foreclosure actions

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Defending Foreclosure Actions

Marcia Johnson and Luckett Anthony Johnson*

Introduction

Markets are cyclical. Since the economic panic of 1797,which was instigated by a burst of the land speculationbubble, there have been more than 20 recessions of varyingseverity in the United States.1 These recessions were drivenby a number of things including government policies andcyclical changes in consumption, business, health, real estateand banking.2 The economic collapse of 2007 was driven by anumber of factors led by the downturn in real estate, basedin part on the sub-prime market.3 Earlier downturns thatsuered real estate crashes saw increased foreclosures, butnot so great as resulting from the crash of 2007. Between2002 and 2006, annual foreclosures averaged 455,000,representing less than 1% of all loans.4 However, between2004 and 2006 the average number of all foreclosure starts

*Marcia Johnson is a professor of law at Thurgood Marshall Schoolof Law, Texas Southern University. Luckett Anthony Johnson is a 2010graduate of the University of Texas School of Law. The authors acknowl-

edge our, research assistant, Matthew Cherry, 2L, Thurgood MarshallSchool of Law for his valuable comments, reviews and edits.1Davis, Joseph H., An Improved Annual Chronology of U.S. Business

Cycles Since the 1790's (February 2005). NBER Working Paper Series,Vol. w11157, pp. 2005. Available at SSRN: http://ssrn.com/abstract=673244.

2See generally Nikola Spatafora, International Monetary Fund, The

Global Financial Crisis 2009: Preparing for the Future; World EconomicOutlook: Crisis and Recovery, Practising Law Institute, 1753 PLI/Corp 65,PLI Order No. 20457, August 5, 2009, and see Investment Strategy Groupof Sandler O'Neill + Partners, L.P., Dangerous Denials for 2010, Practis-ing Law Institute, 1800 PLI/Corp 55, March 9, 2010, addressing consumerspending and consumption and government, and the nancial system.

3Todd A. Knoop, Recessions and Depressions: Understanding

Business Cycles, ABC CLIO, 2nd ed. 2010, ISBN 978-0-313-38164-5.4Lorenzo, Unsafe Loans in a Deregulated U.S. Mortgage Market, 30

Pace L. Rev. 154 (2009).

516 2012 Thomson Reuters E Real Estate Law Journal E Vol. 4 0 No. 4


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was 950,000.5 Since the economic housing crash of 2007 upto the second quarter of 2009, foreclosures escalated to more

than 2,152,000 annually,6 with the largest occurrences beingin the states of California, Florida, Nevada, Utah, Arizona,Colorado, Ohio, Georgia, Michigan, Idaho and Pennsylvania.7

By the fourth quarter 2010, the number of mortgagedelinquencies fell to the lowest level in two years.8 However,the number of loans in foreclosure remained at its highestlevel since the start of the mortgage crisis.9 Today, 9,000

Americans are losing their homes to foreclosure daily.10

With the rising incidences of residential foreclosures, manyhomeowners are overwhelmed by the foreclosure process andanticipated costs and often opt to vacate the premiseswithout oering any defense.11 The American justice system

rests on the premise that no person will be deprived of theirliberty or property without due process.12 Procedural dueprocess requires that a person have notice of the chargesagainst them as well as a reasonable opportunity to defend

5Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang and

Eileen Mauskopf, Designing Loan Modications to Address the MortgageCrisis and the Making Home Aordable Program, 42 UCC L.J. 1 (2009).

6Id.

7See Realty Trac (Anthony's cite).

8Nick Timiraos, The Wall Street Journal, February 18, 2011, A2.

9Id.

10See Olefson and Kaniuk, Florida Foreclosure Defense Strategies:An Imm ediat e Look at the Bes t Pra cti ces for Ass ist ing Dis tre sse dHomeowners in Florida, 2009 Aspatpre Special Report 11 (2009) and stat-ing that a total number of homes lost is anticipated to reach as many assix million with another two million Americans ending up underwater andan aggregate $4 million in home equity lost forever.

11Cox, Foreclosure Reform Amid Mortgage Lending Turmoil: A Public

Purpose Approach, 45 Hous. L. Rev. 683, 709 (2008) and see John Leland,Facing Default, Some Abandon Homes to Banks, N.Y. Times, Feb. 29,2008, at A1 and see Pinkston, In The Weeds: Homeowners Falling Behindon their Mortgages, Lenders Playing the Foreclosure Game, and CitiesLeft Paying the Price, 34 S. Ill. U. L.J. 621 (2010) stating that in certaincircumstances homeowners lack the wherewithal, the nances, the incen-tive, or maybe all three, to ght foreclosure proceedings, and so thechoose to abandon their property.

125th Amendment, United States Constitution, stating in pertinent

part, No person shall be . . . deprived of life, liberty, or property, withoutdue process of law . . ..


517 2012 Thomson Reuters E Real Estate Law Journal E Vol. 40 No. 4


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against them.13 Reasonable opportunity is circumventedwhen the defendant is eectively without the means to

defend.14 This is especially oensive to our notions of justicewhen the defendant has legitimate bases for defense but iseectively denied the opportunity to urge such defensesbecause of nances.15 This article is written to examine thedefenses available to homeowners facing foreclosure and toprovide a practical approach to defending againstforeclosure.16

13Id. and Mullane v. Central Hanover Bank & Trust Co., 339 U.S.

306, 70 S. Ct. 652, 94 L. Ed. 865 (1950) nding that there can be no doubtthat the due process clause requires that deprivation of life, liberty orproperty by adjudication be preceded by notice and an opportunity forhearing appropriate to the nature of the case and citing their opinion in

Grannis v. Ordean, 234 U.S. 385, 394, 34 S. Ct. 779, 783, 58 L. Ed. 1363(1914) stating that the fundamental requisite of due process of law is theopportunity to be heard.

14See Kerrin Maureen McCormick, The Constitutional Right to

Psychiatric Assistance: Cause for Reexamination of AKE, 30 Am. Crim. L.Rev. 1329 (1993) stating that a state may not adopt procedures that re-strict an indigent defendant's ability to defend himself so that only thosedefendants with greater nancial resources are aorded a meaningful op-portunity to defend themselves. But see Freyermuth, Foreclosure By

Arbitration?, 37 Pepp. L. Rev. 459, 465 (2010) stating that the constitu-tional challenge to non-judicial foreclosures on due process grounds asrejected by most courts primarily because it does not involve state actionsubject to due process requirements and see Kenneth Krock, TheConstitutionality of Texas non-Judicial Foreclosure: stating thattraditionally, non judicial foreclosure sale notice procedures avoidedconstitutional scrutiny because they were not considered state action.

And nding that the supreme court has never been faced with a direct dueprocess challenge to a power of sale.

15See Klevens, Poverty and Equal Access to the Courts: The

Constitutionality of Summary Dispossess in Georgia, 20 Stan. L. Rev. 766,773 (1968) distinguishing the eect of due process in the case where thedefendant fails to defend his case at all from the eect on the litigant who,due to nancial constraints are eectively denied a defense. The essenceof dueprocess is basic fairness in procedure. Jafay v. Board of CountyCom'rs of Boulder County, 848 P.2d 892 (Colo. 1993).Dueprocess is not atechnical concept with xed content unrelated to time, place, andcircumstance; rather it is exible and calls for such procedural protectionsas the particular situation demands. Mathews v. Eldridge, 424 U.S. 319,96 S. Ct. 893, 47 L. Ed. 2d 18 (1976). Whether particular proceduresadopted to review determinations aecting property interests satisfy dueprocess depends on the circumstance of the particular case. Morrissey v.Brewer, 408 U.S. 471, 92 S. Ct. 2593, 33 L. Ed. 2d 484 (1972).

16The Homeowner should assess the prudence of ghting to keep a

home in certain circumstances, e.g. when they are substantially underwa-ter. For an examination of the value of such assessment, see generally,

Real Estate Law Journal [Vol. 40:4 2012]



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It is noteworthy that homeowners are not the only personsseeking relief from lender practices during this era of

increased foreclosures. Federal and state governments arealso bringing actions against lenders under various legaltheories.17 However, this article is limited to a discussion ofthe actions and defenses of the homeowner.

First, we examine the transactional documents that arecommonly at issue in a residential foreclosure action. Second,we identify remedies alternative to foreclosure. Third, welook at foreclosure defense available in jurisdictions thatprovide judicial and non-judicial foreclosures. For each typeof jurisdiction, we examine the plainti's (or creditor's)burden as well as viable responses from the defendant (ordebtor/homeowner). Finally, we conclude that while many

foreclosures are likely sustainable, there are those that canbe successfully challenged and homeowners and their at-torneys should be aware of the opportunities to defend.

Transactional Documents

Typically, the documents prerequisite to a residential fore-closure include the mortgage (or deed of trust) and the prom-issory (or real estate lien) note.

The promissory note (also referred to as a real estate liennote in some states) is an agreement between two parties,where one (the payor, maker or borrower) promises to paymoney to the other (the payee or lender).18 It should specify

any conditions to payment.19

Commonly, for a promissorynote to be valid and enforceable it is required to provide: (1)the identity of the parties to the note, (2) be in writing asprescribed by the statute of frauds, (3) state clearly thepromise to pay, (4) specify the payment terms including therate of interest to be charged, (5) be signed by the borrow-

White, Underwater and not Walking Away: Shame, Fear, and the SocialManagement of the Housing Crisis, 45 Wake Forest L. Rev. 971 (2010).

17For example, the federal government has led numerous investiga-

tions into mortgage fraud, misdeeds and lender practices, some of whichrepresent a cost to taxpayers of an amount estimated to be $363 billionpaid in subsidies by the end of 2013. State attorney generals in almost allstates have also been investigating nancial industry lending practicesthought responsible in large measure for the nancial crisis.

18See for e.g. Willis V. Carpenter and Holly S. Hoxeng, Mortgages

and Financing, Colorado Real Estate Practice, Evidence of Debt, 2009;Yanfag v. Cyfred, Ltd., 2009 Guam 16, 2009 WL 5214891 (Guam 2009).

19See Saft, Commercial Real Estate Leasing 2d 26:3.




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er(s) and (6) be delivered by the borrower to and accepted bythe lender.20

Generally, the lender will protect its interests by requiringthe borrower to sign a security instrument. The securityinstrument is commonly in the form of a mortgage or deed oftrust.21 The purpose of the security instrument is to conveyreal property as security for the repayment of the debtevinced by the promissory note.22 Thus, to properly securerealty, there needs to be a mortgage or deed of trust in addi-tion to the promissory note.23 Whether the lender uses themortgage or the deed of trust is dictated by the law of thestate where the property is located.

Mortgages are documents that borrowers sign and deliverto their accepting lender to secure the debt on their real

estate. The mortgage involves two parties, the borrower andthe lender, and eectively creates a lien against theproperty.24 The mortgage is commonly led in the real prop-erty records in the county or parish where the property islocated.25

Three theories exist regarding the identity of the legaltitle holder of the mortgaged property and which theoryprevails is determined by the state practice. The three theo-ries are the title theory, the lien theory and the intermediateor modied lien theory. In states that subscribe to the titletheory, a mortgagee (lender) has the right to possess themortgaged premises upon execution of the mortgage. The

mortgage generally provides that title reverts back to the

20See Saft, Commercial Real Estate Forms 3d 16:3, Part IV. Financ-

ing and see George Lefcoe, Real Estate Transactions, Finance, andDevelopment, 6th Ed., LexisNexis, ISBN 978-1-4224-2986-0 pp 6669.

21Gerald Korngold and Paul Goldstein, Real Estate Transactions,

fth edition, Foundation Press, ISBN 978-1-59941-209-2 (2009) at pg. 375.22

Id.23

See Robinson v. Saxon Mortgage Services, Inc., 240 S.W.3d 311,313 (Tex. App. Austin 2007) holding that a deed of trust is construedalong with the note it is intended to secure also see In re Perry, 425 B.R.323 (Bankr. S.D. Tex. 2010) holding that under Texas law, a deed of trustis simply a mortgage with the power of sale.

24James Buchwalter, J.D. et.al., Mortgages, 59 C.J.S., Mortgages 17(2010 updated) and see B. E. Witkin, Deed of Trust, 4 Witkin, Summary10th Sec TransReal, 5, p 795 (2005).

25See Lefcoe, supra n. 22 at page 175.




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borrower when the loan is paid in full.26 In those states thatfollow the lien theory, the mortgage is recognized as a lien

on the property. The mortgagee holds the lien while themortgagor (borrower) has the right to possess the propertyuntil foreclosure.27 The remaining states describe themortgage as a conveyance of a defeasible fee, but substan-tively limit its use beyond that of a security interest in theland. These states are considered modied lien theory or in-termediate theory states. In these states, title remains withthe borrower and the lender's right to title occurs only if theborrower defaults.28

The deed of trust also serves the purpose of securing thedebt on the home by using the home as collateral. Like themortgage, the deed of trust identies the parties to the trans-

action, states the original loan amount, and specieswhenthe loan begins and ends (matures). The deed of trust alsostates the legal description of the property that secures themortgage, and provides for any conditions and terms (includ-ing late fees). Unlike the mortgage, the deed of trust hasthree parties to itthe trustor (or maker or borrower), thetrustee (who holds the power of sale) and the beneciary(the lender).29 Another importan t distinction from themortgage is that the deed of trust provides a power of saleclause. The power of sale clause permits the lender to fore-close on the property without having to go to court.30 Upondefault, the trustee is instructed to use the power of saleclause to sell the property without the necessity of going tocourt. The power of sale clause gives the trustee the right toforeclose and sell the property and convey ownership to thepurchaser. This right to invoke a non-judicial foreclosure in

26See Rapisardi and Hurwitz, The Mortgagee's Right to Rents After

Default: An Unsettled Controversy, 6 J. Bankr. L. & Prac. 331 (May/June1997) where author reports a survey of the states and identies themortgage theory it recognizes with case citations and see generally,Dunaway, The Law of Distressed Real Estate 1 11:20 to 12:21.

27Id. and see Sturges and Clark, Legal Theory and Real Property

Mortgages, 37 Yale L.J. 691, 704 (1928).28

Id. and see Grant S. Nelson and Dale A. Whitman, An Introductionto the Law of Mortgages, 1 Real Est Fin L 1.5 (5th ed.) 2010 update.

29See George Gingo, Emergency Foreclosure defense strategies in the

California Unlawful detainer action, p 2, http://xa.yimg.com/kq/groups/21872752/43547894/name/EMERGENCY+FORECLOSURE+DEFENSE.pdf and see Eleanor L. Grossman, Mortgages, 15 Md Law Enc 9 (2010).

30Grant S. Nelson, supra n 30 at 1.6.




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the event of default has historically been considered one ofthe key advantages to a deed of trust over a mortgage.31

Whether the lender's interest is secured by a mortgage ordeed of trust, when the borrower defaults on the payment ofthe note, the lien is subject to foreclosure.

PRE-FORECLOSURE REMEDIES

For many homeowners at risk of foreclosure, there may beno option to waiting for the foreclosure process to take itscourse. But that is not the only remedy and there are benetsto the homeowner, lender, community at large and thegovernment to working out the problem rather than permit-ting foreclosure.

Before foreclosure is started or gets to the point of sale,the borrower can take action that may avoid foreclosurealtogether. Among those considerations are (1) working withthe lender to renegotiate the terms of the note resulting inamended (including forbearance) agreements, (2) deeds inlieu of foreclosure, and (3) government interventions.

There are a number of reasons that a lender might be will-ing to renegotiate the terms of a loan to avoid foreclosure.Lenders are not in the business of owning and managingproperties, the costs of which include payment of taxes andsecuring the property from vandalism. Consequently, theymay have an interest in renegotiating loan terms that theborrower can pay. Additionally, lenders are increasinglyconcerned about the quality of their loans, particularly in

judicial foreclosure states. A renegotiated loan allows themthe opportunity to correct those mistakes and create an en-forceable note and mortgage.

Sometimes referred to as the friendly foreclosure, thedeed in lieu of foreclosure is an instrument wherebythe borrower voluntarily conveys the mortgaged propertyback to the lender instead of requiring a full foreclosureproceeding.32 This type transfer is generally accompanied by

31The Hazard of Fraud in Deeds of Trust, 48 Yale L.J. 892 (1939) and

see Beyer, 14 West's Texas Forms: Real Property 10.2 (2d ed.) 2010

updated.32Murray, Clogging Revisited, 33 Real Prop. Prob. & Tr. J. 279, 287

(1998); Murray, Deeds in Lieu of Foreclosure: Practical and LegalConsiderations, 26 Real Prop. Prob. & Tr. J. 459 (1991) and see Ripp, TheNew Treatment of Real Estate Tax Shelter Losses Resulting from Deedsin Lieu of Foreclosure, 57 Notre Dame L. 704, 708 (1982).




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a full release of lien and tax consequences to the borrower,which should be considered before making the conveyance.33

The short sale is a device where the besieged borrowersells the mortgaged property at a price less than the amountowed on the loan.34 The lender must approve the short saleso that the borrower does not remain indebted for the dier-ence in price. With so many borrowers upside down ontheir mortgages, this vehicle presents one way for the bor-rower to avoid foreclosure, but the borrower should considerthe potential tax consequences of such a decision.35

Additionally, there are government incentives that encour-age lenders to work out the loan rather than foreclose it. 36

The Housing and Economic Recovery Act of 2008 (HERA)37

was enacted to assist homebuyers who had subprimemortgage loans. HERA authorized the federal housingadministration to guarantee up to $300 billion in new 30-year xed rate mortgages for qualied buyers contingent onthe lenders agreement to write-down the principal loan bal-ances to 90% of the appraised value of the property.38 TheUnited States Federal Housing Authority Hope for Home-owners Program (HOPE)39 and the United States TreasuryHome Aordable Modication Plan (HAMP)40 are two piecesof federal legislation designed to help relieve homeownersfrom foreclosure.

HOPE was established under HERA and provides op-portunities for the homeowner to modify or renance theirexisting mortgage to make monthly payments more

aordable. HOPE includes a program called the Home Af-

33See Gomez, Bankruptcy and the Tax Impact of Foreclosure for

Consumer Debtors, 30 Cal. Bankr. J. 73 (2009) stating that under I.R.C. 61(a)(12) cancellation of debt is taxable income.

34Braucher, Humpty Dumpty and the Foreclosure Crisis: Lessons

from the Lackluster rst year of the Home Aordable ModicationProgram (HAMP), 52 Ariz. L. Rev. 727, 743 (2010).

35Supra n. 37.

36See, generally, Cordell, Dynan, Lehnert, Liang and Mauskopf,

Designing Loan Modications to Address the Mortgage Crisis and theMaking Home Aordable Program, 42 UCC L.J. 1 (2009) discussing vari-ous government programs designed to prevent foreclosure.

37

Pub. L. No. 110-289, 122 Stat. 2654, enacted July 39, 2008.38

Title II National Housing Act, 12 U.S.C.A. 1707, 257(m).39

Title II National Housing Act, 12 U.S.C.A. 1708, 257(b)(1) to (7).40

Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343.




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fordable Foreclosure Alternatives to assist homeowners whoare interested in short sales or deeds-in-lieu of foreclosure.

The stated purposes of the Act are to create a voluntaryfederal program that helps distressed borrowers avoid fore-closure by working with their lenders to renance loans,reduce principal balances outstanding, reduce interest ratescharged in the original note and to provide servicers of delin-quent mortgages with alternatives to foreclosure in a pri-mary eort to support long-term sustainablehomeownership.41

HAMP provides up to $75 billion including $50 billion infunds under the Troubled Asset Relief Program (TARP) toaid homeowners in reducingforeclosures.42 HAMP providesfunds to (1) modify rst-lien mortgages of homeowners in

danger of foreclosure, (2) encourage loan modications incertain areas, (3) reduce or pay o qualied second lien-mortgages, (4) arrange deeds in lieu of foreclosure or shortsales, and (5) incentive payments to encourage renancingunder HOPE.43 HAMP also includes a home price declineprotection (HPDP) program aimed at encouraging investorsto modify mortgages.44 In July 2009, the United StatesGovernment Accountability Oce (GAO) issued a reportidentifying treasury actions needed to make home aordablemodication program accountable.45 However, the most likely

41Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289,

122 Stat. 2654, 2008, 1402. Numerous government programs provide as-

sistance including the Principal Reduction Alternative, the Second LienModication Program, the home Aordable Renance Program, the HomeAord abl e Une mpl oym ent Pro gra m, Eme rgency Homeo wners' Loa nProgram, FHA Forbearance for Unemployed Homeowners, and the Home

Aordable Foreclosure Alternatives. For additional information visit http://portal.hud.gov/hudportal/HUD?src=/topics/avoidingforeclosure.

42Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343

authorizing the United States Department of Treasury to purchase orinsure up to $700 billion in troubled assets including residential mort-gages; see United States Treasury Press Release, July 31, 2009, FinancialStability.gov, http://205.168.45.55/latest/tg07312009.html, last visitedJanuary 20, 2011.

43Id.

44See United States Treasury Department Supplemental Directive

09-04. HAMP is one component of the Obama administration's comprehen-sive plan to stabilize the United States housing market. The HPDP andHome Aordable Renancing Program are part of the plan.

45Troubled Asset Relief Program, Treasury Actions Needed to Make

Home Aordable Modication Program More Transparent and Account-able, United States Government Accountability Oce Report to Congres-




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concern about these programs is how eective they havebeen since enacted.46

Community Interest

What may appear to be a simple foreclosure of a defaultedloan can seriously impact persons and communities not par-ties to the foreclosure.47 A home foreclosure can negativelyaect the selling price of nearby homes.48 The foreclosedhome reportedly suers physical neglect before and afterrepossession, which encourages nearby homeowners to ne-glect their homes.49 The resulting blight results in lowered

valuation of the foreclosed homes as well as neighboringhomes, creating comparable sales that can result in alowered appraisal for other homes in the community.50 Theseeects may cause ight away from the community by exist-ing homeowners and also discourage new buyers, creating

sional Committees, July 2009 http://www.gao.gov/new.items/d0983, lastvisited January 19, 2011.

46Robert Wassmer, The Recent Pervasive External Eects of Residen-

tial Home Foreclosure, July 19, 2010 at 2526, http://www.csus.edu/ppa/faculty/samplescholarship/The%20Recent%20Pervasive%20External%20Eects%20of%20Residential%20Home%20Foreclosure.pdf. Recognizing thesignicant need for sweeping reform but faced with a deadlocked congress,President Obama announced that he would enact executive orders toprovide additional support for some qualied homeowners. The programwould allow the homeowners to renance their mortgages notwithstand-ing the fact that the home is valued less than the mortgage. The programopened to mixed reviews. See generally, President Obama announces

renancing plan, http://www.wwmt.com/articles/president-1397444-obama-plan.html; Editorial: Obama's mortgage plan won't be enough, http://www.fresnobee.com/2011/10/28/2594595/editorial-obamas-mortgage-plan.html.

47Relman, Foreclosures, Integration, And the Future of the Fair

Housing Act, 41 Ind. L. Rev. 629, 633 (2008).48

Robert W. Wassmer, supra n. 41 at p. 5.49

Id. and see Pinkston, In the Weeds, supra n. 13.50

Id. and see McKinney, The North Carolina Banking InstituteSymposium on the Foreclosure Crisis: Municipalities ght Eects ofForeclosure with Litigation and Neighborhood Stabilization ProgramGrants, 14 N.C. Banking Inst. 257 (2010) stating that experts predict thatforeclosure blight could ultimately cost governments hundreds of billionsof dollars and see Schilling, Code Enforcement and Community Stabiliza-tion: The Forgotten First Responders to Vacant and Foreclosed Homes, 2

Alb. Govt. L. Rev. 101, 111 (2009) reporting the lost of tax revenue inseven Ohio cities to be $49 million and an additional $15 million annualcost in city services including code enforcement, demolition, propertymaintenance, police and re runs and boarding buildings.




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ghost towns.51 Aside from the increased ownership of theproperties by banks and other lenders in the blighted com-

munity, the loss of revenue to the local government can becritical as well.52 In most circumstances foreclosure actionsdo proceed and often without challenge by the mortgagor.

In order to help restore communities at risk of devaluationfrom foreclosure activity, some non-prot organizations havebe gu n p ro v id in g as si st ance t o nan ci all y t rou ble dhomeowners. One group is the Neighborhood AssistanceCorporation of America (NACA). NACA is primarily designedto build strong, healthy neighborhoods in urban and ruralareas nationwide through aordable homeownership.53 It of-fers two foreclosure resistance programs, a home purchaseprogram and a Home Save Program.54 To participate in ei-ther program NACA requires becoming a NACA Member,attending a workshop and participating in advocacy.55 Thehome purchase program oers members a mortgage thatmakes homeownership aordable without the need forperfect credit.56 The mortgage may be used to either purchaseor renance a home and requires no down payment, no clos-ing costs, no fees and a below-market interest rate.57 TheHomeSave program provides solutions for homeowners with

51Johnson, Fight Blight: Cities Sue to Hold Lenders Responsible for

the Rise in Foreclosures and abandoned Properties, 2008 Utah L. Rev.1169 n. 72 (2008) citing e.g. David Garrick, Foreclosed Homes a MessyProblem in Escondido, N. County Times (Cal.), Sept, 21, 2007, n. 58 andsee Azam Ahmed and Darnell Little, Neighborhood Ghost Towns: As

Foreclosures Soar to historic Levels, the City is Beset with a Staggeringnumber of Vacant Homes, Chi. Trib., Feb. 22, 2009, available at http://articles.chicagotribune.com/2009-02-22/news/09022102711ghost-towns-foreclosures-last-year-neighborhood-stabilization-program.

52Hunter, Reducing the Spillover Costs of Foreclosure: Boston's Block-

By-Block Approach to Saving Neighborhoods from Foreclosure Blight, 29Rev. Banking and Fin. L. 533, 534 (2010); Gottlieb, McGuinness, WhenBad Things Happen to Good Cities, 17 Aug. Bus. L. Today 13, 15 (2008).

53NACA Overview, https://www.nacalynx.com/nacaweb/aboutnaca/n

acaOverview.aspx?language=(accessed September 17, 2011).54

Id.55

NACA's Free Services, https://www.nacalynx.com/nacaweb/aboutnaca/nacaServiceFree.aspx (accessed September 17, 2011) NACA reportsthat membership requires payment of an annual fee, currently $20 perhousehold. The workshop introduces the members to NACA programs andservices, and provides important information about real estate, housingand the purchase process.

56supra note 63.

57Id.




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an unaordable mortgage.58 To avoid foreclosure NACAcounselors work with the homeowner's lender to achieve a

mortgage [re]structure or forbearance.59Regional non-prots also assist homeowners at risk of fore-

closure to keep their homes.60

Judicial Foreclosure Jurisdictions

In Connecticut, Delaware, Florida, Illinois, Indiana,Kansas, Kentucky, Louisiana, Maine, Maryland, Mas-sachusetts, Nebraska, New Jersey, New Mexico, New York,North Dakota, Ohio, Pennsylvania, South Carolina, and

Vermont judicial foreclosure is the primary or only methodof foreclosing on residential property.61 A judicial foreclosureis often viewed as costly and time-consuming requiring stan-

dard legal steps such as the ling of a complaint, service of

58NACA Home Save Program, https://www.nacalynx.com/nacaWeb/ref

inance/homesaveProgram.aspx?language= (accessed September 17, 2011)NACA uses a character lending approach to evaluate an applicant'scredit worthiness which includes using criteria other than just creditscore. According to NACA, character lending considers the homebuyer'sparticular circumstances and needs. NACA assists with a thoroughanalysis of the situation to determine whether the homebuyer is ready tomake monthly mortgage payments and how much he or she can aord.

59Id. Since its implementation the program advertises that it has

many thousands of homeowners working with NACA have had theirmortgages restructured with interest rates reduced to 4%, 3% and as lowas 2% and where necessary the outstanding principal reduced. Addition-

ally, NACA's Membership Assistance Program provides comprehensivecounseling for members who are delinquent on their home payments,including establishing payment agreements and providing nancial assis-tance to help members avoid foreclosure. Currently, NACA has taken itsprograms and services on a traveling tour stopping in major cities acrossthe country. This Save the Dream Tour oers homeowners and purchas-ers an opportunity to sit face-to-face with NACA counselors and receiveassistance with participating in their programs.

60For example, See Boston Community Capital which oers its SUN

(Stabilizing Urban Neighborhoods) to Massachusetts families facing homeforeclosure http://www.sunhomehelp.org/. In the San Diego, Californiaarea, Picture Perfect San Diego reports an option for people who have hadtheir homes foreclosed to buy back their homes from the bank. See http://pictureperfectsandiego.com/2009/05/15/buy-back-your-home-after-foreclosure/. Also the National Mortgage Help Center advertises that it provides

foreclosure assistant through their national network of foreclosure preven-tion specialists. Additional resources include http://www.mortgagewalkawayoptions.com/.

61Realtytrac, Foreclosure Laws and Procedures By State, http://www.

realtytrac.com/foreclosure-laws/foreclosure-laws-comparison.asp (accessedFebruary 8, 2011).




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process, notice, and a hearing before the mortgaged propertycan be sold.62 While specic foreclosure procedures vary

depending on the state's laws, in judicial foreclosures states,the foreclosure of the property is initiated when the mort-gagee (lender) les a complaint against the mortgagor (bor-rower) due to a defaultcommonly a failure of payment onthe mortgage and/or the promissory note. In judicial foreclo-sure states, the instruments that are frequently used tosecure the debt are the mortgage and the promissory note.The complaint will state the alleged default, the debt owed,and rationales for why the default should allow the mort-gagee to foreclose on and be delivered the property pursuantto state law. In general, after the mortgagee les the com-plaint, the mortgagee records a lis pendens (a written noticethat a lawsuit has been led) with the court for the property.63

The mortgagor should receive notice from the mortgageepursuant to state law, generally by personal service, mail orpublication. Once the mortgagor has been served notice, themortgagor must answer timely or the judge will likely granta default judgment for the mortgagee. If a default judgmentis granted then the property will go to foreclosure sale. Butif a mortgagor desires to pursue remedies that she may haveavailable to her, she must timely le an answer. The answershould allege all defenses and/or counterclaims. Because theanswer contests the mortgagee's right to foreclose, the casefollows general civil procedures to trial.64

Commonly, a mortgagor does not know that she has an af-

rmative defense against the complaint, which would stopthe foreclosure. Several defenses to a foreclosure action thatcan prevent the mortgagee from being able to successfullyforeclose on the property are discussed later in this paper.

Non-Judicial Foreclosure Jurisdictions

In the remaining states, non-judicial foreclosure is the pri-mary foreclosure method.65 A non-judicial foreclosure isbased on the terms of the mortgage instrument and state

62Black's Law Dictionary 295 (3rd Pocket ed., 2006).

63Olefsons and Kaniuk, Florida Foreclosure Defense Strategies: An

Immediate Look at the Best Practices for Assisting Distressed Homeown-ers in Florida, 2009 Aspatore Special Rep. 11 (2009).

64Some jurisdictions provide foreclosure mediation.

65Realtytrac, Foreclosure Laws and Procedures By State, http://www.

realtytrac.com/foreclosure-laws/foreclosure-laws-comparison.asp (accessedFebruary 8, 2011).




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statute. A public ocial, mortgagee or trustee, without theprerequisite of a judicial proceeding, sells the mortgaged

property at a public sale.66 The major dierence between anon-judicial and a judicial foreclosure is that the non-judicialforeclosure does not require a proceeding before the court.67

Another dierence is that the instrument used to secure thepayment of the debt in a non-judicial jurisdiction is gener-ally a deed of trust rather than a mortgage.68 The deed oftrust contains what is called the power of sale clause. Thepower of sale clause gives the trustee the power to sell theproperty without judicial intervention.69 In case of a default,the trustee is merely required to give notice of default to theborrower, which informs them of the intent to foreclose andsell. The borrower can choose not to respond in which case

the property will be sold.Alternatively, the borrower can respond by ling suit in a

court of competent jurisdiction. The suit would need to averallegations against the trustee sucient to stop foreclosure.

Any interested person seeking to enjoin the exercise of thepower of sale can eectively convert the non-judicial foreclo-sure into a judicial foreclosure by ling for injunctive relief.The most common grounds for seeking such an injunctionare: (1) general equitable grounds, such as unconscionabilityand absence of an adequate remedy at law; (2) fraud, hard-ship, oppression, and breach of agreement; (3) payment ortender; (4) dispute as to amount due; (5) want of, or defect

in, the notice or advertising; and (6) dispute as to title orpending litigation.70 The borrower must state a legitimateclaim upon which relief can be granted or the sale willcommence.

Commonly, a borrower does not know that they have a le-gitimate claim against the trustee that could stop theforeclosure. However, there are several defenses that could

66Olefsons and Kaniuk, Florida Foreclosure Defense Strategies: An

Immediate Look At The Best Practices For Assisting Distressed Homeown-ers In Florida, 2009 Aspatore Special Rep. 11 (2009).

67Texas Bar Journal: Facing Foreclosure, 74 Tex. B.J. 178, 178179

(Feb. 2011).

68Some states also use a promissory note along with the deed of trustto secure the debt.

69See Shari Olefsons & Ronald Scott Kaniuk.

70Pedowitz, Mortgage Foreclosure Under Ulsia (Uniform Land

Security Interest Act), 27 Wake Forest L. Rev. 495, 507 (1992).




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prevent the trustee from being able to successfully foreclosethe lien and sell the property.

FORECLOSURE DEFENSES71

The Lost Promissory Note

In judicial foreclosures the mortgagee needs to produceboth the mortgage and the promissory note to successfullybring a foreclosure suit.72 The mortgage and the promissorynote are both instruments for security of payment of a debt.73

Because the promissory note is assignable or transferablefrom one lending institution to another, the plaintimortgagee may no longer be in possession of the note.74 Inthose cases where the original documents have been lost ormisplaced, most judicial jurisdictions will allow alternateforms of evidence to prove actual ownership of the note andmortgage.75 Some states strictly construe the requirement toproduce the note.For example, Florida considers a promis-sory note to be considered a mortgage statutorily.76 Floridarequires the mortgagee to produce the original promissorynote or seek to reestablish the lost note before a foreclosure

71It is important for homeowners facing foreclosure and their at-

torneys to look cautiously at the likelihood of successfully pursuing theirclaims and defenses. Care should be taken to conduct due diligence and toadequately assess the case. See, for example, discussion in MichaelBracamontes, Understanding the Foreclosure Trend on the West Coast,

Andrews Financial Crisis Litigation Reporter, September 18, 2009.72

Servedio v. U.S. Bank Nat. Ass'n, 46 So. 3d 1105, 1107 (Fla. Dist.Ct. App. 4th Dist. 2010).

73Bank One, N.A. v. Demmler, 2009-Ohio-3848, 2009 WL 2372138, *1

(Ohio Ct. App. 5th Dist. Delaware County 2009).74

Peterson, foreclosure, Subprime Mortgage Lending, and theMortgage Electronic Registration, 78 U. Cin. L. Rev. 1359, 13651370(2010).

75Bank One, N.A. v. Demmler, 2009-Ohio-3848, 2009 WL 2372138,

*34 (Ohio Ct. App. 5th Dist. Delaware County 2009)76

Florida Real and Personal Property Code 697.01(1) (All convey-ances, obligations conditioned or defeasible, bills of sale or other instru-ments of writing conveying or selling property, either real or personal, forthe purpose or with the intention of securing the payment of money,whether such instrument be from the debtor to the creditor or from thedebtor to some third person in trust for the creditor, shall be deemed andheld mortgages, and shall be subject to the same rules of foreclosure andto the same regulations, restraints and forms as are prescribed in relationto mortgages.).




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may take place.77 The produce the note defense is not avail-able in non-judicial foreclosure states.78

The Truth in Lending79

The Truth in Lending Act (TILA) requires creditors tomake certain disclosures to borrowers, and the failure to doso gives the borrowers certain rights to rescind the loantransaction and to make claims for damages.80 However, theact does not protect a signicant number of borrowers inforeclosure because they are generally outside the applicablestatute of limitations. On the other hand, for those borrow-ers who are within the TILA statute of limitations, the act'srescission remedy has proved to be the most useful of all theregulations that are imposed by TILA.

TILA allows for the right to rescind until midnight of thethird business day following the consummation of the trans-action, or the delivery of the information and rescission formsrequired under this section together with a statementcontaining the required material disclosures.81 Also, TILAallows the borrower to rescind the loan for up to three yearsafter the closing date if there is a material disclosure

violation.82 The rescission remedies have strictly adhered tostatutes of limitations. A TILA rescission claim suit musthave commenced before the three-year period, not just noticegiven to the possible parties that a rescission claim willhappen.83 However, the rescission after the three-day period

just needs notication to the creditor.84 TILA imposes a one-year statute of limitations for damages claims and it begins

77Servedio v. U.S. Bank Nat. Ass'n, 46 So. 3d 1105, 11051107 (Fla.

Dist. Ct. App. 4th Dist. 2010).78

Gibson v. Wells Fargo Bank, 2011 WL 221188, *23 (E.D. Va. 2011),judgment a'd, 2012 WL 11237 (4th Cir. 2012).

7915 U.S.C.A. 1601 to 1667f.

80James v. Bridge Capital Corp., 2011 WL 309692, *4 (D. Or. 2011).

81Mier v. Lordsman Inc., 2011 WL 285862, *7 (D. Haw. 2011).

82Romero v. Countrywide Bank, N.A., 740 F. Supp. 2d 1129 (N.D.

Cal. 2010).

83Williams v. Wells Fargo Home Mortg., Inc., 410 Fed. Appx. 495 (3dCir. 2011).

84Barry v. Countrywide Home Loans, F.S.B., 2011 WL 441508, *2 (D.

Colo. 2011).




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to run from the date the violation occurs.85 The failure tobring the claim in the appropriate time frame is one of the

more common reasons that TILA rescission defenses fail.86

In Yamamoto v. Bank of New York the court decided Thestatute adopts a sequence of rescission and tender that mustbe followed unless the court orders otherwise: within twentydays of receiving a notice of rescission, the creditor is toreturn any money or property and reect termination of thesecurity interest; when the creditor has met these obliga-tions, the borrower is to tender the property.87 The Yamamotoruling has caused some courts to analyze the courts discre-tion when it comes to rescission. This apparently arises fromsome judges' concern that the borrower is at fault for failureto pay its mortgage. However, the TILA legislation isunambiguous in eliminating the need for tender as a prereq-

uisite for rescission. Seen as the strongest remedy to combatpredatory lending, TILA requires the lender to take arma-tive steps to ensure its rights of relief, forcing the lender tobe the real creditor in interest with the actual authority toforeclose a mortgage. In the event the lender cannot meet itsburden under TILA, the security interest is void, convertingthe debt from secured to unsecured.88

Home Ownership and Equity Protection Act89

The Home Ownership and Equity Protection Act (HOEPA)was enacted as an amendment to TILA and requires credi-

85

Maxwell v. Chase Home Finance LLC, 2011 WL 181345, *34 (S.D.Tex. 2011).86

But see In re Ameriquest Mortgage Co. Mortgage Lending PracticesLitigation, No. 1715 (USDC-N. Ill.) where the trial judge in this multidis-trict litigation case refused to dismiss the plaintis' TILA claims for dam-ages where Ameriquest averred the claims were time-barred by thestatute's one-year statute of limitations. The court ruled that the statutebegan to run when Ameriquest failed to rescind and not when the loantransaction was consummated.

87Morris v. Bank of America, 2011 WL 250325, *3 (N.D. Cal. 2011);

Yamamoto v. Bank of New York, 540 U.S. 1149, 124 S. Ct. 1146, 157 L.Ed. 2d 1042 (2004).

88See Henry Botelho v. U.S. Bank, N.A. as Trustee for the LXS

2007-4N Trust where court rejected bank's motion to dismiss under Fed.

R. Civ. P. 12(b)(6) arguing that Botelho could not state a claim for rescis-sion of his mortgage loan under TILA unless he alleges a present abilityto tender the loan proceeds. The court rejected bank's motion stating thatan allegation of tender is not necessary for Botelho's case to survive plead-ing in a TILA action.

8915 U.S.C.A. 1692.




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tors to make additional disclosures to borrowers or be subjectto relief under TILA. The purpose of the additional disclo-

sures is to ensure transparency in the transaction. Forexample, HOEPA requires disclosures of the amount ofmonthly payments for a loan as well as the annual percent-age rate when the loan is oered at high interest rates orexcessive fees.90 HOEPA only applies to loans secured for aborrower's primary residence in which either the interestrate exceeds a certain threshold or the fees and costs exceedeight percent of the total loan amount.91

Fair Debt Collection Practices Act (FDCPA)92

Congress passed the fair debt collection practices act in1977. FDCPA provides remedies for borrowers who havebeen subject to abusive debt collection practices. The FDCPA

provides remedies against debt collectors for specic legalacts and omissions toward borrowers who undertook aconsumer debt.93 Under the FDCPA, a creditor is not allowedto use a name that might lead the debtor into believing thata third party is trying to collect on the debt. The FDCPA ap-plies in foreclosure situations where a mortgage servicerobtains an assignment of the note and or mortgage after thedebt is in default.94 However, the act does aect mortgageservicers who obtained the note and/or mortgage that wasnot in default when assigned.95

The FDCPA expressly makes it illegal to falsely representthe character, amount, or legal status of any debt, the

compensation which may lawfully be received by a debt col-lector for collection of a debt, and to collect any amountunless expressly authorized by the agreement creating thedebt or permitted by law.96 It is to be noted that there is alittle indecision amongst courts into whether a mortgage is

90James v. Bridge Capital Corp., 2011 WL 309692, *46 (D. Or. 2011).

91See James v. Bridge Capital Corp.

9215 U.S.C.A. 1692 to 1692p.

93Bergia, No Shelter From The Storm: Dangers From the Fair Debt

Collection Practices Act the Mortgage Industry Attorneys and a Call forLegislative Action, 29 Rev. Litig. 391, 393 (2010) (University of TexasSchool of Law Publications Inc. 2010).

94LaCosta v. McCalla Raymer, LLC, 2011 WL 166902, *6 (N.D. Ga.2011); 15 U.S.C.A. 1692a.

95See LaCosta v. McCallaRaymer, LLC; 15 U.S.C.A. 1692a.

96Weinstein, 30 New Jersey Practice: Law of Mortgages 25.1 (2d

ed.).




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considered a debt according to the FDCPA.97 In non-judicialforeclosure cases the courts have waivered on whether they

consider creditors debt collectors under the FDCPA.98

Texas Fair Market Value Statutes and DeciencyJudgments99

In some states, statutes have been enacted that allow aparty to recover a judgment against the defaulting mortgagorwhere there is a residue of the mortgage debt remainingunsatised after a foreclosure sale. Described as a deciency

judgment, it is dened as a personal judgment against thedebtor for the dierence between the unpaid balance of thedebt and the proceeds received by the creditor from the saleof the security at a foreclosure sale.100 In Texas, the fair mar-

ket value statutes deal with deciency judgments.101

A de-ciency judgment is a judgment against a debtor for theunpaid balance of the debt if a foreclosure sale or a sale ofrepossessed personal property fails to yield the full amountof the debt due.102 The deciency judgment can create adouble recovery by causing the lender to receive the protsfrom foreclosure sale as well as having a nancial obligationfrom the debtor.103 This occurs because the lender is able topurchase the property with a low bid at sale and then turnaround and sell the property on the open market at a higherprice.104 The lender is still able to sue the debtor for a de-ciency, which causes the double recovery. The debtor, whomthe recovery is sought, can request that the court determine

the fair market value of the property as of the date of the

97Thepvongsa v. Regional Trustee Services Corp., 2011 WL 307364,

*78 (W.D. Wash. 2011).98

See Thepvongsa v. Regional Trustee Service Corp.99

Tex. Prop. Code Ann. 51.001 to 51.005.100

See for example Harry Miller and Marvin Starr, Judicial Foreclo-sure Proceedings, Ch. 10 Deeds of Trusts and Moertgages, 4 Cal. Real Est. 10.233 (3d ed.).

101Weselka, Real Property Deciency Judgments-Texas Enacts Fair

Market Value Statutes, 23 Tex. Tech L. Rev. 871, 872 (1992).102

Black's Law Dictionary (3rd ed.).103

Kwan Student Author, Mortgagor Protection Laws: A ProposalFor Mortgage Foreclosure Reform In Hawai'i, 24 U. Haw. L. Rev. 245, 247(2001).

104Hering Student Author, Real Property Foreclosure in Texas: What

Is Decient About the Texas Deciency Judgment Statute?, 37 S. Tex. L.Rev. 277, 380 (1996).




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foreclosure.105 If the fair market value is determined to begreater than the foreclosure sale price, the debtor is allowed

an oset against the deciency.106

Judicial foreclosures usethe same method in determining the fair market value asnon-judicial foreclosures.107 In judicial foreclosure cases any-body who is obligated on the indebtedness can bring a suitfor determining the fair market value of the property as longas it is within the statutory dened period after the foreclo-sure sale.108 A guarantor who did not have notice of the salebefore it occurred may also bring timely suit.109 Under cur-rent law, a deciency judgment action must be broughtwithin two years of the foreclosure sale.110 The deciency

judgment constitutes post foreclosure relief available to thelender that can be avoided if the borrower entered a shortsale agreement, deed in lieu of foreclosure agreement or

other agreement whereby the lender foregoes any right torecover a deciency judgment. States have dierent ap-proaches to addressing deciencies caused after the sale ofthe property. In some states, statutes have been enactedthat allow the lender to only receive the property withoutclaim to decit that might arise after sale of the property,called anti-deciency statutes.

Robo-Signing

A number of states are tak ing not ice of the gro win gproblem created when process mortgage servicers fail toconduct a required review of loan documents before generat-ing adavits in support of judicial foreclosures. Generally,the purpose of the adavit is to ensure that the entity thatseeks foreclosure is authorized to foreclose the lien. This pro-cess has become known as robo signing and occurs whenloan servicers use highly automated processes to generateadavits in the foreclosure process without the aant hav-ing reviewed facts contained in the adavit or having the af-

105Tex. Prop. Code Ann. 51.003.

106Tex. Prop. Code Ann. 51.003.

107Hering, Real Property Foreclosure in Texas: What Is Decient

About the Texas Deciency Judgment Statute?, 37 S. Tex. L. Rev. 277,380 (1996).

108Tex. Prop. Code Ann. 51.004.109

Tex. Prop. Code Ann. 51.004.110

Weselka, Real Property Deciency Judgments-Texas Enacts FairMarket Value Statutes, 23 Tex. Tech L. Rev. 871, 872 (1992).




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ant's signature witnessed in accordance with state laws.111

Recently, these insuciencies have caused fraud allegations

against lenders in foreclosure lings throughout thecountry.112 Actiona ble insuciencies include: failure ofplaintis and their counsel to review documents and lesnecessary to establish standing and other foreclosurerequisites; ling of notarized adavits which falsely attestto such review and to other critical facts in the foreclosureprocess; and robo-signing of documents by parties andcounsel. Moreover, the wrongful ling and prosecution offoreclosure proceedings, which are discovered to suer fromthese defects, may be cause for disciplinary and other sanc-tions upon participating counsel.113

State Foreclosure

The foreclosure epidemic that has spread across the UnitedStates has cause state legislatures to enact or proposelegislation that would curb the foreclosure rates.

In the summer of 2011, Hawaii's governor signed SenateBill 651. Senate bill 651 is one of the most comprehensiveforeclosure bills in the country to date. The bill does noteliminate foreclosures but sends foreclosures to be settledout of court where the home-owners are not kicked out oftheir homes. The bill arranges for a mortgage foreclosuredispute resolution program, the ability to change from non-

judicial to judicial foreclosures in certain circumstances,voiding of foreclosures by certain mortgage providers, as

well as other amendments.Nevada has been one of the leaders in foreclosure rates inthe nation for a number of years. In 2011, Nevada passedseveral bills to try to address the foreclosures throughoutthe state. Assembly Bill 284 gives residents access to the in-formation on the companies that hold their mortgages which

111Arnold, FDIC: Mortgage Servicing Issues, 43 No. 21 Mortgage &

Real Est. Executive Rep. 2, 1 (Jan. 1, 2011).112

For example see Joe Rauch, SunTrust nds problems in foreclosures,Feb 25, 2011 available at http://www.reuters.com/article/2011/02/25/us-suntrust-foreclosure-idUSTRE71O50R20110225 and reporting that SunTrustBanks Inc.'s internal review found that thousands of cases in judicial

states had documents robo-signed by employees who had never reviewedthe documentation. The article further reports that SunTrust is one of 14U.S. mortgage lenders under investigations by state and federalauthorities.

113Washington Mutual. Bank v. Phillip, 29 Misc.3d 1227(A), 1-2 (N.Y.

Supp. Nov 29, 2010).




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will allow the parties being foreclosed on to make sure thatwhomever has led to foreclose has the right to exercise the

power of sale. Assembly Bill 273 makes sure that individu-als being foreclosed on do not have deciency judgment andinsurance payments that they have to pay to the banks ornancial institution. Senate Bill 414 prohibits a bank orother nancial institution from unreasonably delaying a re-sponse to an oer for a sale in lieu of a foreclosure sale onreal property secured by a residential mortgage loan.

Florida is preparing to propose a piece of legislation in2012 that will make foreclosures in the state easier to obtainby changing the state from a judicial foreclosure state to anon-judicial foreclosure state. This type of legislation wasproposed in 2011 but was never enacted. The proposed billcould make foreclosures easier to obtain by taking them out

of the courts.Arizona is one of the top ve foreclosure states and in its

2011 legislative session a proposed bill in the state senateset out help slow foreclosures. The bill was championed tohelp the individuals being foreclosed upon to keep theirhouses. Arizona Senate bill 1259 passed the senate with a29-3 vote however, when it was in the states house the billwas amended to change the entire bill completely. Thoughthe bill maintained its bill number it no longer dealt withforeclosures in the state. The new bill was passed and signedby the governor.

California was one of the few states with a high foreclo-

sure rate that failed to pass any of the proposed legislationthat addresses foreclosure. There were several proposed billsincluding SB 1275, SB 729, AB 935, and AB1321 that failedto make its way through the legislature.

U.S. Bank National Association v. AntonioIbanez114

In October 2009, a Massachusetts trial court entered anorder regarding the plainti's motion to vacate the court'searlier judgment that mortgagees were not entitled to fore-closure of defaulted residential mortgages notwithstandingpower of sale provisions. In Ibanez, the court was faced withfacts common to the mortgage industry's practice of selling

114Commonwealth of Massachusetts Trial Court, MISC 08-384283

along with 08 Misc 386755 (KCL): Wells Fargo Bank, N.A., as trustee forABFC 2005-OPTI Trust, ABFC Asset Based Certicates Series 2005-OPTIv. Mark A. Latace and Tammy L Larce.




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and reselling mortgages as part of a portfolio comprised ofmortgages that are packaged as a single asset backed

security.115 The court, nding that the power of sale wascontractual held that the proper parties to the foreclosuremust be traceable back to the original parties to the contract.In other words, the burden was on the plainti to show thatthey were the parties with the right to foreclose the lien.116

To meet their burden, the plainti must be able to producethe executed mortgage, the signed note and one or morelegally recognized mortgage assignments showing that theyhad the authority to exercise the power of sale.117

It is noteworthy that Massachusetts follows the title the-ory of mortgages.118 Thus, to meet the burden the plaintimust show that the assignment constituted a valid convey-

ance of the mortgagee's interest in the land with all the deedrequirements that that entails.119 Further, the court opinedthat the laws regarding foreclosure must be strictly followedbecause of the import of the act to both the mortgagor andmortgagee.120

115Id.

116Id.

117Id.; also see In re Foreclosure Cases, 2007 WL 3232430 (N.D. Ohio

2007) where the federal district court dismissed 14 home foreclosure ac-tions because the lender could not show that it owned the mortgages atissue.

118

Ibaniz, supra n. 105 citing Faneuil Investors Group, L.P. of Select-men of Dennis, 75 Mass. App.Ct. 260, 264265 (2009) holding that Underour title theory of mortgages, a mortgage of real estate is a conveyance ofthe title or of some interest therein defeasible upon the payment of moneyor the performance of some other condition. Literally, in Massachusetts,the granting of a mortgage vests title in the mortgagee to the land placedas security for the underlying debt. The payment of the mortgage noteterminates the interests of the mortgagee and revests the legal title in themortgagor.

119Ibaniz, supra n 105.

120The court stated that what is at stake is of utmost importance and

nality the complete extinguishment of a person's rights in his or herproperty (often the home where that person and his or her family live)and the transfer of those rights to someone who wants (and is entitled) tocomplete assurance of good title to that property so that he or she can livethere without concern . . . [requiring] strict compliance and a failure to doso means that the foreclosure is invalid.




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Aceves v. U.S. Bank121

Promissory Estoppel and Fraud

Plainti homeowner led an action against U.S.Bank in aCalifornia court claiming relief on the grounds that the bankhad failed to renegotiate her loan in good faith. 122 Theplainti, Claudia Aceves argued that the bank promised towork with her to reinstate and modify her mortgage loan,that she relied on the bank's promise by foregoing chapter13 bankruptcy proceedings, and that the bank breached itspromise by foreclosing on the property causing her damage.123

The trial court dismissed her complaint, but the appellatecourt reversed on the grounds of promissory estoppel andfraud.124 The court found that the plainti had met herburden to show promissory estoppel by showing that (1) thebank had made a clear and unambiguous promise, (2) theplainti had relied on that bank's promise, (3) plainti's reli-ance was both reasonable and foreseeable, and (4) theplainti was injured by her reliance.125 Specically, the courtfound that U.S. Bank's promise to work with [Aceves] on amortgage reinstatement and loan modication was clearindication that the bank would not foreclose on Aceves'shome without rst engaging in negotiations. The court foundthat the bank's failure to engage in negotiations constituteda breach of their promise. Moreover, Aceves had led achapter 7 bankruptcy claim that was pending in bankruptcy

court which she was converting to a chapter 13 proceeding.Relying on the bank's promise, Aceves chose not to opposethe bank's motion to lift the bankruptcy stay. The courtfound that the bank expected her to rely and that it wasforeseeable that she would rely on their promise. The courtheld that Aceves' reliance was reasonable since a chapter 13action could not produce as favorable results as a bank

121See Case number B220922 Aceves v U.S. Bank, N.A. located at htt

p://www.courtinfo.ca.gov/opinions/documents/B220922.PDF.122

Id.123

Id.

124Id.125

Id. citing Advanced Choices, Inc. v. Department of Health Services,182 Cal. App. 4th 1661, 1672, 107 Cal. Rptr. 3d 470 (2d Dist. 2010).




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modication of the terms of the loan.126 By asserting promis-sory estoppel, the court held, Aceves had avoided the need

for consideration in the usual sense of something bargainedfor and given in exchange.

The court also found that Aceves' claim of fraud was alsoviable holding that the elements of fraud are similar to theelements of promissory estoppel, with the additional require-ments that a false promise be made and that the promisorknow of the falsity when making the promise.

Garret v.Bankwest127

Waddell v. Dewey County Bank128

Breach of Fiduciary Duty

Generally, the relationship between a bank and its bor-rower is arms-length and considered a debtor-creditor rela-tionship, which imposes no special or duciary duties on abank.129 However, where the borrower reposes faith, con-dence and trust in the bank; the borrower is in a position ofinequality, dependence, weakness or lack of knowledge; andthe bank exercises dominion, control or inuence over theborrower's aairs then a duciary relationship between thebanker and debtor could be satised.130 Generally, a lendermust be more than just a lender to owe a duciary duty tothe borrower. For example, one court has held that a du-

ciary relationship was created when the bank served as anancial advisor to the borrower and the two relationshipswere not maintained separately.131

126A bankruptcy court could not modify the terms of the loan nor could

a chapter 13 plan exceed ve years where Aceves had 28 years left on hermortgage.

127Garrett v. BankWest, Inc., 459 N.W.2d 833 (S.D. 1990).

128Waddell v. Dewey County Bank, 471 N.W.2d 591, 593 (S.D. 1991).

129See Cowan Brothers, LLC; Tigh Cowan; Tork Cowan; and Treg

Cowan v American State Bank, 2007 SD 131 located at http://www.sdjudicial.com/Uploads/opinions/24427.pdf.

130

Garret, supra n. 122.131See Scott v. Dime Sav. Bank, 956 F.2d 1161 (2d Cir. 1992); 101

F.3d 107 (C.A.2-N.Y.-1996) unpubl disposition; and see Barry Capello,What is Lender Liability?, located at http://cappellonoel.com/what-is-lender-liability/ and reporting that After a six-day trial, the jury found in favorof the Scotts on a claim for breach of duciary duty. The trial court, on a




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National Association for the Advancement of

Colored People (NAACP) v. Ameriquest Mortgage

Company et.al.132

Reverse Redlining

In July 2007, the NAACP led a class action lawsuitagainst 14 lending institutions arising from what they foundto be a subprime mortgage crisis fueled by the discrimina-tory actions of the lenders who, they allege, illegally targeted

African American homebuyers for subprime mortgageloans.133 The case is pending in the California District Courtand has survived challenges including standing134 andmootness.135

The suit claims that research indicates that overall lend-ers made high-cost subprime loans to higher-qualiedAfrican Americans and Hispanics at signicantly greaterrates than similarly situated Caucasians.136 The NAACP

subsequent motion, acknowledged the rule that a debtor-creditor relation-ship does not alone create a duciary relationship. However, the courtfound the jury verdict of a duciary relationship was supported by themanner in which the bank: 1) extended credit to the Scotts, 2) usedpromotional devices to persuade them to invest loan proceeds with an af-liated company with whom the bank shared prots, and 3) continued toadvise the Scotts about their investments through employees that workedfor both the bank and the investment company.

132NAACP v. Ameriquest Mortgage Company et.al. C.A. 07-0794,

USDC-Central Dist Cal.133

The plainti alleged violations of the Fair Housing Act, 42 U.S.C.A. 3601, et seq.; the Equal Credit Opportunity Act, 15 U.S.C.A. 1691 etseq.; and Civil Rights Act, 42 U.S.C.A. 1981 and 1982. Aside from

Ameriquest, the other lenders were Wells Fargo, Fremont Investment, op-tion One Mortgage (H&R Block), WMC Mortgage, Countrywide (bought byBank of America), Long Beach Mortgage, CitiGroup, BNC Mortgage, Ac-credited Homoe Lenders, Encore Credit (Bear Stearns), First Franklin,HSBC and Washington Mutual (bought by Bank of America).

134National Ass'n for Advancement of Colored People v. Ameriquest

Mortg. Co., 635 F. Supp. 2d 1096 (C.D. Cal. 2009), as amended, (Jan. 13,2009), C.D.Cal., January 12, 2009 (No. SACV07-0794 AG (ANX)).

135NAACP v. Ameriquest Mortg. Co., 653 F. Supp. 2d 1013 (C.D. Cal.

2008).136

See generally National Community Reinvestment Coalition, Incomeis No Shield Against Racial Dierences in Lending: A comparison of High-Cost lending in America's Metropolitan areas, July 2007 and available athttp://www.ncrc.org/images/stories/mediaCenterreports/ncrc%20metro%20study%20race%20and%20income%20disparity%20july%2007.pdf andsee Maurice Jourdain-Earl Politics and the Subprime Mortgage




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lawsuit relies not only on claims of present discriminationbut on the lending industry's long history of discrimination

with mortgage loans, and further charges that the statisticaldisparities are evidence of an insidious and systematic policyof predatory targeting of African American borrowers.137

Other racial discrimination suits include one led by theDepartment of Justice (DOJ) against American InsuranceGroup (AIG) subsidiaries, which settled for $6.1 million. Thesuit alleged that AIG had engaged in a pattern and practiceof lending what discriminated against African-Americans.138

In 2010 Illinois attorney general led suit against Country-wide, a subsidiary of Bank of America for unlawful discrimi-nation against African American and Latino borrowers inhome mortgage sales. The suit also alleged violation of Illi-

nois Human Rights Act and the Illinois Fairness in LendingAct. In Detroit, the Center for Community Justice andAdvocacy led a lawsuit against RBS Citizens Bank and itssubsidiary, CCO Mortgage, claiming federal fair lendinglaws violations within Detroit, Michigan.139

Challenging Acceleration

It is not uncommon that once a debtor defaults in payingthe mortgage, the lender exercises its right to elect to ac-celerate all payments unpaid under the note.140 However,some courts have held that a lender's actions constituting aconsistent prior pattern of acceptance of late payments by

Meltdown:An Examination of Disparities by Congressional District, Politi-cal Party, Caucus Aliation and Race, National Community Reinvest-ment Coalition, 2008 available at http://www.ncrc.org/images/stories/pdf/research/politics%20and%20the%20subprime%20mortgage%20meltdown-nal.pdf 2009.

137See Glenn Setzer, NAACP Subprime Siscrimination Suit, Mortgage

News Daily, July 16, 2007 available at http://www.mortgagenewsdaily.com/7162007NAACPSubprimeLawsuit.asp.

138See Brent Kendall and Evan Perez, AIG Units Settle Discrimina-

tion Case, Wall St. J., March 5, 2010.139

See Eric T. Campbell, Lawsuit claims discrimination against Detroithomeowners, The Michigan Citizen, available at http://michigancitizen.com/lawsuit-claims-discrimination-against-detroit-homeowners-p9527-1.htm.

140Grant S. Nelson and Dale A. Whitman, Chapter 7. Foreclosure, 1

Real Estate Finance Law 7.7 (5thed.).




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the mortgagee relieves the debtor for defaults in payment ofprincipal or interest.141 See FN 3 cases.

CONCLUSION

Most homeowners who face foreclosure face an uphillstruggle in order to delay or avoid foreclosure altogether.Typically, the defaulting borrower allows the foreclosurewithout challenging the lender's right to recovery at all.However, the homeowner might be wise to assess their posi-tion and consider possible claims and defenses that theymay make that could result in the deferral or quashing of aforeclosure proceeding.

141

Id.




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Appendix

Based on the November 2010 Foreclosure Rate report byRealty Trac, that tracked foreclosure lings in November2010, ten states continue to lead the country in the numberof foreclosure lings.

Nevada 1 in every 99 housingunits

11,371 foreclosureproperties

California 1 in every 233 housingunits


Utah 1 in every 221 housing

units

4279 foreclosure

properties

Arizona 1 in every 262 housingunits


Colorado 1 in every 433 housingunits


Ohio 1 in every 486 housing units


Georgia 1 in every 270 housingunits

14, 423 foreclosureproperties

Florida 1 in every 267 housingunits


Michigan 1 in every 296 housingunits


Idaho 1 in every 301 2,133 foreclosureproperties

Pennsylvania 1 in every 969 5,672 foreclosedproperties

RealtyTrac notes: Despite a 20 percent monthly decreasein foreclosure activity, Nevada posted the nation's higheststate foreclosure rate for the 47th straight month. One in




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every 99 Nevada housing units received a foreclosure lingin November nearly ve times the national average.

Thanks in part to sharp monthly drops in foreclosure activ-ity in Arizona, Florida, California and Michigan, Utah's fore-closure rate leapfrogged to second highest among the statesin November after being sixth highest the previous month.One in every 221 Utah housing units received a foreclosurenotice during the month more than twice the nationalaverage. Douglas A McIntyre, A Real Estate Silver Lining:Foreclosure Rates Plunge, Posted: December 16, 2010 at6:15 am; http://247wallst.com/2010/12/16/a-real-estate-silver-lining-foreclosure-rates-plunge/

Realty Trac also reported 2,168,080 foreclosure homes onthe market. http://www.realtytrac.com/trendcenter/

