FORECLOSURE DEFENSE FALLACY

If you are a listingRealtor or a person who has just gotten foreclosure notice from your lender(s), no doubt you have heard about a myriad of "Foreclosure Defense" firms that promise to delay or prevent foreclosure or even prevent the enforcement of the mortgage because if irregularities in the loan.  What in fact are foreclosure defenses?

RESPA and TILA

The most popularly cited defenses relate to violations of RESPA (Real Estate Settlement Procedure Act) and TILA (Truth In Lending Act).  Other federal and state laws may also be in violation.  The general remedy to the borrower for violation of these laws by the lender is "putting the parties back into the position they were in prior to them entering into the transaction."  There are also remedies that include refunding all loan fees paid by the borrower, paying for the borrower's legal fees for the lawsuit, and statutory penalty fees that are, relating to the size of the loan, relatively nominal.

For the last two decades the enforcement of these laws was involved but a real problem for lenders and borrowers that were victims had easy access to attorneys that specialized in these prosecutions against the lenders.  Today, these attorneys are watching TV and twiddling their thumbs for lack of business.

What Happened to Foreclosure Defense?

So the question is - why are the consumer attorneys that specialize in RESPA and TILA violations sitting with no business yet there are firms and attorneys out there that seem as busy as bees with foreclosure defense?

The answer is too obvious to the consumer attorneys with no business - the key element to a successful RESPA or TILA defense is no longer available to consumers!  That key element is that the consumer is to be put back in the position they were in before the transaction.  That means that the consumer (borrower) has to give the money borrowed back to the lender!!!  In the 80's and 90's and most of the 2000's this was not a problem as it was easy to refinance or sell the home to pay back the lender.  But today the loan is greater than the value of the home and there is no way to repay the lender!  So even if the consumer wins in court, to get the benefits of the win the money has to be repaid to the lender.  Since this can't be done, everyone just was spinning their wheels. And since the consumer attorneys get paid based on success - if the consumer does not repay the loan then the lender does not have to pay the penalty and attorney fees.   Thus the consumer attorneys are not taking the cases!

Congress Working on the Fix

Congress is already aware that the federal laws that worked well to protect consumers in an "up market" from predatory lending have just stopped working in this "down" market, and they are exploring amendments to address the effective elimination of the RESPA and TILA violation remedy we face today

Defense or Delay?

So what are these "defense" firms doing?  Many of the foreclosure complaints that we see are technically defective from a "pleading" perspective.  These technical issues can almost always be fixed by the lender attorney and thus bringing them to the court's attention usually just delays the eventual finality of the foreclosure.  It is like throwing peanut butter in the gears of the lawsuit - it will slow it down but not stop it.

Slowing down a case can be good if there is a viable reason to slow it down - like working on some modification or short sale or working on reinstatement.  But many homeowners just want to get to live in the house for free as long as possible, and some foreclosure defense firms are happy to oblige - for a fee.

Legitimate defenses

Make no mistake, there are some legitimate defenses for a foreclosure.  One we recently brought is for a usurious promissory note.  In Florida, if the interest charged is over 18% the lender has to return double all of the interest charged and the note is thereafter interest free until its due date.  Another defense we recently brought was where the foreclosure complaint was brought for the non-payment of the interest payment beginning March 1, 2007.  But a careful reading of the loan documents showed that the first payment was not until April 1, 2007. (Here the bank will have to re-file the complaint after they re-default the borrower, but by then the home should be sold).

Another defense has to do with the lost promissory note. However, borrowers should not think that a lost promissory note is a free ticket to a permanently unenforceable mortgage. State statutes are pretty uniform about the re-establishment of a lost promissory note as the note is deemed a commercial instrument, and commercial instruments can be proven and re-established by a set methodology set forth in the statutes. It does take time and proofs to make this occur, so we can call it a delay tactic. However the ability not to prove up the existence of the promissory note for all intents and purposes, happens infallibly.

There are other legitimate defenses and I don't mean to be complete in this analysis, but don't confuse defense with delay.  As a Realtor you need to understand these differences and guide your clients appropriately.

 copyright 2009 Richard P Zaretsky, Esq.