foreclosure defense

FORECLOSURE DEFENSE

ALWR

Florida Coastal School of Law

December 9, 2010

Albert R. Tetrault SGN 67079884

Albert R. Tetrault

© Albert R. Tetrault, December 2010 2

On October 9th 2010, Bank of America announced it is suspending foreclosure actions in

all fifty states to review whether foreclosure documents were processed correctly.1 This

and several similar announcements by large residential mortgage banks brings new

energy to the foreclose defense attorneys in many states who have been challenging

foreclosures on behalf of their homeowner clients.

OVERVIEW....................................................................................................3

MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. (“MERS”)........9

Current situation 14

FORECLOSURE DEFENSE OBJECTIVES ...................................................15

FORECLOSURE DEFENSE TACTICS ..........................................................17

Due Process 17

Fraud 21

Truth in Lending Act (“TILA”) 23

Home Ownership and Equity Protection Act (“HOEPA”) 24

PROPOSAL .................................................................................................25

Moratorium 25

Legislation 27

SUMMARY ..................................................................................................30

1Bank of America, http://homeloanhelp.bankofamerica.com/en/foreclosure-sales-halt-announcement.html (last visited Nov. 18, 2010).

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OVERVIEW

The housing market is a large and important part of the U.S. economy. The contribution

of this market sector depends on the stage of the housing cycle. Since quarterly data

collection began in 1947, spending on new home construction and remodeling

(residential fixed investment or “RFI”) has averaged about 4.8% of the U.S. gross

domestic product (“GDP”). During the same period, when rents, furnishings and other

housing related costs are included, housing has averaged 21% of GDP.2

The GDP in the U.S. at the end of June 2010 was $13,195 Billion.3 The current rate of

RFI, including rents, furnishings and other housing related costs, is 15.3%.4 The resultant

size of the housing market represents nearly $2 Billion. Not only is this a very large

market segment, but it is also quite volatile. Historically, changes in RFI have been a

leading indicator for future performance of the economy. Drops in RFI forecast a

contraction in economic growth two quarters into the future, and an increase in RFI

forecasts a turnaround in the economic cycle within two quarters.5 Our experience during

the current period of 2005 – 2010 has been consistent with the historical record.

Reductions in RFI predicted the recession two quarters in advance, and the resurgence in

2 FREQUENTLY ASKED QUESTIONS ABOUT THE ROLE OF HOUSING IN RECESSIONS AND RECOVERIES, Joint Center for Housing Studies of Harvard University, 1 (Aug. 2009) available at http://www.jchs.harvard.edu/publications/faq-housing_in_recessions_and_recoveries_8-09.pdf (last visited on Nov. 23, 2010). 3 Nat’l Ass’n Home Bldrs., http://www.nahb.org/generic.aspx?sectionID=784&genericContentID=66226 (follow “Table 1” hyperlink) (last visited on Nov. 21, 2010). 4 Id. 5Joint Center for Housing Studies of Harvard University, supra note 2, at 2.

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RFI, although admittedly small, forecast the emergence of the economy from recession in

2009.

The collapse of the financial industry in the third and fourth quarter of 2008 signaled to

Main Street that we had entered a serious recession. As predicted by the reduction in RFI

from 6.3% of GDP in the fourth quarter of 2005 to 2.4% in the second quarter of 2009,

the U.S. economy experienced the “Great Recession.” 6 The recession lasted 18 months,

which makes it the longest of any recession since World War II.7 Although The Business

Cycle Dating Committee has noted the emergence of the economy from recession in June

2009, the rate of growth of GDP and employment has been so tepid that nearly everyone

feels like we are still in the Great Recession. Total employment dropped by 8.4 million

from December 2007 through December 2009.8 Total unemployment in November 2010

was 15.1 million.9 The unemployment level, combined with the practices of the financial

services/mortgage banking industry, led to the foreclosure crisis.

During the recession of 2008 – 2009, the reduced value of homes devastated the

economy. During the 2001 – 2005 timeframe, many homeowners and speculators

purchased homes with borrowed money using “liar loans.”10 As these adjustable rate

6 The Business Cycle Dating Committee, National Bureau of Economic Research, 1 (Sept. 20, 2010) available at http://www.nber.org/cycles/sept2010.pdf (last visited on Dec. 7, 2010). 7 Id. at 1. 8 THE STATE OF THE NATION’S HOUSING 2010, Joint Center for Housing Studies of Harvard University, 28 (2010) available at http://www.jchs.harvard.edu/publications/markets/son2010/son2010.pdf (last visited on Dec 7, 2010). 9 News Release, Bureau of Labor Statistics, United States Department of Labor, 1 (Dec. 2010) available at http://www.bls.gov/news.release/pdf/empsit.pdf (last visited on Dec. 7, 2010). 10 A category of mortgages known as low-documentation or no-documentation mortgages that have been abused to the point where the loans are sometimes referred to as liar loans. On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated on the

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mortgage (“ARM”) loans adjusted, purchasers were unable to meet their mortgage

payments, and banks began the foreclosure process. As the number of foreclosures

increased, the supply of available housing exceeded the demand, and the housing market

began its decline.

Foreclosure activity not only accelerated the loss in value of homes in foreclosure, it

eroded the value of nearby, existing homes. A study by Temple University found that

properties in Philadelphia located within 150 feet of an abandoned home sold for $7,627

less than properties not located near an abandoned home.11 Median home prices declined

in over 85% of metro areas in 2009.12 By March 2010, the median price of existing

homes had fallen 26 percent below the median value in October 2005.13 As foreclosures

continued to increase, the prices of surrounding homes began to decrease further.

This negative, downward spiral in home values led to a situation where homeowners no

longer had actionable options for resolving their personal economic problems. As long as

house prices are rising, homeowners and investors who get into financial trouble can

loan application. On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders. These loan programs are designed for borrowers who have a hard time producing income and asset verifying documents, such as prior tax returns, or who have untraditional sources of income, such as tips, or a personal business. These loans are called liar loans because the SISA or NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage. Investopedia, http://www.investopedia.com/terms/l/liar_loan.asp (last visited Nov. 20, 2010). 11 William C. Apgar and Mark Duda, Collateral Damage: The Municipal Impact of Today’s Mortgage Foreclosure Boom, 23 Homeownership Preservation Foundation (May 11, 2005) available at http://www.995hope.org/content/pdf/Apgar_Duda_Study_Short_Version.pdf (last visited on Nov. 23, 2010). 12 STATE OF THE NATION’S HOUSING 2010 – KEY FACTS, Joint Center for Housing Studies of Harvard University, 2 (Jun. 14, 2010) available at http://www.jchs.harvard.edu/publications/markets/son2010/son2010_key_facts.pdf (last visited on Dec. 7, 2010). 13 Id. at 2.

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refinance or sell their properties. But, when house prices fall enough so that the

outstanding mortgage balance plus the costs of selling exceed the sale price, borrowers

cannot sell their way out of their problems. Nearly 46 percent of home values in Florida

are “underwater,” meaning that the homes are worth less than the amount owed on the

properties.14 As house prices continue to fall, more and more borrowers cannot sell their

way out of trouble and lender losses increase, further depressing house values. Lenders,

in turn, contribute to the downward spiral by selling their recovered/foreclosed properties

at even more distressed prices.

Adam J. Levitin, an Associate Professor of Law at the Georgetown University Law

Center, in Washington, D.C. testified before the House Financial Services Committee on

November 18, 2010. He opened his remarks with this summary:

“We are now well into the fourth year of the foreclosure crisis, and there is no end

in sight. Since mid-2007 around eight million homes entered foreclosure, and

over three million borrowers lost their homes in foreclosure. As of June 30, 2010,

the Mortgage Bankers Association reported that 4.57% of 1-4 family residential

mortgage loans (roughly 2.5 million loans) were currently in the foreclosure

process, a rate more than quadruple historical averages. Additionally, 9.85% of

mortgages (roughly 5 million loans) were at least a month delinquent.”15

14 Carole Fleck, AARP.org/bulletin, at 20 (Nov. 2010) available at http://www.aarp.org/money/credit-loans-debt/info-10-2010/foreclosuresthrough_theroof.html (last visited on Nov. 23, 2010). 15Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing, Written Testimony before the Subcomm. on Hous. & Commun. Oppty., H. Fin. Svcs. Comm., 111th Cong. 4 (2010) (Statement of Adam J. Levitin, Assoc. Prof. of L. at Geo. Univ. L. Ctr.) available at http://financialservices.house.gov/Media/file/hearings/111/Levitin111810.pdf (last visited on Nov. 23, 2010).

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Initially, the foreclosed properties were largely due to speculators and homeowners who

over-extended themselves in buying properties. The risky loans created by the mortgage

banking industry fueled the seemingly endless increase in the price of housing. When the

economy began to falter, these borrowers were among the first to default on their loans.

These people simply did not have the income or resources to support their loan

commitments. As the recession broadened and deepened, the foreclosure crisis spread to

citizens who lost their jobs or had medical bills and could not make their house payments.

In the first round, “we saw exotic loans and people overextending themselves, buying

expensive homes,” says Rick Sharga, a senior vice president of RealtyTrac, a California

real estate data source. “Now, we’re seeing fixed loans in default by people who simply

don’t have a job.” 16 A recent survey of Freddie Mac loans found that 58 percent of

delinquent borrowers cited unemployment or curtailment of income, and another 11

percent cited illness or death as the reason for their mortgage payment problem.17

This crisis has been particularly acute in Florida, where many speculators built and sold

properties as second homes and to people who did not have the income to support the

risky loans. In August 2010, the number of mortgages in the U.S. that were 90 days or

more delinquent was 4.82%.18 With an unemployment rate in Florida of 11.9% in

September 2010, many people often have no option but to stop making house payment on

16 Carole Fleck, supra note 13, at 20. 17Joint Center for Housing Studies of Harvard University, supra note 11, at 4. 18 Nick Timiraos, Mortgage Picture Brightens, for Now, WALL ST. J. (Aug. 27, 2010) available at http://online.wsj.com/article/SB10001424052748703959704575453532991332448.html (last visited on Nov. 23, 2010).

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mortgages whose balance exceeds the value of the property.19 This leads to foreclosure

action by the banks and continuing the foreclosure crisis.

This downward spiral will not abate until the economy recovers and the unemployment

situation similarly abates. Jobs are the key to restoring to people the financial resources

to pay their mortgages. Yet, economists say that the recovery will be very slow, and

perhaps a “jobless recovery” – as it has been so far. 20 With the passage of time the

economy will recover, the unemployment rate will decrease and, perhaps more important,

employment will increase. This will end the current foreclosure crisis.

Until the economy recovers, the foreclosure process needs to be arrested. The banks have

recently announced that they will slow the process and insure that their procedures

comply with regulations and loan agreements. There is talk by State Attorneys General,

and the Federal government, about a moratorium on foreclosures.21 These actions would

have the effect of retarding the foreclosure process, and allowing supply and demand to

work toward increasing the prices of the current supply of homes. We will then be in a

positive spiral where, with rising home prices, people will once again have the ability to

either repay their loans or resell their properties to people who can afford them.

19 Economic News Release, Bureau of Labor Statistics, United States Department of Labor, at 1 (October 22, 2010) available at http://www.bls.gov/news.release/laus.nr0.htm (last visited on Dec. 7, 2010). 20 Stephen Linaweaver, Inside the ‘Growthless, Jobless Recovery’, (Nov. 18, 2010) available at http://www.greenbiz.com/print/40441 (last visited on Nov. 23, 2010). 21 Chad Fisher, 5 Things You Should Know About the Foreclosure Moratorium, (Oct. 15, 2010) available at http://money.usnews.com/money/blogs/my-money/2010/10/15/5-things-you-should-know-about-the-foreclosure-moratorium_print.html (last visited on Nov. 24, 2010).

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Can this foreclosure tsunami be brought under control? First, we will examine the

foreclosure process today, and the legal issues in the process. Then, we will explore a

proposal for resolving the legal issues.

MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. (“MERS”)

MERS is a private corporation created by the mortgage banking industry in 1996 to

bypass the traditional process for recording real estate documents.22 When the

investment banking industry developed the concept of mortgage backed securities

(“MBS”) 23 and selling them internationally, they encountered a logistical nightmare.

The traditional paper based system of recording real estate transactions in county records

across the country is not efficient. Efficiency, however, is essential to implement the

vision of securitized assets backed by home mortgages. This led to the creation of

MERS.

Since the founding of our country, each county in the United States has maintained

records of who owns the land within the county. These records are public, authoritative,

and transparent. These county real property records are the oldest and most stable metric

tracking real estate transactions in America.24

22 Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration System, 31 ID. L. REV. 811 (1995). 23 A mortgage-backed security (“MBS”) is a security backed by a residential mortgage that represents a claim on the cash flows from the mortgage loan through a process called securitization. This process pools assets (here mortgage loans) for sale as bonds to various investors, theoretically lowering the risk compared to direct investment in specific mortgages. 24 Foreclosed Justice: Causes and Effects of the Foreclosure Crisis, Written Testimony before the H. Comm. on the Jud., 111th Cong. 2 (2010) (Statement of Christopher L. Peterson, Assoc. Dean for Acad. Aff. & Prof. of L. at S.J. Quinney C. of L.) available at http://4closurefraud.org/2010/12/02/foreclosed-justice-house-judiciary-hearing-written-testimony-of-christopher-l-peterson/ (last visited on Dec 7, 2010).

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Prior to MERS, and continuing today for many real estate transactions, each county of the

United States is responsible for maintaining the records of all real estate mortgages and

assignments. Whenever a new mortgage is originated, or a mortgage is satisfied, the

Clerk of the Court in the County Records office of the county where the real estate is

located records the document. Mortgagees who do not record their mortgages or

assignments run the risk of being unable to enforce their rights against a subsequent

purchaser for value.25 The objective of the public records system is to protect the

property rights of the landowner by providing transparency and certainty in private land

transactions. However, the process is paper based, and dependent on efficient

administration within each county records office. It is slow. It may take several days, if

not weeks, to have a real estate transaction properly recorded by the Clerk of the Court.

The counties charge a fee to record titles, mortgages, assignments, liens, and similar

documents in the public records. This system provides the revenue to cover the costs of

maintaining the public system. When planning for MERS, the accountants’ concluded

that the finance industry would save $51.7 million annually by NOT paying fees that

local governments receive to record mortgage assignments.26 In Virginia, Robert G.

Marshall, a Republican member of the Virginia House of Delegates, plans to draft a

Virginia law that will require lenders to pay county fees before initiating foreclosure

25Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, U. CIN. L. REV, 1364 (2010). 26Slesinger, supra note 22, at 812.

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actions. “The disdain with which the conditions of law have been treated by those who

want to make money too fast is very troubling to me.”27

In testimony before the House Financial Services Committee, R. K. Arnold, President

and CEO of MERSCORP, Inc. stated:

“Some have raised questions about the reduction of recording fees that has

accompanied the need to record assignments, and there have been suggestions that

these fees are somehow owed or outstanding. Fees are paid for service

performed, and if a document is eliminated because it is no longer legally

necessary, no fee is due and owing because there is nothing to record.”28

“The mortgage banking industry created MERS to streamline the mortgage process by

using electronic commerce to eliminate paper.”29 The primary goal, however, was to

“lower cost for [mortgage] servicers.”30 They identified as their mission to register every

mortgage loan in the United States on their computer systems. They planned to do this

by creating an electronic system, called the “MERS System.” Today, MERS is keeping

track of 31 million active loans.31

27 Robbie Whelan, Lawmaker Questions Power to Foreclose, WALL ST. J., available at http://online.wsj.com/article/SB10001424052748704865104575588791583567372.html (last visited on Nov. 21, 2010). 28 Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing, Testimony before the Subcomm. on Hous. & Commun. Oppty., H. Fin. Svcs. Comm., 111th Cong. 19 (2010) (Statement of R.K. Arnold, Pres. & CEO of MERSCORP, INC.) available at http://financialservices.house.gov/Media/file/hearings/111/Arnold111810.pdf (last visited on Nov. 24, 2010). 29 MERS, INC, www.mersinc.org/about/index.aspx (last visited on 11/21/2010). 30 Slesinger, supra note 22, at 812. 31 Testimony before the Subcomm. on Hous. & Commun. Oppty., supra note 28, at 1.

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The MERS System collects the information from the original loan documents of a real

estate transaction and creates an electronic database. This is a proprietary system owned

by MERS. The MERS System has destroyed the transparency that has been the

hallmark of public records. After the first transaction for a particular parcel of real estate,

subsequent transactions related to that parcel are electronic within MERS System. The

MERS database now becomes the repository for mortgage documents and assignments.

The mortgage banking industry developed this system without any legislation. The

MERS System bypasses the traditional paper based land recording system, and taken

over the county’s record maintenance system enshrined in law “by the democratically

elected legislature to a bank-owned shell company.”32

MERS acts as nominee in the county land records for both the loan servicing

company and the lender. Since the records are now processed electronically, the

owners of the mortgage can easily transfer mortgages, and change loan-servicing

companies quickly and efficiently. As nominee, MERS remains as the nominal

mortgagee regardless of the number of times the mortgage or servicing changes,

isolating any loan registered on the MERS System from the traditional property

recording systems of the counties. Fannie Mae, Freddie Mac, Ginnie Mae, FHA

and VA, as well as all of the major Wall Street rating agencies approve MERS as

original mortgagee.33

32 Written Testimony before the H. Comm. on the Jud., supra note 24 at 6. 33 MERS, http://www.mersinc.org/about/index.aspx (last visited on 11/19/2010).

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Not everyone is satisfied that this process provides the required security and

transparency. Christopher L. Peterson criticized the company’s recordkeeping in a

recent Law Review article.34

“By having all the mortgage loans recorded in the name of one entity, the

records don’t mean anything anymore. We used to have the records that

showed the true economic interest of who owns the land in the public

system. Now we just have one proxy, and we can’t tell which lender or

which trust owns the right to foreclosure, because virtually every securitized

loan is recorded in the name of MERS.”35

For the first decade of its existence, MERS operated with little conflict. Although

there were complaints from many county government officials, the system kept

track of the records. The county officials were upset over losing the revenue that

they traditionally received when assignment of mortgages were recorded in the

county offices. With the availability of cheap money, the investment bankers

accelerated their appetite for MBSs, which they packaged for re-sale to investors.

These new securities were very successful, and demand accelerated for them. The

documents representing the transferred mortgages did not keep pace with the

electronic transactions. Today, many of the original documents are missing, lost or

destroyed in the frenzy of trading that occurred preceding the financial crisis.

These missing documents are at the crux of the foreclosure crisis today that is

threatening to shut down the foreclosure process (moratorium) until this issue is

resolved.

34 Peterson, supra note 25, at 2. 35 Whelan, supra note 27.

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Current situation

Foreclosure defense lawyers across the country, and especially in Florida, are

challenging MERS to provide the original paperwork, and a paper trail of

assignments, to affect a foreclosure. The legal tactics include motions challenging

the standing of the foreclosure plaintiff (in many instances MERS itself),

compelling discovery to establish the chain of title (note ownership and beneficial

interest), lost note affidavits, etc. This has increased the backlog of foreclosure

actions in the courts. In a few cases, the judges ruled that MERS holds the

mortgage but without rights to the debt.36 In a case in Maine, the Supreme Court of

Maine held that MERS is not actually mortgagee under that state’s real property

law.37 In other situations, judges have permitted MERS to foreclose mortgage

liens. One judge, the honorable Jon Gordon of Florida’s circuit court in Miami-

Dade stated:

“It truly concerns me, however, that thousands and thousands –

thousands and thousands of mortgage foreclosure actions have been

filed with these allegations [that MERS is the owner and holder of

the note]. I am not certain what remedy, if any, these people would

have were it to be determined that MERS was not ever the proper

party notwithstanding that these folks [might] have been in default

what their recourse, if any, would be. I’m not certain with the

satisfaction of mortgages that have been filed on behalf of MERS

36 Landmark Nat’l Bank v. Kesler, 40 Kan.App.2d 325, 192 P.3d 182 (holding that MERS not required as defendant in foreclosure action when lender of record has been served) (Kan. 2009). 37 Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing, Response of MERSCORP, INC. to questions from the Subcomm. on Hous. & Commun. Oppty., H. Fin. Svcs. Comm., 111th Cong. 75 (2010) (Statement of R.K. Arnold, Pres. & CEO of MERSCORP, INC.) available at http://financialservices.house.gov/Media/file/hearings/111/Arnold111810.pdf (last visited on Nov. 24, 2010); Mortgage Electronic Registration Systems, Inc. v. Saunders, 2010, ME 79, Cum-09-640 (MESC), (Aug. 12, 2010).

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how good those are and I am not certain how good title to property is

that people bought at these foreclosure sales if it turns or becomes

established that MERS was indeed not only not the right party, but

misrepresented by way of their pleadings and affidavits that they hold

something they didn’t own, so I’m not certain of the consequences

but it seems vast.”38

Today, MERS has established standing in Florida as a proper party to initiate

foreclosure actions as a nominee for the note owners. The landmark cases of MERS

v. Azize, 965 So.2d 151 (Fla. 3d DCA 2007) (holding “the fact that mortgagee

lacked beneficial interest in note did not deprive it of standing”) and MERS v.

Revoredo, 955 So.2d 33 (Fla. 3d DCA 2007) (held that MERS had standing to bring

foreclosure action) validated its standing.

FORECLOSURE DEFENSE OBJECTIVES

Foreclosure defense can have several different objectives. One may be simply to

delay the foreclosure. With additional time, the owner hopes to sell the house,

refinance the property, or simply save enough money to move to another, more

affordable home. The objective is to introduce motions, request hearings, request

discovery and otherwise prolong the legal process. Of course, the bank will be

adding interest and additional fees to the claim for damages, but the homeowner

has already damaged his/her credit. Now, the homeowner needs time to repair

38 Plaintiff’s Notice of Filing Transcript of Proceeding, FLA. CIR. CT. OF THE 11TH

JUD. CIR., IN AND FOR MIAMI-DADE CTY., FLA ., CIV. DIV., CASE NO. 05-02425 CA 05, 83 (Sept. 16, 2005).

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credit, and the money saved from avoiding rent payments may permit a fresh

start.39

Another objective may be to persuade the bank to negotiate a loan modification,

reducing the principal balance or the interest rate, or both. If the homeowner

demonstrates that the foreclosure will be defended vigorously, and if the bank has

concerns about its procedures in managing the loan since origination, it may

consider the option of loan modification rather than pursue the foreclosure. The

bank will also consider the judge and jurisdiction, as well as its own procedures,

understanding the risk of having the case dismissed, perhaps even with prejudice.

The homeowner wants to stay in the home . Loan modifications or foreclosure

dismissals both satisfy this interest.40

The most aggressive objective to defend against the foreclosure action is to show

that the bank has violated some legal provisions that could lead to loan rescission.

This outcome is unlikely. The rush to create and refinance mortgages over the past

decade has led to errors by the mortgage companies. If the violations by the bank

are significant, the foreclosure is dismissed and the lien on the house disappears.

The bank would refund all payments made by the homeowner to the bank.

Obviously, the bank will defend vigorously this claim by the homeowner.41

No homeowner should simply ignore a foreclosure notice from the bank. To

simply put the keys in the mail to the bank and walk away is not a strategy. Every

39 Posting of George Beckus Esq. to http://blog.floridaforeclosurelawyer.org/2009/12/28/step-1-in-defending-a-foreclosure-action (Dec. 28, 2009) (last visited on Nov. 24, 2010). 40 Id. 41 Id.

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foreclosure should be defended, at least until the homeowner can develop a

financial plan to restore his/her credit and financial situation.

FORECLOSURE DEFENSE TACTICS

Once a homeowner decides to contest a foreclosure action, and has decided on the

objective of the foreclosure defense, the work begins. The homeowner must collect

all documents related to the transaction, including the history of all previous

transactions. The task then is to review carefully the documents with an eye

toward discovering errors than may be a part of this complex transaction. This

forensic audit of the documents is a necessary first step. Very likely, some errors

do exist. They may be minor, or so serious that the homeowner will successfully

defend against the foreclosure action. Realistically, however, very few errors will

lead to foreclosure dismissal with prejudice. However, the homeowner will likely

achieve the first objective of delay. This will extend the time available to find

another alternative to eviction from their home.

Due Process

Every homeowner has legal rights to defend any action to foreclose by the lender.

Since the magna Carter in 1215, democracies have recognized property rights.

These rights include the principle that the bank cannot seize the property without

proper legal recourse.42 This principle is also a part of the U.S. Constitution’s Fifth

Amendment, which says, “No person shall be … deprived of life, liberty, or

42 Nancy Troutman, National Public Telecomputing Network, www.constitution.org/eng/magnacar.htm (last visited on Nov. 24, 2010).

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property without due process of law; …”43 In the event of a foreclosure action by

the lender, the homeowner should exercise this right.

Once the lender files the foreclosure lawsuit, the homeowner will be required to

respond within 20 days.44 The homeowner should submit a Motion for Extension

of Time with the court. This will provide the homeowner the opportunity to review

the lender’s claim, and research the issues that apply to this foreclosure action, and

develop a reasoned defense. Courts look favorably on this motion, if the time

extension request is reasonable . Typically, the homeowner can receive at least an

additional thirty days to respond. 45 If the Court extends the time to respond to the

foreclosure action, the homeowner must respond within that time with an answer or

another relevant motion. A powerful motion for the homeowner is the Motion to

Dismiss.

Some of the issues a homeowner should research are:

1. Does the plaintiff have legal standing46 to file the lawsuit? The party that

actually owns the note and mortgage must initiate any foreclosure action.

Since the advent of MERS, and especially during the foreclosure crisis of

the past severa l years, the homeowner should insure that the plaintiff has

standing to bring the foreclosure action. This is the essence of the most

recent voluntary moratorium by the lenders to suspend foreclosure actions.

43 U.S.Const. amend. V. 44 Fla. Stat. § 48.23(1)(b) (2008). 45 Posting of George Beckus Esq. to http://blog.floridaforeclosurelawyer.org/2009/12/28/step-3-in-defending-a-foreclosure/ (Dec. 28, 2009) (last visited on Nov. 24, 2010). 46 Standing, n. – A party’s right to make a legal claim or seek judicial enforcement of a duty or right. BLACK’S LAW DICTIONARY 671 (3d Pocket ed. 2006).

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Any foreclosure complaint must include an attachment of the original note

and mortgage, proving that the lender has standing to foreclose. In

thousands of documented situations, lenders have presented incomplete

information to the courts yet often move for summary judgment of

foreclosure.47 The lender may also file a Motion for Summary Judgment

shortly after filing the complaint, and before the homeowner has filed an

answer to the complaint and before the answer to the complaint is due.48 If

there is no counsel to represent the homeowner, the court will usually grant

the lender’s motion, and the property will be foreclosed. Increasingly, if

counsel does represent the homeowner, the court will deny the motion

because there is a genuine issue of material fact, namely, who is the owner

of the note and mortgage. Unfortunately, many homeowners do not appear

for the hearing to contest the foreclosure action and the court approves the

Motion for Summary Judgment.

2. Is the amount owed correct? There are many possible errors in calculating

the amount owed, including assessing charges improperly, calculating

interest improperly, and failing to credit all payments received.49 Sadly,

some mortgage servicers have regularly engaged in abusive practices, since

their income increases at the detriment of the borrower. These practices

include imposition of improper fees, especially late fees; forced-placed

47 Fla. R. Civ. P. 1.1510(c) states that a movant is entitled to summary judgment “if the pleadings, depositions, answers to interrogatories, admissions, affidavits, and other materials as would be admissible in evidence on file show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” 48 35 Fla. L. Weekly D494a (reversing summary judgment based on late service and filing of the summary judgment evidence and the existence of a genuine issue of material fact). 49 Stopa Law Firm, http://www.stayinmyhome.com/foreclosure.htm (last visited on Nov. 22, 2010).

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insurance that is unnecessary50, and misuse of escrow funds.51 Another fee

often found in a forensic audit is the cost of serving a notice of foreclosure

(court summons) on the homeowner, when the summons was never

delivered, or even not issued. These non-existent summons are documented

through the filing of “affidavits of lost summons” by process servers.52

3. Did the bank fulfill all the conditions precedent to accelerating the mortgage

note? The mortgage note is a lengthy document, typically 15 – 25 pages

long. It identifies the rights and responsibilities of the parties. The

mortgage note defines the conditions precedent for the lender to foreclose on

the mortgage, one of which is usually an acceleration clause. The mortgage

note will specify how the lender must execute any notice of acceleration to

the borrower. 53 54 This may lead to dismissal by the court upon filing of the

Motion to Dismiss for Insufficiency of Process. If the lender did not satisfy

the terms of the note, the Court may deny summary judgment. 55

50 In a recent opinion by the Fla. 3d Dist. Ct. App., Honorable Judge J. Salter challenged charges of $6,400 of forced placed insurance and “forbearance interest” of over $11,300. Bennett v. Christiana Bk. & Tr., Fla. 3d Dist. Ct. App., No. 3D09-2653, Rev. & Rem. (Opinion filed Dec. 1, 2010). 51 Kurt Eggert, Comment on Michael A. Stegman et al’s “Preventive Servicing Is Good for Business and Affordable Homeownership Policy”: What Prevents Loan Modifications? , 18 HOUSING POL’Y DEBATE 287 (2007) available at http://pdfserve.informaworld.com/119512__920616455.pdf 52 Matt Taibi, Courts Helping Banks Screw Over Homeowners, ROLLING STONE, (NOV. 25, 2010), available at http://www.rollingstone.com/politics/news/17390/232611 (last visited Nov. 23, 2010). 53 “An acceleration clause is a loan agreement provision that requires the debtor to pay off the balance sooner than the due date if some specified event occurs, such as failure to pay an installment or to maintain insurance.” BLACK’S LAW DICTIONARY, 5 (3d pocket ed. 2006). 54 35 Fla. L. Weekly D1292b (where plaintiff had failed to provide notice of acceleration). 55 35 Fla. L. Weekly D1292b referencing Frost v. Regions Bank, 15 So. 3d 905, 906-07 (Fla. 4th DCA 2009) (“Because the bank did not meet its burden to refute Frosts’ lack of notice and opportunity to cure defense, the bank is not entitled to final summary judgment of foreclosure”)

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Fraud56

Many of the actions of the lenders, MERS, and the lawyers associated with the

plaintiffs in foreclosure activity are arguably fraudulent. These actions may result

in an illegal foreclosure. Some examples of the issues prevalent in the foreclosure

process today are:

1. Foreclosure does not follow all of the steps required by law. The rules of

civil procedure direct how a lender must proceed in any foreclosure action.

For example, in Frost v. LaSalle Bank ,57 the lender, inter alia ,

“prejudicially violated Fla.R.Civ.P. 1.510(c)58 by presenting Appellant for

the first time immediately prior to the summary judgment hearing the …”

“In Bifulco v. State Farm Mutual Automobile Insurance Company, 693 So.

2d 707, 709 (Fla. 4 th DCA 1997) the court elaborated on the importance of

the procedural strictures of the rule by stating ‘Caution must be exercised in

the granting of summary judgment, and the procedural strictures inherent in

the Florida Rules of Civil Procedure governing summary judgment must be

observed.’”59 “The procedural strictures are designed to protect the

56 “Fraud , n. 1. A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment. 2. A misrepresentation made recklessly without belief in its truth to induce another person to act. … 4. Unconscionable dealing; esp. … the unfair use of the power arising out of the parties’ relative positions and resulting in an unconscionable bargain.” Fraud on the court. In a judicial proceeding, a lawyer’s or party’s misconduct so serious that it undermines or is intended to undermine the integrity of the proceeding. Examples are … introduction of fabricated evidence.” BLACK’S LAW DICTIONARY 300 - 301 (3d Pocket ed. 2006). 57 Frost v. LaSalle Bank, N.A., 2010 WL 2862149 7-8 (Fla.App. 4 Dist.). 58 Fla.R.Civ.P. 1.510(c) defines the rules for summary judgment motions. The specific prejudicial violation was that the lender violated the provision that: “The movant shall serve the motion at least 20 days before the time fixed for hearing, and shall also serve at that time copies of any summary judgment evidence on which the movant relies that has not already been filed with the court.” 59 Page v. Staley, 226 So. 2d 129, 132 (Fla. 4th DCA 1969).

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constitutional right of the litigant to a trial on the merits of his or her claim.

They are not merely procedural niceties nor technicalities.”60

2. Foreclosure is started by the wrong lender. In Ruscalleda v. HSBC Bank,

USA, two lenders were simultaneously attempting to foreclose on the same

mortgage. The trial court entered final summary judgment in favor of

HSBC, which, the appellate court reversed and remanded with directions.61

3. Promissory note and assignment not attached to complaint and not served at

least twenty days before date of summary judgment hearing. “… it is

undisputed that the Bank did not attach those documents to the complaint or

serve them at least twenty days before the hearing date.” 62 “In addition …

those documents reflect that at least one genuine issue of material fact

exists.”63

4. Lender’s claim is absent proof that the mortgagee or assignor ever had

possession of the note. “To maintain a mortgage foreclosure, the plaintiff

must either present the original promissory note or give a satisfactory

explanation for its failure to do so.”64

5. Plaintiff mis represents the signers, assignments, etc. (date problems). “West

Palm Beach foreclosure defense attorney Thomas Ice found 21 examples last

year of assignments … that had been executed with a date before the

60 Frost, 2010 WL 4226242 at 23. 61 2010 Fla.App. LEXIS 13619; 35 Fla.L.Weekly D 2061(Sep. 15, 2010). 62 35 Fla .L. Weekly D494a (Mar. 3, 2010). 63 Id. 64 Fla. Stat. §90.953(1) (2002).

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notary’s commission was issued.” 65 This seems to meet the definition of

fraud on the court.

The lenders are filing foreclosure actions that are replete with legal errors and

violations of the law and due process. In addition, many of the documents are

fraudulent - signed by attorneys and notaries without having actual knowledge of

the allegations in the documents. As foreclosure defense lawyers identify these

process and fraud errors, the backlog of court cases expands. To get the property

ownership records validated, we must decelerate the foreclosure process.

Truth in Lending Act (“TILA”) In 1981, the Board of Governors of the Federal Reserve System promulgated Regulation

Z to implement the Federal Truth in Lending Act (“TILA”). “The purpose of this

regulation is to promote the informed use of consumer credit by requiring disclosures

about its terms and cost. The regulation also gives consumers the right to cancel certain

credit transactions that involve a lien on a consumer’s principal dwelling … .”66 This

regulation is among the most powerful that a homeowner can use to challenge a

foreclosure if the lender violated its provisions.

If a forensic audit of the loan origination documents shows a material violation of TILA’s

requirements, the homeowner may be able to rescind the loan transaction. The right to

rescind can extend up to three years from the date of the closing, if (1) it is a refinance

transaction; (2) it is on your primary residence; (3) it was closed within the last three

65 Kimberly Miller, Lawsuit claims that Florida’s largest foreclosure firm faked documents, THE PALM

BEACH POST (Aug. 4, 2010) available at http://www.palmbeachpost.com/money/lawsuit-claims-that-floridas-largest-foreclosure-firm-faked-839393.html (last visited on Nov. 14, 2010). 66 12 C.F.R. § 226.1(b) (1982).

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years; and, (4) there are material disclosure violations. Material disclosures means the

required disclosures of the annual percentage rate, the finance charge, the amount

financed, the total payments, the payment schedule, and the disclosures and limitations

referred to in §§ 226.32(c) and (d) and 226.35(b)(2).67

TILA rescissions are very powerful, and the lender will defend vigorously any claim by

the homeowner. The consequences to the lender are severe if the homeowner wins in

court. When a consumer rescinds a transaction, the security interest giving rise to the

right of rescission becomes VOID and the consumer is not liable for any amount,

including any finance charge such as interest and closing costs.68 In summary, if the

mortgage is voided by operation of law, the creditor becomes unsecured because there is

no longer any valid instrument to foreclose on the property!

Home Ownership and Equity Protection Act (“HOEPA”)

This act is an amendment to TILA. The act addresses certain deceptive and unfair

practices in home equity lending. The enhanced disclosures help to protect the

consumers from predatory loans.69 These loans reduce or strip away the home equity and

create an impossible repayment schedule. Most are Adjustable Rate Mortgages (“ARM”)

that reset to a higher interest rate in one to three years after closing.

HOEPA is a very powerful law. When used to defend foreclosures where the borrower

has a predatory loan, they can stop a foreclosure action abruptly. The terms are very

67 12 C.F.R. § 226.23 (1982). 68 12 C.F.R. § 226.23(d) (1982). 69 A predatory loan is one that is the result of misleading and coercive tactics deliberately sold to unsuspecting homeowners. They are often home equity or refinance loans. They have excessive interest rates and closing costs. The elderly are frequently targets for them. These loans are often made without regard for the borrower’s ability to repay the loan.

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particular, and should be researched diligently, based on the forensic review of the

borrower’s mortgage. A summa ry review of the requirements for these mortgages can be

found at: http://www.law.cornell.edu/uscode/15/1639.html.

PROPOSAL

The foreclosure system in the country is flawed. Times like this suggest the need

for bold action. When a child misbehaves, parents often call for a “time out.”

Now, with the mortgage banking industry misbehaving, one possibility is for the

government to issue a moratorium on foreclosure actions.

Moratorium

When a lender files a foreclosure action, this proposal would direct the parties into

forced mediation for six months. The District of Columbia has approved a measure

for forced mediation before proceeding with foreclosure.70 Maryland implemented

a new foreclosure mediation law in July 2010. Florida has also directed that all

foreclosure actions participate in mediation. 71 This action would take the claim out

of the courts for a mandatory six months. It would require the parties to review

their cases. The lenders would insure that their documentation is accurate. There

would be an opportunity for the parties to agree to loan modification, when this is a

realistic possibility. Finally, the benefit to the economy itself would be greatly

enhanced by relieving stress in the legal system and defusing the contentious

70 www.washingtonpost.com/. 71 http://www.housingwire.com/2009/12/29/florida-supreme-court-adopts-foreclosure-mediation-program; http://www.floridasupremecourt.org/clerk/adminorders/2009/AOSC09-54.pdf .

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litigation. Successful mediation will lead to a reduction of the backlog of

foreclosure claims.

The lenders must get the paperwork right. Lenders must eliminate the

documentation mistakes that have evolved since securitization of residential

mortgages. These problems have resulted in illegal foreclosures.72 73 In many

cases, the chain of title for the properties is no longer certain. Title insurer Fidelity

National has decided that they will no longer insure titles for properties sold

through foreclosure without a warranty signed by the lenders assuring that their

paperwork is sound.74 The solution to these problems is to correct the

documentation that exists today. We must have confidence in the chain of title. 75

The MERS System is at the center of many of the issues, including the chain of

title and standing to foreclose. Some courts recognize MERS as a proper party to

foreclose on a property, while others have refused to allow MERS to foreclose in

its own name. In either case, MERS must provide assurances that its system is

properly tracking and acknowledging the transfer of properties as investors sell and

72 BAC Funding v. Ginella Jean-Jacques, 28 So. 3d 936 (2010) (where lender failed to establish standing to sue as the holder of mortgage and note). 73 South Florida Sun-Sentinel, http://blogs.trb.com/business/columnists/brackey/blog/2010/11/foreclosures_who_owns_jasons_house.html (last visited on Dec 8, 2010). 74 The Miami Herald, http://www.miamiherald.com/2010/10/20/v-print/1883401/title-insurer-fidelity-national.html (last visited on Dec. 8, 2010). 75 Problems in Mortgage Servicing from Modification to Foreclosure, Written Testimony before the S. Comm. on Bank., Hous. & Urban Aff., 111 Cong. 19-22 (2010) (Statement of Adam J. Levitin, Assoc. Prof. of L. at Geo. Univ. L. Ctr.) available at http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=df8cb685-c1bf-4eea-941d-cf9d5173873a&Witness_ID=2ada1da6-e7cc-4eca-99a4-03584d3748af, (last visited on Dec. 8, 2010).

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trade their MBS. MERS must be a legitimate title , mortgage and note custodian,

and viewed as such by all parties within our real property recording system.

Legislation

To achieve a high level of confidence that MERS documentation is accurate, the

legislature needs to pass laws, and establish regulation of their process. It is

necessary, for public policy reasons, to legitimize the activities of MERS. Having

a private, non- regulated system responsible for transferring ownership of real

property outside the view of the public is not acceptable. Nor is it reasonable to

dismantle this electronic system. The rational decision, therefore, is to

acknowledge the existence of the system, and to regulate the MERS processes to

protect the property rights of the individuals, and to restore lost revenue to the

county records offices. This may require transforming MERS into a quasi-

governmental organization with the legal authority to perform the recording

functions. In addition, the new legislation and regulation should provide

transparency to the public for the transfer of mortgages as well as funding for the

county recording offices.

Loss mitigation, an alternative to foreclosure, includes repayment plans, loan

modifications, short sales and deed in lieu of foreclosure. In a repayment plan, the

most common way of resolving a loan default, is to work out a plan that will let you

repay part of the delinquency each month, along with you regular monthly installment. A

loan modification is a permanent change in one or more of the terms of a mortgagor’s

loan, allows the loan to be reinstated, and results in an affordable payment. Common

Albert R. Tetrault


loan modifications are a reduction in the principal or interest rate on the loan, or both.

Short sale refers to a sale of the property, approved by the lender, for less than the value

of the outstanding mortgage. Deed in lieu of foreclosure is a deed instrument where the

borrower conveys all interest in the property to the lender, satisfying the loan.

Each of these alternatives to foreclosure limits the need for foreclosure actions and,

therefore, reduces the burden on the judicial system.

Loss mitigation was common when most mortgages were part of the loan portfolio

of the originating lender. The loss mitigation process requires agreement between

the homeowner and the lender. With MBS, the homeowner and the lender are

strangers. Furthermore, the owner of the note (lender) is usually a different party

than the organization that interacts with the homeowner (mortgage servicer) for the

collection of mortgage payments. Further complicating the loss mitigation process

in the current environment, the mortgage servicer’s fees for bringing a foreclosure

action is significantly more profitable than loss mitigation.76

There are several possibilities for legislation that would lead to increasing the

number of loan modifications. One proposal would apply to homeowners who have

filed for protection from creditors under Chapter 13 Bankruptcy. Another would be

attractive to homeowners who need mortgage relief to avoid foreclosure, but have

not filed for protection from creditors under Chapter 13 Bankruptcy.

“Cramming down” the loan. A “cram down” is a court order to reduce the

principal amount of the loan, the interest rate, or other terms, over the objection of 76 Id. at 7.

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the creditor. Today, courts use this involuntary enforcement action in conjunction

with Chapter 13 Bankruptcy proceedings for personal property loans. Under

current United States law, the Bankruptcy Court cannot “cram down” mortgages of

a homeowner’s primary residence. Legislation to permit “cram down” was

introduced for potential inclusion in the Economic Stabilization Act of 2008, but it

was subsequently not included. Having this legislation would encourage lenders to

pursue loss mitigation rather than relinquish their authority to modify a mortgage

loan to the Bankruptcy Court judge.77

“Deed in Reduction”78 In June of 2010, Kevin F. Jursinski proposed that Florida

adopt a “Deed in Reduction” proposal to resolve many foreclosure situations. His

proposed deed would allow the borrower to tender an unconditional fee simple

deed to the lender. This deed would have no conditions or restrictions. This

process would require legislation so that the lender would have no option but to

accept this deed. The lender and borrower would negotiate and potential

deficiencies based on the difference in the value of the property and the amount of

the mortgage. The presentation of the deed would stop the accumulation of any

additional interest, fees, and legal costs associated with the foreclosure process. As

a result, both the borrower and the lender would minimize costs and the judicial

system would benefit by avoiding the foreclosure litigation. This proposal would be

beneficial to all parties, including the judicial system.

77 Bankruptcy 7-13.com, http://www.bankruptcy7-13.com/bankruptcy-process/2010/06/%E2%80%9Ccramming-down%E2%80%9D-your-loan/ (last visited on Dec. 8, 2010). 78 Kevin F. Jursinski, The Mortgage Foreclosure Crisis in Florida: A 21st Century Solution, 84 Fla. B.J. 91 (2010).

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We now know that the foreclosure crisis has gone beyond the people who

overextended themselves to buy property, and has gone beyond homeowners who

were victims of fraud by the mortgage originators. Many of the 15.1 million

unemployed, and the millions more under-employed homeowners, will resolve their

financial problems with re-employment. With successful mediation, and resultant

loss mitigation, many will be able to retain their homes. With rising property

values, and a decline of foreclosure sales in their neighborhoods, other homeowners

will be able to sell their homes and relocate to more affordable housing.

SUMMARY

The housing “bubble,” and the subsequent foreclosure crisis in the economy,

reminds many of the Dutch “tulip mania” of the early seventeenth century and

other economic bubbles. Allegedly, some tulip bulbs became the most expensive

objects in the world in 1637.79 In the past decade, Wall Street bankers sold

securities backed by residential mortgages. The overvalued residential home

secured the MBS. In 2008 – 2009, when people who owned the homes were unable

to pay the mortgages, the real estate “bubble” burst, and the foreclosure crisis

developed. This crisis continues today.

As the risky loans of the past decade began to fail, foreclosure activity increased.

As the foreclosure activity increased, home values depreciated – the result of an

increasing supply of homes in the market and a decrease in demand for them.

Soon, the related financial crisis of 2009 further exaggerated the decline in home

79 Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds, with a foreword by Andrew Tobias (1841; New York: Harmony Books, 1980).

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values, and still further depreciated the value of residential real estate. This cycle

has continued for the past three years.

With all the confusion in the system today, the foreclosure process should stop. A

moratorium on the foreclosure process, forced mediation, and new legislation will

not only resolve the problems with the foreclosure process but also revise the

system to permit using electronic technology (like the MERS System) to

improve tracking real estate transactions in the future.

Albert R. Tetrault December 8, 2010

The rule of law is what preserves the stability of our democracy. As we allow the mortgage loan industry to circumvent the rule of law we show that corporate interests can get away with such massive dishonesty, and we thereby encourage more of it. As citizens see our largest financial institutions flaunt their violations of our legal systems, our citizens lose faith in these institutions and in their government. Surely, this loss of faith is what is leading to the increasing volume of “strategic defaults” that the financial institutions so loudly condemn.

There are remedies that can significantly improve the foreclosure problem if the political will can be mustered to implement them and if regulators can be motivated to do their jobs. Appropriate prosecution of those responsible for the massive levels of dishonesty that have been exposed can help restore the loss of confidence in the legal system by those victimized by the abuses of the mortgage servicers.80

80 Foreclosed Justice: Causes and Effects of the Foreclosure Crisis, Written Testimony before the H. Comm. on the Jud., 111th Cong. 21 (2010) (Statement of Thomas A. Cox, Esq., Volunteer Program Coordinator, Maine Attorneys Saving Homes) available at http://4closurefraud.org/2010/12/02/foreclosure-fraud-house-judiciary-hearing-written-testimony-of-thomas-a-cox-esq/ (last visited on Dec 7, 2010).

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