Third-Party Buyers of Foreclosed Properties: Buyer Beware

Foreclosure by Sale

The ongoing foreclosure crisis in Massachusetts hasn’t just impacted homeowners. Third-party buyers of foreclosed homes who purchase unlawfully foreclosed properties can also be really hurt in this process, and need to be aware of the risks of purchasing foreclosed homes.

When a home is sold at a foreclosure sale, the lender is most often the person who ends up purchasing the property (against its own financial interest in the home).  Occasionally, an unrelated buyer (aka a third-party buyer) ends up buying the property at the sale.  This often occurs when the foreclosed property is in a desirable location or the home has significant equity (the difference between the property’s value and what is owed on it).  The third-party buyer often thinks he or she is getting a great deal, as foreclosed properties are often sold below the market rate for comparable properties.

However, buying a foreclosed property comes with enormous risks.  Massachusetts law is abundantly clear that the failure to strictly comply with the foreclosure process makes the foreclosure void (as in, it never happened in the first place).  If a mistake occurred in the foreclosure, even years in the past, the property’s title is shot (Ibanez and Bevilacqua are two examples of major foreclosure law cases on this matter).  Recent cases reaffirm that even minor defects can have serious consequences on the validity of a foreclosure.

If the former homeowner is still residing in the property, it gets even more tricky.  To obtain possession of the home, the third-party buyer needs to evict the former owner, and the former owner is permitted to argue as a defense that the foreclosure was void even though an unrelated party did the foreclosure.  In other words, the third-party buyer needs to defend a foreclosure it never performed and bears the full burden of proving it was done correctly.

This isn’t to say that all foreclosures are void.  Many are done correctly, and even if the foreclosure was done improperly, such mistakes can eventually be corrected.  But, there is no doubt that the purchase of a foreclosed property comes with risks.

What’s a potential third-buyer of a foreclosure to do?  Proceed with caution. These potential buyers need to do their research and, most importantly, get title insurance to protect themselves if a mistake did occur in the foreclosure process.  When possible, third-party buyers should also reach out to the former homeowners and see if a settlement can be reached to avoid problems down the road.

Loan Securitization and Foreclosure Defense

Loan

In recent years, loan securitization has become a hot topic among mortgage lending and foreclosure defense.  Borrowers often first learn about securitization when reviewing the assignments of their mortgage:  many are shocked to learn that their mortgage is being held by a trust, often with a long name with many numbers and dates.  (Ex.  Deutsche Bank National Trust Company, as Trustee of the IndyMac INDX Mortgage Trust 2007-FLX3, Mortgage Pass-Through Series 2007-FLX3).  The borrower, who usually made their loan with a local bank or lender, has no idea what this entity has to do with their loan.  The answer is that their loan has been securitized.  With the ongoing foreclosure crisis, challenges to the loan securitization process have become a popular foreclosure defense.

In the old days, when you borrowed money from a bank, the bank held onto the loan until it was paid off.  The promissory note (the contract you signed to borrow this money) remained in the vault of the local bank, and there was generally no dispute over who owned what.  (The Christmas movie, It’s A Wonderful Life, has many scenes showing this traditional role of a lender).

In the last half century, things began to change.  Lenders no longer held onto the loan they originated for the life of the loan and instead, began to sell them in the secondary market for loans.  The two biggest buyers of these loans were Fannie Mae and Freddie Mac:  government-sponsored corporations whose sole purpose was to buy loans from originators, so these lenders had more money to lend again.  A change to the federal tax code in the 1980s opened the door for more participants to get involved in securitization.  Securization is often blamed as a major reason for the recent financial meltdown; the rush to sell these loans on the secondary market encouraged many banks to freely lend money and ignore underwriting standards.

Understanding securitization is an oxymoron; the process is too complicated for anyone to really understand.  The short explanation of securitization is that loans are intended to be transferred among several different entities and finally into a trust, where shares of the loans are sold to investors.  This securitization process has strict rules and deadlines.  During the ongoing foreclosure crisis, it became apparent that few of these securitizited trusts followed these requirements.  I, personally, have never seen a loan that has complied with the applicable securitization requirements.

Can mistakes in the securitization process help with foreclosure defense?  The trend in Massachusetts is that these mistakes alone will not beat a foreclosure.  Even if a mistake did occur in the securitization process, courts generally say that the borrower has no “skin in the game” for raising it as a defense.  Some courts have disagreed, and I expect appeals courts to resolve this issue in the near future.  However, loan securitization has, at times, revealed problems in the transfers of promissory notes that can be a defense to foreclosure, pursuant to the foreclosing entity’s requirement to hold the note at the time of foreclosure.

Speak to a foreclosure defense attorney if you have a securitized loan and are in need of assistance.

Beware of Foreclosure Defense Scams

Beware of Foreclosure Defense Scams

In addition to the loss of homeownership for many Americans, the continuing foreclosure crisis has another dire consequence: the rise of foreclosure defense scams.  A recent story from New Jersey about a family losing their home due to a nationwide foreclosure scheme demonstrates the importance of struggling homeowners needing to be careful in seeking foreclosure defense assistance.

Foreclosure scams often involve attempts to provide loan modifications to struggling homeowners.  These often come from purported companies offering to assist with the loan modification process.  Often, they reference the Home Affordable Modification Program (“HAMP”)–a federal loan modification program.  Almost always, these scammers directly solicit homeowners through mail, the Internet, or phone.  These con artists often require homeowners to pay large, upfront fees and typically do little to assist with foreclosure defense.

How should struggling homeowners avoid these scams?  By staying away from any shady offer to assist with foreclosure defense.  I recommend that homeowners only accept help from a reputable attorney, a non-profit organization, or a state or federal government agency.  Private companies offering loan modification or other foreclosure defense assistance should raise a red flag for homeowners, if these purported businesses do not have proper credentials.
Let me add an important caveat to this advice: I’m not suggesting that those in need of foreclosure defense avoid seeking the help of anyone requiring a fee for their services.  While there are many free services available for homeowners trying to avoid foreclosure, these programs aren’t the best for everyone.  There are many reputable professionals–myself included–who do charge a fee for their work.  Homeowners should not rule out paying someone to help save their home, but do need to be diligent in making sure that their money goes to a reputable professional.

“Strategic Default” and Foreclosure Defense

 

If you have been following the news in the last few weeks, you have probably heard about the New York Times’s editorial Why I Defaulted on My Student Loans.  In this opinion piece, the author gives his reasons for not paying his student loans and encourages other borrowers in a similar scenario to do the same.  The article has generated alot of buzz, with several financial and legal experts criticizing this approach.  (Click here and here for good reads on this topic).
With this in mind, I thought I would discuss in this blog post a related question I sometimes get regarding foreclosure:  does it ever make sense to do a “strategic default” on a mortgage loan?  Is it ever worth it to stop paying for a home?
If the goal is to live at the home for a few years rent free (without concern to the impact on one’s credit history), then I suppose a default may make sense.  Otherwise, purposely deciding not to pay a mortgage loan is a bad idea.
As I have written before, getting a free home from a foreclosure defense lawsuit is an unrealistic goal.  The much more realistic goal is affordability: a loan payment that the borrower can pay. However, even with a strong case, foreclosure defense is tough. With that said, a borrower should never risk loosing their home in hopes of getting a free home or a reduced principle balance.  If a borrower is having trouble affording their home, they should try for a loan modification (and consult an attorney if they are not making any progress in this difficult process).

Practice Pointers: Overcoming a Default Judgment

 

Homeowners facing foreclosure, like defendants in other types of lawsuits, sometimes find themselves in one of the toughest spots available: facing a default judgment.  A default judgment occurs when the defendant does not respond to the lawsuit.  This allows the plaintiff (the person bringing the lawsuit) to automatically get what they want.  In a post-foreclosure eviction, for example, the foreclosing entity automatically gets an execution (which allows them to obtain possession of the home).  A recent Boston Globe article discusses the rise of default judgments in debt collection cases and the shocking fact that many defendants were never notified about the lawsuit.  This applies equally to foreclosure defense cases as well.

What should someone do if they are the victim of a default judgment?  Get a lawyer . . . right away.  Default judgments, fortunately, can be lifted if the court is convinced there is a good reason for doing so.  A lawyer can help identify possible arguments to accomplish this.  For example, I have succeeded in lifting a default judgment based on the wrong date in the lawsuit’s paperwork.  Other possible grounds include challenging service of the lawsuit and raising extenuating circumstances for the failure to originally respond to the lawsuit.

A lawyer can also help you in determining how best to fight the underlining lawsuit against you.  As I heard judges state before, the court is more likely to remove a default judgment if you can show that you have a real defense to the case.
Are you facing a default judgment?  Contact me for a consultation.

Firm News: Sherwin Law Firm Succeeds in Helping Homeowner Beat Foreclosure

I’m pleased to announce that I settled a foreclosure defense lawsuit last month, resulting in my client obtaining an affordable loan modification and a rescission of the foreclosure.  My client had been foreclosed and was only days away from being physically removed from the home.  I stopped the move-out by winning a temporary restraining order (“TRO”) from the court, which later became a preliminary injunction, which prevented the bank from doing anything to enforce the foreclosure for the duration of the case.

After two years of litigation in court, the case is finally settled, with my client accepting a loan modification in exchange for a court approved agreement to eliminate the foreclosure.

My client, like others I have helped avoid foreclosure, didn’t get a free home.  Rather, she received an affordable loan modification: my goal in every foreclosure defense case.
Are you facing foreclosure?  Contact me for a consultation.

Breaking News: Massachusetts Appeals Court Upholds Validity of Mortgage Assignments

SJC

The Massachusetts Appeals Court ruled in favor of the banks today in a decision that challenged the validity of mortgage assignments prior to a foreclosure.  In Shea v. Federal National Mortgage Association, a homeowner challenged the validity of the foreclosure against his home on the basis that the underlining assignment of his mortgage was void.  In short, this homeowner tried to argue that Federal National Mortgage Association (“Fannie Mae”) was never a valid recipient of his mortgage.  The Appeals Court rejected these arguments, and supported its decision by citing several, prior Appeals Court and Supreme Judicial Court decisions that limit the ability of homeowners tochallenge the assignment of their mortgages.
The lesson from Shea is that challenges to mortgage assignments are difficult to make.  While there is documented evidence of “robo signing,” fraudulent assignments, and missing paperwork, homeowners have limited means to challenge the assignment of their mortgages unless they can show that the assignment is void, and never legally binding in the first place.  Shea reaffirms that both the underlining debt for the purchase of a home (“promissory note”) and the security interest for this debt (“mortgage”) can be freely transferable to third parties, with the original homeowner having few defenses to the person or entity acquiring these items.

Practice Pointers: Qualifed Written Requests (“QWRs”)

Homeowners who have questions about their mortgage loans or wish to dispute an error with their servicer have a useful tool at their disposal: a qualified written request (“QWR”).

A QWR is a requirement for loan servicers under the Real Estate Settlement Procedures Act (“RESPA”).  QWRs are written requests to loan servicers to dispute an error in a mortgage loan. For example, if a homeowner believes that their loan servicer has not properly credited their account with a mortgage loan payment, they can notify the servicer of this through a QWR.

QWRs are useful not only for fixing errors, but also for obtaining important information about their mortgage loan.  A homeowner can request that the mortgage servicer notify them of which entity owns the loan and request a copy of the promissory note (the contract that the homeowner entered into for the purchase of the home).  Believe it or not, this information is not always easy to find, and a QWR is a useful means of getting this information.

A QWR needs to be in writing, and should be sent separately from a regular loan payment to the servicer.  Loan servicers often have separate addresses for QWRs (which can often be found on their websites).  If you cannot find this address, you can call the servicer and ask where it should be sent to.  A QWR should always be sent using certified mail, so there is proof that the servicer received the request.

When preparing a QWR, avoid making a “laundry list” of documents that you are looking for.  Case law suggests that a loan servicer does not need to respond to a long list of requested documents, but instead, merely needs to address a borrower’s specific concerns.  The best practice in a QWR request is to state your reason for writing the letter and request any relevant documents related to the inquiry.  For example, I always ask for a validation of the underlining debt; specifically a copy of the promissory note and any documents showing how this instrument has been sold during the life of the loan.

A borrower can sue a loan servicer for its failure to comply with a QWR.  With this in mind, borrowers should keep detailed records of their QWR letter and proof that it was sent.

Jury Trials in Foreclosure Defense Cases

 

Jury

I’m happy to write that I won a post-foreclosure eviction case several weeks ago using a new defense that I had been working on for the past year.  One of the critical reasons for this victory, I believe, was my client’s decision to pursue a bench trial instead of a jury trial—a topic I want to discuss in this blog post.

The right to a jury trial depends on both the type of case and the court that the parties are in.  In Massachusetts, the particular cause of action determines whether a jury trial is available. Eviction (“summary process”) cases, for example, entitle parties to a jury trial.  A party needs to claim their right to a jury trial in the beginning of a case, or it is otherwise waived.

A non-jury trial goes before a judge and is called a “bench trial.”  In a bench trial, the judge hears all of the evidence presented by the parties and, like a jury, determines questions of fact.  For example, in a post-foreclosure eviction trial, the judge will decide whether the foreclosing entity complied with all of the foreclosure requirements.

In a bench trial, as opposed to a jury trial, a judge is required to present his or her findings of fact.  In other words, the judge has to explain the decision that he or she made, as opposed to a jury trial, where the jury only needs to give its verdict.

In my experience, I have found jury trials for foreclosure law issues to be extremely difficult.  The information is dense and difficult to explain to six non-lawyers who likely have no familiarity in this area of law.  More than once, I have seen jurors fall asleep during such trials!

The decision on whether a client should waive their right to a jury trial is theirs alone, and a single blog post cannot offer enough information to make this decision.  The point of this post is to encourage those involved in these cases to give serious thought about whether their case should go before a judge or jury. Rarely do “Perry Mason” moments occur in foreclosure defense; these defenses are often based on mountains of paperwork and uneventful testimony.  Because of this, jurors often may not understand the reasons why the foreclosure is void, even if the defect is crystal clear.  On the other hand, a defense based on a foreclosing entity’s blatant disregard of the law may be enough to excite a jury and therefore justify a jury trial.

With this in mind, give serious consideration to the type of trial you request in a foreclosure defense case.  Better yet, speak with an expert before making this decision.

 

Mortgage/Deed Reformations & Foreclosure Defense

As the foreclosure crisis continues throughout Massachusetts and the rest of the country, mortgage/deed reformations continue to be popular cases in Massachusetts Land Court and Superior Court. With the right approach, these cases can be effective tools in foreclosure defense.

Reformation cases, simply put, are attempts by banks and lenders to fix mistakes in mortgages and deeds.  When a mortgage loan is in default, the foreclosing entity often takes a close look at the title to see if the paperwork is in order.  In many cases, these foreclosing entities are finding huge mistakes in mortgages and deeds, including incorrect property descriptions and missing information (a reason why real estate law has one of the highest areas of legal malpractice).

The bank and lenders will often first try to contact the borrowers and see if they will consent to correcting the mistake.  If they won’t, the bank or lender needs to bring a court action to reform the mortgage or deed.  These cases are generally brought in either Superior Court or Land Court and ask the Court to correct the error based on principles of equity and fairness.

Following a common piece of advice given on this blog:  if you get notice of one of these lawsuits against you, don’t ignore it.  The foreclosing entity is bringing one of these lawsuits for a simple reason: unless it corrects the mistake in the land records, it can’t foreclose.  With this in mind, you may be able to use this mistake to your benefit and negotiate with your lender for a loan modification or some alternatives.

If you find yourself in one of these situations, contact me for a consultation.