Foreclosure Defense Strategies and Preparation

The purpose of this post is to provide a general overview and paint a broad picture of available foreclosure defense strategies.  Generally, if you are facing a foreclosure, in most cases you should be able to draw upon defenses from the three broad categories described below.

Category 1 is defenses arising out of violations of consumer protection laws. These include federal laws such as TILA, RESPA, HOPA, ECOA, FDCPA, etc., as well state consumer protection statutes, which often include mortgage broker liability.  This category of defenses is based primarily on the conduct of the parties shortly before and at the closing of the loan.  This category may also involve common law causes of action such as fraud and related defects in the note and trust deed rendering them void ab initio. 

This category provides decent defenses in terms of substance, but is much more complex in terms of factual development and the number of claims that need to be hammered out and presented when compared to the other two categories below.  Additionally, because it is based on the conduct before and at the closing, it is susceptible to statute-of-limitation defenses (one- and three-year limitations in most cases) and hence may not be available with respect to most older loans. Facts establishing equitable tolling and other "extensions" of claims must be carefully plead at the outset and with specificity.

Category 2 can be described as "technical" defenses.  Such defenses seem to be the most attractive to most people, as they are the easiest to comprehend.  Technical defenses amount to having the bank prove a "chain of title," i.e., that the bank has any interest in the loan, that the loan was securitized properly, that the bank either lent the money or purchased the loan, etc.  In contrast to the previous category of defenses, this category mainly pertains to the conduct of the parties after the closing of the loan, and may also involve claims against the foreclosure trustee for not ensuring that the foreclosing party has established its authority to foreclose, as well as post-closing conduct of misapplying payments by the servicer.

While this category is the easiest to understand and, arguably, the easiest to present, it is also the least likely to provide any tangible "win," at least at the time of this writing.  Nonetheless, the tide is turning, and this situation may soon change substantially. See my November post "Technical Defenses Are Growing For Securitized Loans."

Category 3 is based on the bank's conduct shortly before and after the default, i.e., conduct during loan modification negotiations and other loss mitigation efforts undertaken as a result of non-payment. This category involves mostly common law claims of fraud, interference with homeowner's right to cure a default, estoppel (equitable, promissory, and judicial), breach of contract and of implied covenant of good faith, etc.  Occasionally, it may also involve post-closing conduct of misapplying payments by the servicer

Thus, to brace themselves up for foreclosure defense, interested homeowners should mentally break up their loan history into the above three periods of time: shortly prior to closing and the closing itself, after closing and prior to stopping payments (default), and shortly prior to and during default and loan modification process.

Homeowners should then gather documentation pertaining to each time period.  For category 1, it would include all pre-closing and closing documents.  For category 3, it would include all correspondence and other records during the loss mitigation process (that's why it is so important to document every step of your attempts at loan modification!).  And for category 2 it would include the combination of the above, plus research of other documents such as those pertaining to securitization of the loan, any assignments of the mortgage/deed-of-trust, and any allonges to the note.

With this in mind, if you are or may be facing foreclosure and need to prepare a defense, get cranking on collecting the necessary records and information for each time period outlined above and have everything prepared and ready to go in some organized form.  Good luck!