2011 is being called the Year of the Foreclosure as Lenders accelerate collection efforts, Owners seek to save their homes through Loan Modification, and Realtors try to complete Short Sales.  In many cases, Owners are turning to the Courts for help in forcing Lenders to do what would seem to make logical sense. Yet all too often, Owners are finding themselves being foreclosed anyway and out the thousands of dollars spent on litigation and lawyer costs. Today’s E-News looks at the current state of the Law, how Courts are ruling in these disputes, and why these decisions are so often in favor of the Lenders and against the upside-down Owners. 

Upside-down borrowers, frustrated with a lack of lender willingness to modify their loans and desperate to keep their homes, often turn to lawyers who promise to stop foreclosures and force lenders to modify loans. But all too often what appears to be a meritorious Complaint gets quickly thrown out by the Courts and the borrower ends up still losing their home… plus thousands of dollars in legal fees.

Significantly, in these cases the borrower typically requests and is granted a Temporary Restraining Order (TRO) to stop the pending foreclosure sale. It appears as a quick victory. But a TRO is just a short-term stoppage for approx. two weeks at which point the borrower must convince the court to grant a Preliminary Injunction stopping foreclosure for the entire time it takes to get the case to trial which could be two years or more. Here is where the lenders are winning the war.

The following analyzes several of the legal arguments raised against the lenders and what has happened in the Courts. The cases cited all originated in California state courts but were decided in the Federal courts. The decisions appear consistent with what is happening in other states.

1. I MADE ALL THE TRIAL MODIFICATION PAYMENTS AND GAVE THEM ALL THE DOCUMENTS THEY ASKED FOR. THE COURT SHOULD COMPEL THEM TO MODIFY MY LOAN – This argument is often raised as part of a lawsuit to stop a foreclosure from occurring. The underlying arguments are: 1) the lender did not handle my HAMP modification application properly (Negligence claim); or 2) I met the lender’s or HAMP’s loan mod requirements but the lender denied the modification anyway (Beach of Contract claim) ; or 3) the lender never intended to give me the modification, they just wanted to get my Trial Mod payments (Fraud claim). Most loan modifications on homes are being done under the government’s Home Affordable Modification Program (HAMP). Where a borrower doesn’t fit HAMP’s guidelines, many lenders have their own “proprietary” modification programs. The legal question is whether a borrower can force the lender to modify if they fit within the guidelines. The courts routinely are saying: “No”. In January, 2011, in the case of Phipps v Wells Fargo Bank, the Federal Court ruled that a Borrower has no right to sue a lender to force a HAMP modification. Even before this, in the 2009 case of Pantoja v Countrywide Home Loans, the Federal Court ruled that California laws do not impose a duty to modify a mortgagor’s loan.

2. THE LENDER PROMISED ME THEY WOULD EXTEND THE FORECLOSURE SO I COULD COMPLETE MY MODIFICATION BUT THEY THEN FORECLOSED ANYWAY. THE COURT SHOULD UNWIND THE SALE AND GET MY HOME BACK – Again the courts are routinely saying: “No”. In the 2010 case of Mehta v Wells Fargo Bank (Fed Ct decison 3/29/2011), the Court ruled: a gratuitous oral promise to postpone a sale is ordinarily unenforceable. Typically the loan agreements require that any modification be in writing and signed by all. Alternatively, the borrower must have proviuded the lender with some “consideration” to which the lender is not otherwise entitled. Merely submitting modification application documents is not consideration nor is it enough to have continued making Trial Mod payments. Without a written agreement with the lender extending the sale, the foreclosure will not be rescinded.

3. IF THE LENDER CANNOT PRODUCE THE ORIGINAL PROMISSORY NOTE, THE COURT SHOULD BAR THEM FROM FORECLOSING – This “standing” argument has received extensive publicity natonwide, especially concerning the rights of MERS to foreclose. Although early rulings tended to vary, Courts are more generally ruling in favor of the foreclosing lenders. As stated in Pantoja v Countrywide Home Loans, under California law there is no requirement to produce the original note prior to completing a non-judicial foreclosure (Trustee’s Sale). A different result could possibly arise in a Judicial Foreclosure although that process is extremely rare in a home foreclosure. Similarly, the courts agree that MERS has a right to foreclose when MERS is named in the Deed of Trust (which is most often the case).

4. I WOULD HAVE PAID BUT THE FORECLOSURE NOTICE WAS DEFECTIVE – California has a “Tender Rule” which requires the borrower to allege and to prove not that they “concievably” could have paid, but it was “plausible” that they would have paid. Simply put, actual proof of real capacity to pay is needed. Court rulings are consistent: If you couldn’t pay anyway, a defective notice was not the cause of the foreclosure.

The bottom-line in all of this is to be wary in believing that just because the lender may have mishandled your loan modification, a court will help you out. At a basic level, a loan is a contract between the lender and borrower in which the lender gives the borrower money in exchange for the borrower promising to repay the loan on the terms in the written agreement. Courts will generally not interfere in the contractual agreements of parties unless one of the parties breaches the agreements or does some other illegal action.

Obviously the above analysis just touches the surface of where the law is today. Hundreds and perhaps thousands of cases are moving through the courts as borrowers seek to keep their homes. In some cases, different courts will reach different rulings from those stated in this Article. However, it does appear that these decisions are likely to be widely followed. In fact, just yesterday a Sacramento Superior Court judge denied a Preliminary Injunction after having granted a TRO and allowed the foreclosure to continue. The judge’s legal reasoning cited all of the cases identified above and more.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, or if you are considering suing your lender, get competent legal advice in your State immediately so that you can determine your best options.

If you have specific questions about your upside down loans or real estate, feel free to contact us at [email protected].  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.