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Legal Speak

Ways to Stop Foreclosures

Published November 18, 2010 12:29 PM by Tony DeWitt
A foreclosure, or the repossession of a home under a deed of trust, is a complex legal process. Until the past few years, foreclosures were rare. In most cases foreclosure is the last step a bank takes, and the last it wants to take when a borrower simply can't make payments. Foreclosed property does not sell well. Foreclosed properties often are vandalized after being vacated. A bank can lose as much as 25 percent of the value of its loan when it has to foreclose.

The reason for this is obvious. People are more likely to buy a house with furniture in it (one that looks lived in) than a house that's empty. A bank is much more likely to get a better result from the voluntary sale of a home than it is from a forced sale. That's why a lot of banks have helped their lenders by extending terms and forgiving late payments. But some have not. These are usually the bigger banks with larger numbers of loans.  For them, the answer is usually foreclosure.

But there are ways to stop foreclosure.

The first and most obvious way to stop foreclosure is to pay the loan to its current status. If you do this early enough in the process (before formal foreclosure proceedings begin), you can usually be reinstated.  Most of the time simply paying the deficiency is enough to stop the process, however, sometimes a bank will issue what's called a Notice to Accelerate.   When an acceleration notice is filed, it means that the bank has exercised its option under the loan to require you to pay the entire balance immediately. If this happens it means that if you cannot pay off the entire note (and if you can't make the monthly payments its doubtful you can pay the entire balance), the house will be sold and the bank will take its money.

Usually, if an attorney has already filed formal notices and set the house for a sale at auction, additional fees and expenses are tacked on as well as the balance of the loan. Sometimes a timely refinancing can save the day, but frequently, after the matter has gone to court, the only way to stop the foreclosure is to pay off the entire balance.

The other way to stop foreclosure is to seek bankruptcy protection. Under the bankruptcy law the foreclosure can be stopped and providing the loan can be brought current, often the bank will continue to accept payments.

But, now there may be a third way to stop foreclosure.

In the media you have probably read about the vast problems with foreclosures nationwide. There are several reasons for this mess. The first is that when interest rates began to drop, banks of all varieties started competing for the refinancing business, offering better rates and better loans to people who were buying bigger and better houses. In addition, there were banks that were offering higher rates to higher risk customers who either had only one income, a low income, or who had additional consumer debt. 

When the recession hit full bore and people lost their jobs, the ability to pay the mortgage (particularly for people who overbought their homes) created a wave of deficiencies, and banks, particularly in states like Florida, had trouble keeping up with foreclosures. In a department that normally did one or two foreclosures a year, banks were seeing 20 to 30 a month!  They did not have the resources to keep up with the bad loans. 

There are important procedural safeguards built into the foreclosure process and they are designed in such a way as to protect homeowners from errors and mistakes. One of the safeguards is that when a bank submits is paperwork to a court to seek a default sale of property, it does so with certain facts "verified" in the petition. This means that a bank officer signs an affidavit, which is effectively a testimonial statement under oath. That affidavit says that the records have been checked, that the bank is entitled to relief, and that the customer has taken no steps to reclaim the property.

In about 90 percent of the cases these affidavits reflect the good work of the people actually preparing the documents, and the statements are true. But the affidavit usually has several important safeguards in it. It will say, among other things, "this affidavit is made from personal knowledge." It may also say "I have personally reviewed the attached documents and I attest to the truthfulness of the statements contained therein."  he judicial system relies on those representations to ensure that the homeowner has due process - notice and an opportunity to object - in the foreclosure process.

What lawyers representing homeowners were finding, however, is that even customers whose payments were current were being foreclosed, that payments had not been credited, and that the homeowners, who are required to get notices via certified mail, were not getting the notices. All of these things should have caused the bank officers to send the files back to the paperwork departments so that the proper notices could be sent. 

But that was part of the problem. When a bank officer has 300 documents to sign in a day, as well as other duties at the bank, he cannot make a thorough review of the foreclosure files. And many of the banks used a document preparation service run by Ally. In depositions recently officers of Ally readily admitted that there was no way to read 300 files in one day, and that for the most part, they were just signing the documents put in front of them by others and trusting their work.

This means that a large number of foreclosures may have been void, and that the sales of the foreclosed homes may have been improper. Two classes of people are concerned now: those who bought homes that were foreclosed and those who had their homes taken.

Whenever a person buys a home they usually get title insurance which is designed to protect the homebuyer (and the real estate process) from damages in the event there are problems with the title. A homeowner unlawfully evicted from their home could easily file an action against the buyer, and attempt to force the buyer to turn over the property.

In most cases the damages actions are going to be filed against the banks, not the homeowners, and the remedy will be damage, not a return of the home. However, if you've lost your home to foreclosure, or if you've purchased a foreclosed home, now would be a good time to consult an attorney to make sure your rights are protected.

posted by Tony DeWitt
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About this Blog

    A.L. "Tony" DeWitt, RRT, CRT, JD, FAARC
    Occupation: Attorney
    Setting: Jefferson City, Mo.
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