Keeping Banks Honest: Protect Yourself During Foreclosure

For many people, the American dream of homeownership has turned into a nightmare. Nearly 1.3 million households were in foreclosure at the end of 2010, according to a federal report, and another 350,000 homes slid into foreclosure in just the last four months of the year.

Are you worried your house might be next? Maybe your house has already been foreclosed upon, and you’re looking for the best possible exit?

We have some tips for what to do. They come from Todd Allen, the Florida attorney who recently made national headlines by foreclosing on a Bank of America branch after the mega-bank illegally foreclosed on two of Allen’s clients.

[Related article: What it Takes to “Foreclose” on Your Bank]

But first, a disclaimer. A few judges in a handful of states, notably New York, Ohio and Massachusetts, have grown so outraged at lenders and mortgage servicers trying to foreclose on homeowners using fraudulent or missing paperwork that they now require attorneys for the companies to vouch for the documents’ legitimacy. In a small number of cases, judges got so angry they actually threw cases out of court, giving the homes to the borrowers free-and-clear.

Such cases are the exception, Allen says. And in rare instances, banks do get confused and foreclose on the wrong person. (In the case that made Allen famous, Bank of America foreclosed on a couple who never had a mortgage from the bank, and who in fact owned the house outright.) Most people facing foreclosure will not be able to keep their house. The best they can hope for is to delay the inevitable and make sure the case being presented by the bank is in good order, with all documents accounted for properly.

“At some time they’re going to fix their documentation and then they’re going to foreclose on you,” Allen says.

Delay might actually be a good policy, says Gerri Detweiler, Credit.com’s expert on credit and debt issues.

“A lot of times you can stay for several months, even as long as two years, and during that time you can save money for your next move,” says Detweiler.

[Related article: Huge Backlogs Still Delaying Foreclosure Actions]

Tips to help you protect yourself »

Whatever your situation, here are some tips to help you protect yourself during the foreclosure process:

Keep all your documents.

Make sure to keep your mortgage closing paperwork and your promissory note. These documents will form the foundation of any foreclosure case against you.

Lose your documents? Get new ones.

Under the Real Estate Settlement Procedures Act, you can submit a Qualified Written Request to your original lender for new copies of all your loan documents. To find out what qualifies as “qualified,” check out this guidance from the federal government. ”Do that as far in advance as possible,” Allen says.

Check the numbers.

Since banks have proven time and again that they cannot handle the tidal wave of documents involving mortgages in trouble, there’s a chance they filed for foreclosure on the wrong house (something you would have obviously recognized right away). The first thing you should do is check the loan number on your promissory note against theirs. Are they different? The bank made a mistake. “You always should have something to compare to what the bank is filing,” says Allen.

Check the process.

Chances are, your original lender doesn’t own your mortgage anymore. Instead they probably bundled it with hundreds of other loans, and sold the bundle to investors. That process involves your mortgage changing hands five or six different times. Every time it’s transferred, it needs a new promissory note to document the passage from the old owner to the new one. Separately, a “pooling and servicing” agreement tracks which parties need to sign off on every step of the process. Compare all the promissory notes to the pooling and servicing agreement. Are any of the parties missing? If so, the process broke down along the way. That could mean the investors don’t have the paperwork to prove they legally own your mortgage. Bringing that evidence to a court will slow down the process, and in rare cases could get the foreclosure motion thrown out.

“Does the transfer of the mortgage go from A to B to C? Or does it go from A to C?” Allen says. “The promissory note will tell you if they skipped a step.”

[Related: Why the Home Loan Mod Program is Failing]

Hire a lawyer.

As you can see, this stuff gets complicated fast. Find a lawyer who has handled foreclosure cases before.

Avoid scams.

There are foreclosure avoidance scams everywhere, including handwritten signs posted at freeway off-ramps. Don’t fall for them. Allen sees two that are especially well-run and sneaky:

• Mass joinder lawsuits. These operate like class action suits. Many law firms and just plain scammers promote such suits against lenders on behalf of homeowners facing foreclosure. They often advertise online, and require payment upfront. The problem is that such lawsuits depend on having a class of plaintiffs with identical allegations of illegal conduct. But each foreclosure is unique. Besides, a bank foreclosing on you might be a serious drag, but there’s probably nothing illegal about it. Either way, “It’s just a scam,” Allen says.
• Foreclosure avoidance scams. Many companies advertise that they can help you avoid foreclosure. Exceptional cases aside, they probably can’t. In particular, some scammers tell homeowners that if the bank cannot produce the original promissory note, it can’t legally foreclose. “That’s not true,” Allen says. “I don’t think you’re ever going to delay a foreclosure inevitably.”

Image: Taber Andrew Bain, via Flickr