to mail the “How to Avoid Foreclosure” booklet to, or scheduling a meeting with, borrowers in advance of collection enforcement.
- Home Ownership and Equity Protection Act (HOEPA) – Charging excessive fees and interest on high interest loans.
- Interstate Land Sales Full Disclosure Act (ILSFDA) – Failing to disclose appropriate information in certain subdivision land sales
- Notary Fraud – Robosigning, or absentee notarization of loan documents, expired notary commission.
- Document Fraud – Counterfeiting of “original” loan documents, forgery of borrower’s signature.
- PSA – Bank violated provisions in the Pooling and Servicing Agreement.
- Vapor Money – Lender created money out of thin air because the borrower’s note funded the loan
- Real Estate Settlement Procedures Act (RESPA) – Broker, lender, appraiser, title company, or others gave or received kickbacks or unearned fees, failed to provide proper disclosures at closing.
- Real Party in Interest – The wrong party tried to foreclose.
- Truth in Lending Act (TILA) – Failure of lender or title company to provide proper disclosures and notice of right to rescind at or before closing.
- Unconscionability – Lender or broker inserting extremely unfair or one-sided terms in the note or mortgage, or inserting items unbeknownst to the other party, or running a fly-by-night operation outside the scope of federal and state requirements.
- Unfair and Deceptive Practices – Creating overreaching mortgage transactions, failure of brokers to conduct a lawful business, or having proper licensing.
If you need to know the answers, contact Mortgage Attack using the Contact page.