Being served with a summons telling you that you are being foreclosed upon can be a frightening experience. Many people assume that if they are foreclosed upon, there is nothing they can do. Even if you have fallen behind in your payments, you may still have defenses in a foreclosure suit. In order to foreclose a loan, a lender must be able to prove specific things to the court.
1. The plaintiff in a foreclosure action must be able to prove that they own the debt being foreclosed.
In order to foreclose a loan, the plaintiff must be able to show that they own the debt that is the subject of the foreclosure action. This sounds like a simple thing. The traditional conception of a mortgage goes something like this:
1. The borrower applies for a loan from the bank.
2. The bank reviews the borrower’s application to determine whether to issue a loan to the borrower.
3. If approved, the bank issues a loan to the borrower. The bank is left with a secured obligation in the form of a note and mortgage.
4. The borrower makes payments on the loan to the bank.
In reality, a mortgage can be a much more complicated transaction. First, the borrower probably is not making payments on the loan to the issuing bank, but rather to a mortgage servicer. The servicer is the entity that interacts with the borrower, manages the loan, and makes all the decisions regarding the loan, including whether and when to foreclose. After issuing a mortgage, the bank turns around and sells the loan to an aggregator, who contracts with the servicer to manage its loans. The aggregator takes the loans that it acquires and puts them into a securitized pool of loans that is governed by a Pooling and Servicing Agreement. Investors can then invest in the pool.
A mortgage may change hands multiple times before it gets foreclosed upon. When a mortgage is sold, the holder of the mortgage executes a document called an assignment. The assignment assigns the debt to its new owner and must be signed and authenticated prior to filing the foreclosure suit. Every time a mortgage changes hands, there must be a new assignment. However, frequently a foreclosure complaint will not establish a complete chain of title from the originator of the mortgage to the plaintiff in the foreclosure action. There may also be other defects in the assignment documents that show that the mortgage was not assigned correctly. If the plaintiff cannot show that they are the owner of the debt being foreclosed upon, they will not have legal standing to bring a foreclosure action.
2. The plaintiff must possess the original note.
The only person who can foreclose a mortgage is one who possesses the original note. Because the note gives the right of enforcement to the holder, a copy is not good enough! Often when a mortgage gets transferred from person to person, the original note gets lost somewhere along the way.
When a plaintiff seeks to foreclose a loan, and the note is lost, the plaintiff may include a count in the complaint to re-establish the lost note. In order to re-establish the note, the plaintiff must show that is was entitled to enforce the note at the time of the loss or that it acquired ownership of the note from the person who was entitled to enforce the note when the loss occurred.
If the plaintiff is not in possession of the note and does not re-establish it, then the plaintiff cannot foreclose on the mortgage!
3. The plaintiff must comply with all fair debt collection laws.
There are numerous laws on the state and federal level that protect consumers from unfair practices by lenders, including:
§ Truth in Lending Act
§ The Truth in Lending Act governs disclosures that lenders must make to borrowers at the time of the loan. A violation of the Truth in Lending Act may result in statutory damages or, in some cases, even rescission of the entire transaction.
§ Fair Debt Collection Practices Act
§ The Fair Debt Collection Practices Act protects consumers from abusive debt collection practices. Some of its protections include regulating when and how often debt collectors may call consumers, preventing debt collectors from discussing your debt with third parties, and preventing debt collectors from using abusive or threatening language when dealing with debtors. Failure to comply with this act may result in the debt collector having to pay statutory damages and attorney’s fees.
You have options!
Even if you have fallen behind on your mortgage payments, you still may have options that will allow you to remain in your home or avoid foreclosure.
A lender may reinstate a mortgage if the borrower repays the total amount in default. This means that the mortgage is brought to current status. Generally, to reinstate a mortgage, the borrower will have to pay all of the missed payments and late fees, as well as any costs incurred by the lender in attempting to enforce the mortgage. This may include attorney’s fees and court costs if the lender has had to file a foreclosure action in court.
Forbearance is the temporary reduction or suspension of mortgage payments. This may be an option for borrowers who are experiencing temporary financial difficulties and just need some time to get their situation straightened out. Borrowers who enter a forbearance agreement will still be responsible for interest accrued during the forbearance period.
Sometimes it is possible to modify the mortgage to make it possible for the borrower to stay current on the loan. In a modification, some or all of the terms of the original agreement are permanently changed.
A short sale occurs when the borrower sells the property for less than the total amount owed on the mortgage. In order for the remaining balance to be forgiven, the lender must approve the terms of the short sale.
Deed in Lieu of Foreclosure
The homeowner may voluntarily offer title of the property to the lender in exchange for the lender not foreclosing on the property. The borrower will still lose the property in this situation, but it will not have as much of an effect on the borrower’s credit rating as a foreclosure would.
In conclusion, if you have been served with a foreclosure complaint, don't panic and don't ignore the situation! Ignoring the complaint will simply lead to a default judgment being filed against you. Once that happens, your options become much fewer. Instead, you should contact a foreclosure defense attorney to walk you through your options.