Thursday, February 4, 2010

A Primer on How to Successfully Challenge a Foreclosure

Foreclosure is a legal process wherein a lien holder (the person who owns your debt) forces the sale of collateral (your house) to satisfy the debt when you no longer have the ability to make the required payments. When it happens to someone else, it is too bad, when it happens to you, it is bewildering and somewhat scary. In order to counter that fear, you need information which all too often (you are told) is only available from an attorney and at a high price.
Nothing in what you are about to read should be considered legal advice. It is information gleaned from years of study of this current economic recession. While there is a certain commonality to every situation, your situation is unique. NOTHING IN THIS ESSAY SHOULD BE CONSIDERED LEGAL ADVICE. FOR SPECIFICS AS TO YOUR CURCUMSTANCES IN RESPECT TO THE LAWS OF YOUR STATE, YOU SHOULD CONSULT AN ATTORNEY. THE PURPOSE OF THIS ESSAY IS TO BE INFORMATIVE , TO EXPLORE ALL OF THE OPTIONS WHICH ARE AVAILABLE TO YOU SO YOU CAN MAKE A FULLY INFORMED CHOICE.
Foreclosure is a different process in each state. Some states require a court order, others are non judicial. A non-judicial state simply requires the interested party follow a set procedure to foreclose. A judicial state requires the interested party to file suit and you must follow the procedures for responding to any lawsuit. If you choose not to answer or defend the suit, the court will find in the plaintiff’s favour by default. You need to determine exactly what your state law is on this. If you will check out this website ( you will find basic information on the foreclosure laws in your state. From there, you should do a google search using a term such as (foreclosure laws ID…or AK …or ??). You should be able to find the specifics to your state that way.
The foreclosure process usually follows this basic order:
Notice of Default (NOD)
Notice of Intent to Accelerate (NIA)
Notice of Foreclosure (NOF)
What you probably do not know is that your mortgage information is available from list brokers for people who wish to sell to this demographic. Your specific information isn’t available, but a great deal of information is available by certain filters in the overall larger database. The most common are 30/60/90/120 days late (all or some combination thereof), NOD & NOF. There are marketers out there who will attempt to contact you during the late payment period to try to sell you a refinance package or perhaps even a loan modification package. Once you get to the NOD/NOF period, you can expect to be contacted by real estate professionals who would like to help you sell your house.
There are seven ways to respond to your situation. They are:
Loan Modification
Quick sale
Short sale
Deed in Lieu of Foreclosure (aka Jingle Mail)
Contested Foreclosure
How you respond depends upon where you are in the process.
Re-finance is an option only in the very early stages of the process and you may not find it available at all. In the good ol bad ol days, mortgage brokers were selling all sorts of mortgage products. There were Adjustable Rate Mortgages (ARMs), Option ARMs (where you “choose your payments” and even Negative Amortization Mortgages (NAMs) where your payment wasn’t enough to satisfy even the interest payment on the note. Unpaid interest accrued to the principal and would be rolled over when you refinanced the note when (hopefully) the value of the house was higher than when you first bought it. If you are very early in this process (as in your ARM or Option ARM is resetting to a higher interest rate) you might be able to refinance. It is certainly worth the try as the rest of this process is not pleasant to live through.
Loan Modification
Loan modification is where you negotiate with the lien holder to modify the terms of the contract. Many people think that once the mortgage process is completed the terms and conditions are what they are. This isn’t true. Provided all parties agree, any change can be made. The Federal Government has incentives in place to motivate banks to modify home loans so the homeowner can stay in their home (there are countering incentives which will be explored later). The banks will ask you to fill out a series of forms which spell out your actual income and your actual expenses. They will want to see exactly how much money you make and exactly where it goes. You will need to fax this information to the bank. You may be able to use USPS, but odds are high they will request you to fax the information. The banks do not seem to be set up to use email with attachments so if you do not have fax capabilities on your computer, you will need to use someone else’s fax machine.
The process is intensive and takes a lot of time. The banks themselves do not make it easy. You often will find yourself sitting on hold for long periods of time and never talking to the same person twice. There are numerous reports from people stating the banks “lose” the paperwork requiring the homeowner to fax the same information many times. During this process, the loan itself falls further into delinquency and further towards the default/foreclosure deadline. There are even reports of houses being foreclosed upon during this loan modification process. One side of the bank is telling you to not worry about the foreclosure process and assures you your loan modification request is being processed quickly and not to worry. Meanwhile, the other side of the bank is continuing with the foreclosure process. There are reports of homeowners being notified of the sale after it has happened even while negotiations on a loan mod were ongoing.
There are companies out there who will offer to do the loan mod for you; to stay on top of the negotiations so that they are completed in a timely manner. Many states have regulated the process of loan modifications so that the company may not collect a fee in advance. Some states even require the loan modification company be a law firm or affiliated with a law firm. Please be aware, with the advent of this banking/mortgage crisis, scam artists are crawling out of the woodwork. It is imperative you do your due diligence on any company or attorney group you may hire to do the loan modification process for you. There are many stories out there of homeowners who have hired a company to handle the loan modification process for them only to lose both their houses as well as a large amount of money. For more information about the loan modification pitfalls, google: Loan Mod Scams
Quick Sale
At some point in this process, you will be contacted by a real estate agent and/or broker. They will want to talk to you about putting your house up for sale so you can get away from a bad situation so you can start all over. Some may be rude, but for the most part, it will be quite low key and non-threatening. The agents know this is an emotional time for you and will want to sit down with you to share with you what you can expect from the process. From that, they hope to be able to list your property for sale.
This is not a bad conversation for you to have. It will enable you to get a handle on time lines as well as a good idea of what your house is worth in the local market and what the odds are for a quick sale.
A quick sale is just that. It happens quickly. The house will have to be discounted from its true market value in order for it to happen, but happen it can. It allows you to pay off the debt, maintain your credit rating and hopefully walk away with a little bit of money in your pocket.Short Sale
A short sale means to sell your house for less than what you owe on it. It requires the permission and approval of your note holder. Usually, it means consulting with your real estate professional to determine the correct price and then gaining approval for that short sale with your lender. Sometimes the lender will agree to a short sale price in advance, usually they will require a buyer be lined up and ready to move on the sale once approved.
Short sales sometimes work, sometimes they don’t. It all depends upon your lender’s overall condition both nationally and in the local market. If the local market is flooded with REO’s (Real Estate Owned – as in owned by the bank) and if you have a buyer lined up, the odds are higher that the sale will be approved.
Because of the overall intensity of this nationwide market, banks seem to be flooded with requests for short sales and sometimes take a long time to respond to the request. There are reports of short sales pending and then taking so long for bank approval that the potential buyer walks away from the deal. Meanwhile, the foreclosure clock continues to tick. But sometimes they work, and when they work, they work nicely. You are able to get away from the property, the bank takes a hit, but they end up with a performing loan which is what they want more than anything else.
One caution, if you are approved for a short sale, make sure the bank does not issue you a 1099 for the shortfall. A 1099 is an IRS form issued from an entity to another entity to indicate monies paid absent a W2. You can negotiate the 1099 issue with your bank. If you do not assure this in advance and the bank issues a 1099, you will be liable for taxes on the shortfall as it will be considered income. Forget that you don’t get to see it or spend it in any way whatsoever. For accounting purposes, the shortfall is considered income.
Deed In Lieu of Foreclosure – “Jingle Mail”
Some people may tell you to walk away from the house. You may choose to do this; walk away and send the keys back to the bank in the mail or even leave them in the front hallway. This is sometimes referred to as “jingle mail”.
While there is a certain amount of satisfaction in jingle mail, it doesn’t absolve you of your responsibility to the system nor does it relieve the bank of going through process. Remember, these are contracts and the whole point of contracts is that there is a process to resolve disputes. If you send jingle mail, you have not lived up to your end of the dispute resolution and the bank must continue with the process to take the house back.
A Deed in Lieu of Foreclosure means you officially give up all rights to your house and give up possession without any sort of contest. It is process recognized by the courts and the official way to send jingle mail. It stops any foreclosure action as it is no longer necessary. If you choose to go forward with this process, contact your bank and let them know. They will prepare the necessary forms and process for Deed in Lieu of Foreclosure to take place.
Foreclosure is the end of the process. Depending on which state you are located in, it can be a judicial process or a non judicial process. For details on which method of foreclosure is in your state, please see This website will provide you with both a summary of the laws in your state as well as navigation links to find out the specific process in your state.
No matter the process, once it is complete, a sale will take place. It will take place as proscribed in the law, usually either on the courthouse steps or in a title office. The sale is an auction with the house going to the highest bidder. No matter what happens, you will have to vacate the house. Again, different states, different processes. In some states you will need to vacate in 10 days, in others you can force the new owners to go through the entire eviction process as if you were a renter who hasn’t paid rent and won’t quit the residence. Some states have a right of redemption on a homestead which means you have a certain amount of time to cure the default and buy the house back. Again, check the specific laws of your state for details.Bankruptcy
Bankruptcy (BK) is a legal process where you declare to the courts that you have debts exceeding your assets and you ask the courts to set up a way to liquidate everything in an orderly and just manner. There are three types of BK, Chapter 7, Chapter 11 & Chapter 13, all of which refer to various chapters in the code. The Bankruptcy Code anticipates the goal of Chapter 13 as enabling income-receiving debtors a debtor rehabilitation provided they fulfill a court-approved plan. This is in contrast to the goals of Chapter 7 that offers immediate, complete relief of many oppressive debts.
This essay is not intended to go into a great deal of detail of the bankruptcy code nor is it intended to give any sort of legal advice. However, for basic information as to the various chapters of the bankruptcy code, please see
Chapter 7:,_Title_11,_United_States_CodeChapter 11: 13:,_Title_11,_United_States_Code
Should you choose BK as a way out of your financial problems, you are strongly urged to consult an attorney specializing in Bankruptcy.
Challenging the Foreclosure
Believe it or not, you can challenge the foreclosure process … and win. Challenging the foreclosure means just that. You challenge the bank’s right to foreclose on your house. This may sound counter intuitive, but it is true. In order to understand the process of challenging the foreclosure, the why’s and wherefore’s you need deep background information as to the nature of this financial meltdown and how we got to where we are as a country.
Back in the early 90’s, the Gramm Leach act passed by Congress was signed into law. This act erased the financial firewall which stood between investment banks and traditional banks. This firewall had been put in place during FDR’s administration to separate these two groups as the mixing of the two was determined to have been a prime reason for the Great Depression. Shortly after this act was signed into law, you may recall a whole host of consolidations in the financial markets. Many household names and logos vanished into the consolidation frenzy. Citigroup is just one example of this consolidation. Before too long, they became a bank, an investment bank, an insurance company and the source of a whole host of financial services.
The next thing that happened was Fannie & Freddie, two quasi governmental agencies focused on affordable home loans, were pressured by the Clinton administration to focus their efforts on heretofore neglected elements of society. These efforts came to be known as the sub-prime and alt-A mortgage sectors.
The next piece of the puzzle can be placed at the feet of the Federal Reserve and the reserve requirements they placed on banks. Money, like water, seeks to flow and if profits can be made, they will be made. The large banking houses were restricted by their reserve requirements from making more loans, a source of profits. In an effort to get around these restrictions, the large banks (Citigroup, JP Morgan Chase, Goldman Sachs, Bank of New York Mellon, Washington Mutual and Wells Fargo to name a few) created “exotic” financial products from bundled mortgage loans such as Collaterized Debt Obligations(CDO’s) and Structured Investment Vehicles (SIV’s). These financial products were packaged up and they sold like shares of stocks to “sophisticated investors” such as pension funds, endowment funds, and foreign banks. This moved the loans off the books of the large banks meaning they then had more reserves to lend and the process would start all over.
As the party progressed, the investment vehicles became more sophisticated. The banks would create a structured investment vehicle which would require a certain mix of different types of loans and the order would go out seeking such loans. It is almost as if they ordered the loans off a menu and the storefront mortgage brokers would be like the cooks back in the kitchen preparing and delivering meals of a certain mix of ingredients. Once the order was filled, the large banks would slice and dice the paper into finer and finer pieces assigning those pieces to certain tranches of the structured vehicle. This created various grades of paper which could be marketed as high grade/low grade with a commiserate rate of return upon the investment. Once again, these would be sold to pension funds, endowment funds, foreign banks, wealthy individuals, hedge funds, mutual funds, anyone willing to buy.
The final piece of the puzzle was the high degree of complicated ownership of any single home loan and trying to find a way to register that complicated ownership with each individual county courthouse as required by law. Enter the Mortgage Electronic Registration Systems (MERS). MERS ( offered themselves up as a way to track the ownership & servicing rights. This is direct from their website:
MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.
And that very quote, based upon the need to keep track of the high degree of slicing and dicing of ownership of Cashflows and servicing rights is the reason you can challenge your foreclosure and win.
Here is what happened.
In 2007, Deutches Bank attempted to foreclose on a group of properties in Ohio. In October of that year, Judge Boyko of the Eastern Ohio United States District Court dismissed 14 Deutsche Bank-filed foreclosures in a ruling based on lack of standing for not owning/holding the mortgage loan at the time the lawsuits were filed. Due to all of the slicing and dicing of the cash flows mentioned above, Deutches bank could not prove they had perfected interest in the title and hence, had no standing to sue for foreclosure. In essence, the issue was not had the homeowners defaulted on their mortgage, but was Deutches Bank the person they owed the money to? In essence, a stranger who was unknown to the homeowner popped up out of nowhere claiming to own the title. The judge said they didn’t. The homeowners walked away still in their houses, Deutches Bank walked away with their hat.
From that ruling came the entire “produce the note” strategy of successfully challenging foreclosure actions. The issue has been appealed by the banks through several state court systems and was shot down first by the Kansas State Supreme Court. That was followed by the Arkansas State Supreme Court, Ohio State Supreme Court and the Massachusetts Landbank. There have been two rulings in Federal Bankruptcy court in Idaho and one in Nevada which also support the premise that the foreclosing party has a duty to prove perfected interest in the title and if unable they are barred from foreclosing. There have also been numerous state district court rulings in New Jersey, California and Florida supporting this notion as well.
The best analysis of this movement is by Ellen Brown and it is excerpted in its entirety here:
Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks
Ellen BrownWeb of DebtTue, 22 Sep 2009 10:24 EDT
A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.Eliminating the “Straw Man” Shielding Lenders and Investors from Liability
The development of “electronic” mortgages managed by MERS went hand in hand with the “securitization” of mortgage loans – chopping them into pieces and selling them off to investors. In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into “financial products” called “collateralized debt obligations” (CDOs), ostensibly insure them against default by wrapping them in derivatives called “credit default swaps,” and sell them to pension funds, municipal funds, foreign investment funds, and so forth. There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically. MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of “corporate shield” that protects investors from claims by borrowers concerning predatory lending practices. California attorney Timothy McCandless describes the problem like this:
“[MERS] has reduced transparency in the mortgage market in two ways. First, consumers and their counsel can no longer turn to the public recording systems to learn the identity of the holder of their note. Today, county recording systems are increasingly full of one meaningless name, MERS, repeated over and over again. But more importantly, all across the country, MERS now brings foreclosure proceedings in its own name – even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. . . . So imposing is this opaque corporate wall, that in a “vast” number of foreclosures, MERS actually succeeds in foreclosing without producing the original note – the legal sine qua non of foreclosure – much less documentation that could support predatory lending defenses.”
The real parties in interest concealed behind MERS have been made so faceless, however, that there is now no party with standing to foreclose. The Kansas Supreme Court stated that MERS’ relationship “is more akin to that of a straw man than to a party possessing all the rights given a buyer.” The court opined:
“By statute, assignment of the mortgage carries with it the assignment of the debt. . . . Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” [Citations omitted; emphasis added.]
MERS as straw man lacks standing to foreclose, but so does original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a “security.” The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.
The Potential Impact of 60 Million Fatally Flawed Mortgages
The banks arranging these mortgage-backed securities have typically served as trustees for the investors. When the trustees could not present timely written proof of ownership entitling them to foreclose, they would in the past file “lost-note affidavits” with the court; and judges usually let these foreclosures proceed without objection. But in October 2007, an intrepid federal judge in Cleveland put a halt to the practice. U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not filed the proper paperwork to establish its right to foreclose on fourteen homes it was suing to repossess as trustee. Judges in many other states then came out with similar rulings.
Following the Boyko decision, in December 2007 attorney Sean Olender suggested in an article in The San Francisco Chronicle that the real reason for the bailout schemes being proposed by then-Treasury Secretary Henry Paulson was not to keep strapped borrowers in their homes so much as to stave off a spate of lawsuits against the banks. Olender wrote:“The sole goal of the [bailout schemes] is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value – right now almost 10 times their market worth. The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
“. . . The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC . . . .
“What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back.”
Needless to say, however, the banks did not buy back their toxic waste, and no bank officials went to jail. As Olender predicted, in the fall of 2008, massive taxpayer-funded bailouts of Fannie and Freddie were pushed through by Henry Paulson, whose former firm Goldman Sachs was an active player in creating CDOs when he was at its helm as CEO. Paulson also hastily engineered the $85 billion bailout of insurer American International Group (AIG), a major counterparty to Goldmans’ massive holdings of CDOs. The insolvency of AIG was a huge crisis for Goldman, a principal beneficiary of the AIG bailout.
In a December 2007 New York Times article titled “The Long and Short of It at Goldman Sachs,” Ben Stein wrote:
“For decades now, . . . I have been receiving letters [warning] me about the dangers of a secret government running the world . . . . [T]he closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.”The pirates seem to have captured the ship, and until now there has been no one to stop them. But 60 million mortgages with fatal defects in title could give aggrieved homeowners and securities holders the crowbar they need to exert some serious leverage on Congress – serious enough perhaps even to pry the legislature loose from the powerful banking lobbies that now hold it in thrall.
Comment: It will be interesting to see how this develops. No doubt lawyers for the banks are looking for a way around this.
But this ruling does reveal just how fragile the system is. In an attempt to build a system where they, the bankers, have no responsibility at the core they have created a system where they have little control.
Wouldn’t it be quite a scene if the whole system collapsed in the banksters faces?(
So to put it short and sweet, here is what happened. In their infinite cleverness of achieving ever new and novel ways to create profit, the banks managed to separate the mortgage from the deed of trust. When they did that, the mortgage holder lost the ability to foreclose because they have no interest in the Deed of Trust and is now holding a worthless piece of paper. The owner of the Deed of Trust can sue to recover, but because the investment vehicles are the holder of the deed of trust and ownership of that vehicle has been sold to a wide variety of entities, it is difficult if not impossible to determine just who the true owner of a given mortgage is. It’s a mess, their mess, and it is not your responsibility as a homeowner to clean up their mess.
It is appropriate to bring your attention to one more aspect of this mess. Recall the TARP fund? It was a $700B bailout to the large banks and particularly AIG. AIG was/is an insurance fund which insured all of the mortgages in the structured investment vehicles against default and foreclosure and because these mortgages had been sliced and diced seven ways for Sunday, each mortgage was actually insured four or five times over. When the mortgages started to default and foreclose, the insurance companies ended up paying 100 cents on the dollar on these insurance policies they wrote to companies such as Goldman Sachs, Wells Fargo, Bank of America, JP Morgan Chase and others. It was the TARP money, the taxpayer’s money passed through AIG which bailed out the banks.
All of this information goes a long way to answering the question “why is it so difficult to get a loan modification?” The truth of the matter is, because it is more profitable to foreclose on the mortgage, collect the insurance (maybe more then once), remove a non performing loan from the books and put a tangible asset of certain value back on the books. This creates a better balance sheet from whence they can then create more loans. And the process starts all over again. Why should they accept a measly $4,000 from the Government in exchange for the windfall of foreclosure? In the parlance of the gangster, “fuhgedaboudit”
Can you challenge the right to foreclose in a bankruptcy proceeding? Absolutely. As a matter of fact, your BK attorney has a duty to pursue this line of action. Do not let him tell you it is only a delaying action of the inevitable. There are three rulings of the US Bankruptcy court; two in Idaho, one in Nevada; which come down quite hard on the side of the homeowner on this issue.
Does this process work in both judicial and non-judicial states? Absolutely. In both cases, you must file suit. In judicial states, you file a counter suit. In a non-judicial state, you must file suit and additionally seek an injunction and if necessary a Temporary Restraining Order (TRO) to stop the foreclosure sale on your house.
Can you initiate this action before you are in financial difficulty? Absolutely. You can request your loan servicer provide you with the exact ownership of all portions of your note and show conclusively that the money is going to the correct entities. Will the loan servicer grant your request? Probably not. But that’s OK, because it shows the courts you tried to resolve the dispute before it was ever escalated and you were ignored.

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