Cleveland Foreclosure Defense Information
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Foreclosure Defense, Strategies and Challenges
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The practice at Benson Law Firm focuses on bankruptcy, while the foreclosure defense work is generally limited to negotiating workouts in mediation either in lieu of bankruptcy or leading up to bankruptcy. In other words, we try to resolve the foreclosure during the mediation phase with a loan modification. There has been an increase in foreclosure activity in our practice, largely due to economic conditions and plummeting real estate values.
We represent clients throughout Northern Ohio, from Toledo to Youngstown and from Cleveland to Mansfield. Most of our foreclosure clients have some kind of major loss, usually a reduction in employment, a major medical event or a recent divorce. Our approach with these clients is as holistic as possible, linking my clients’ financial challenges with the most logical legal and non-legal solutions. For example, many clients are in need of public benefits, assistant from nonprofit agencies and credit repair.
Over the last several years, Northern Ohio has seen steady job losses and reductions in work hours. If two people in the household are making money sufficient to support mortgage payments and one or both lose a job or suffer a reduction in hours, it can send that household into a tailspin. Some people try to hang on, concentrating on the house by making payments on the mortgage while they defer other things. Eventually, they reach the limit on their credit cards while trying to make ends meet and find they cannot further reduce their expenses. Often, clients come into my office with a complaint in hand from a creditor lawsuit. Older individuals on fixed incomes who suffer major medical events and incur large amounts of medical debt discover at the end of the month that they don’t have enough money with which to make the monthly mortgage payment.
Many debtors find multiple factors can trigger or accelerate foreclosure. Any one problem may not cause an emergency but may begin a slow downward spiral. When people try to keep things on an even keel, they may be successful for a while. But eventually, they may end up “robbing Peter to pay Paul.” Other clients have been victims of predatory lending, and so they have houses that are worth a fraction of their loan amounts. They may want to stay in the home because it holds fond memories. But from an investment standpoint, it is a black hole. When asked if they would carry the same loan and buy the house at the same price all over again, they invariably say “of course not.”
Nonetheless, most borrowers want to give some effort to working out an accommodation with their lender.
What one does with a distressed borrower depends first on whether they have sufficient time to negotiate with the mortgagee. If a foreclosure suit has not been filed, we suggest first to apply to the lender for a loan modification.
To receive a loan modification and avoid a foreclosure, a debtor should immediately contact either the lender (or mortgage servicer) directly, or get help from a nonprofit housing counselor. We say immediately because there is currently significant delay in processing applications for loan modifications. At Benson Law Firm, we recommend using a housing counselor (e.g., Neighborhood Assistance Corporation of America at www.naca.com) if clients are not too far behind on their mortgages. In fact, major lenders and servicers provide funding to many of the counseling agencies in order to reduce the number of foreclosures currently in the pipeline. Of course, it is important to communicate to clients that getting assistance from a housing counselor does not guarantee that a loan modification will be accomplished. Counselors and their counterparts in the lender’s loss mitigation department are still limited by internal lending policies and agreements with investors.
If a foreclosure seems imminent or has already been initiated, a client has several options. First is to answer the foreclosure complaint and request mediation. In mediation, a debtor previously rejected for a loan modification may be able to get a second bite of the apple. And if the debtor has not yet applied for a loan modification, this may be the forum for initiating this process. Of course, mediation is not a cure-all and if negotiations fail here, the options are limited.
When loan modification efforts in mediation fail, the debtor basically has three choices: surrender the property, defend the foreclosure or file bankruptcy. If surrender is desired or necessary and a foreclosure complaint has been filed, we attempt to get “cash for keys.” Rather than go through judgment in the foreclosure, the lender will accept the keys to the property and provide a small stipend to cover the debtor’s moving expenses. This enables the lender to secure the property, foreclose, and move quickly to a sheriff sale.
If surrendering the property is not an option, a debtor may want to avoid bankruptcy by defending the foreclosure. Defenses to foreclosure are limited and, in most cases, only a temporary solution. If the lender failed to follow proper state procedures or mortgage terms in the process of foreclosing on the homeowner, the lender may have to go back to square one. However, my experience is that most judges are not interested in trivial errors or ones that don’t result in substantive harm.
One defense that I have used both in state court and in bankruptcy court is a lack of standing. If the foreclosing party (usually an investor group) can’t establish it owns the mortgage, a defense of lack of standing may be raised. This strategy is sometimes referred to as the “produce the note defense.” But this defense may be difficult due to the complexity of some mortgage transactions and may result only in a delay until the proper party with standing can be established.
Another defense arises from the fact that lenders and mortgage servicers often make serious mistakes when dealing with borrowers. From inaccurate reinstatement quotes to misapplied mortgage payments to failure to pay property taxes, lender errors can be used to stop a foreclosure.
Finally, a foreclosure may be fought on the basis of unfair lending practices under the Truth in Lending Act (TILA) or the Home Ownership and Equity Protection Act (HOEPA). Both of these laws allow a debtor to sue for damages and may even allow the cancellation of a mortgage under certain circumstances (but the debtor would have to refinance the balance of the loan). Although these defenses sound attractive, most lenders are either in compliance or have ensured that the laws don’t apply to their loans.
If defending the foreclosure is not an option due to a lack of plausible defenses (or a lack of available funding), the next step should be to consider bankruptcy.
Bankruptcy is an option when the foreclosure process has progressed to the point that constructing a workout is no longer feasible or all efforts to find a resolution have failed. In my practice, bankruptcy is often the only remaining option where a default judgment has been entered in the foreclosure case, a sheriff’s sale has been scheduled and the lender stated it is unwilling to pull the sale in order to give the parties more time to modify the mortgage loan. Bankruptcy can be used to halt the sale and either put the loan back on track (where employment conditions have improved) or discharge unsecured obligations that may be getting in the way of a loan modification. At the very least, the automatic stay in bankruptcy buys the debtor some time to reorganize and potentially work something out with the lender.
However, it is important to keep in mind that a bankruptcy petition must be filed in good faith. The classic example of bad faith in the context of foreclosure involves a debtor filing serial Chapter 13 bankruptcy petitions in order to stay in the house rent-free. Under this scenario, the debtor has filed and the mortgage lender responds by filing a motion to lift the automatic stay. The debtor then dismisses the action, only to re-file when the foreclosure again reaches to point of a sheriff sale. The second filing would be presumed to be in bad faith.
Presuming the client is acting in good faith, the attorney must determine under which chapter to file in order to achieve the client’s goal of saving the home. If the client got into trouble with bills but now has the wherewithal to pay both the regular mortgage payment and a plan payment to the trustee, a Chapter 13 reorganization may be an option. However, if it is not feasible for the client to put together such a plan and household income is below the median, a Chapter 7 liquidation may clear out sufficient unsecured debts for the lender to rethink a loan modification request. If the latter tack is chosen, it is extremely important to be in close contact with the mortgagee and begin the application process immediately. The lender will require a consent form filled out by the client, giving the attorney the authority to speak directly with the company about the loan.
If a Chapter 7 filing is necessary, the client should be on notice that the lender has the option of filing to lift the automatic stay at any point. In fact, this may happen even if there is a pending application for a loan modification. But a debtor should not allow this dissuade him or her from applying. And it does not mean that the lender has decided not to offer a loan modification package. It just means that the mortgagee is pursuing judgment in order the minimize the time necessary to get the property sold should the debtor decide to surrender the house, should the household income dry up and make a loan modification unfeasible, or should the debtor get a package but fail to make required payments on time during the probationary period.
I have seen several options offered by lenders in restructuring an existing mortgage loan. The first is a repayment plan, wherein a borrower is urged to get back on track by making current mortgage payments coupled with a portion of their arrearage. Typically, the debtor is asked to make installments of one and a half times their regular monthly payment over a period of months. This is probably the easiest to arrange with the lender and was one of the only options available during the beginning of the current crisis. The trouble with this option, though, is that most people who are currently behind on their mortgage now do not have the extra income necessary to make must larger payments. That, after all, is how they found themselves in arrears in the first place.
The second option is a forbearance agreement, whereby the lender agrees to postpone mortgage payments for a period of time. These missed payments are often added onto the back of the loan and the term extended for the number of months deferred. This kind of workout is most common where a debtor has been laid off temporarily or called to active duty.
Finally, loan modifications involving lower interest rates and hence lower monthly payments have been on the rise. These have been necessary due to the continuing infeasibility of the prior two options in cases where homeowners have been laid off indefinitely, have been unable to afford their obligations from the outset due to predatory lending, have variable rate loans whose interest rates have re-set to unaffordable levels, or whose household expenses have suddenly increased (e.g., due to children moving home or a major medical event). This alternative is probably all that is available for debtors who can’t afford their current mortgage payments and there is little prospect that they will be able to afford them in the future.
There are other strategies that may be available in unusual circumstances, including extending loan periods beyond 30 years, converting from a variable to a fixed interest rate, and completely re-negotiating the entire loan for a new term and at a new interest rate.
Occasionally, a lawyer will come across a homeowner who has been the victim of a foreclosure scam. The latest, forensic mortgage loan audits, are peddled by companies claiming to review mortgage loan documents in order to find violations of state and federal mortgage lending laws. Their reports, they claim, can be used to avoid foreclosure, accelerate the loan modification process, reduce loan principal or even cancel the loan. But according to the Federal Trade Commission and its law enforcement partners, there is no evidence that forensic loan audits will help a debtor get a loan modification or any other foreclosure relief, even if they’re conducted by a licensed, legitimate and trained auditor, mortgage professional or lawyer.
If you think your client has been the victim of foreclosure fraud, the FTC urges you to contact them at www.ftc.gov, as well as contact your state’s attorney general at www.naag.org.
It is always advisable to consider the internal processes and institutional challenges an opposing party is facing in a foreclosure action. If you are sensitive to the obstacles faced by the lender, its loan servicer and its litigation counsel, it will be easier to advise a debtor as to what can reasonably be expected from proposed strategies. Always bear in mind that there are different departments within an institution from which the client may be receiving confusing or even conflicting information about their loan.
A common complaint from clients is that their bank appears to be sitting on a loan modification application for months after having received all requested documents, only to turn around and request updated documents all over again. Clients must understand that each lender has an unprecedented volume of applications and that, when it finally comes time for a particular application to be reviewed, it must contain current information. Clients are also surprised to receive different responses from customer service than from the loss mitigation department or the legal department. Once a typical client understands the entire process, as well as the separate functions of each of these departments, it goes a long way to diffusing any frustration or anxiety about the status of an application.
Of course, taking a combative stance with the lender in response to client frustrations is not helpful. In fact, it can push a client’s application to the bottom of the pile and result in greater delay. Just remember: Lenders have an interest in keeping homeowners in their houses and would prefer to reach an accommodation that allows cash flow to resume. After all, the lender does not want to be in the business of owning real estate. So the alternatives are pretty clear: Either get the cash flow back on track with minimal disruption and cost, or liquidate the asset and move on to more productive activities.
The challenge for all parties — debtors and lenders alike — is to come up with an agreement that makes financial sense. If the mortgagee and homeowner can fashion a solution that makes modification more attractive than the expensive process of foreclosure, that’s a deal worth doing. However, if the financial upside for the lender is limited due to poor payment history and weak income prospects, it will probably decide to move that loan off its books through foreclosure. In many recent cases, the debtor’s situation has changed so markedly that there is little chance the parties will be able to find common ground. Under these circumstances, it is important for debtor’s counsel to explain the lender’s perspective to his or her client, and why it is impossible in the debtor’s case to create a viable solution.
This area of practice is interesting right now because the situation for lenders is very fluid. It is difficult to say from month to month what terms will be acceptable and what will be rejected out of hand. But right now, homeowners have more leverage than ever to renegotiate their mortgages in light of changed circumstances.
How you structure a solution depends on whether the client is trying to avoid foreclosure, recently has been served with a complaint or has a sheriff sale date pending. The most common solutions include:
1. Loan modification application if there is sufficient time prior to the filing of a foreclosure complaint.
2. Workout in mediation after answering a foreclosure complaint.
3. Bankruptcy either to halt a pending sheriff sale or buy more time to get a response on a loan modification application.
1. If no foreclosure has been filed, have the client file a loan modification application immediately.
2. If a foreclosure has just been filed, answer the complaint and request mediation.
3. If there is a pending sheriff sale, bankruptcy is probably the only option to save the home.
4. Always stay in close contact with the lender’s representative and understand the particular challenges he or she faces within the institutional structure.