How to Stop a Foreclosure
Many of the clients we meet at The Willingham Law Firm, PC don’t realize that they don’t have to agree to be foreclosed on. If you are facing foreclosure, you have a right to fight to keep your home. Although the world we live in will completely change because of the economic impacts COVID-19, it doesn’t have to be a disaster for you and your family. Below, we discuss what you need to either keep your home or at least let it go under better circumstances.
Understanding the Players & Their Motivations
It’s crucial you understand the role that each of the following plays in the foreclosure process:
This refers to you. What is your motivation? Why do you want to keep your home? Is it a good idea to keep it?
Most banks do not lend money. Instead, they act as the middle man. As a servicer, a bank has purchased the right to skim off some of the profits of the loan (“service” the loan) from the actual owner of the mortgage. You could compare it to renting a property. If you were the renter, you would probably speak to the property manager, not the property owner. Similarly, borrowers speak with banks instead of the people who actually hold their mortgages.
The bank wants you out of the property because, if you are not making payments, they are not getting their cut. The bank is often obligated to keep paying the “owner” and can only be made whole if they foreclose. This gives them a big incentive to get you out of the property.
Who is the actual owner? It’s not as simple as you might think. To reduce their risk, banks typically package their mortgages into financial assets called “mortgage-backed securities” (or MBSs). In turn, these MBSs are bought by investors, who receive periodic payments.
MBSs come in two forms: pass-throughs and collateralized mortgage obligations (CMOs). Pass-throughs are structured as trusts that pass mortgage payments from borrowers, to servicers, to investors. CMOs divide MBSs into “slices” or “tranches”, which are divided based on the risk.
In the years following the Great Recession, the Federal Reserve reduced its stake in MBSs, but with the COVID-19 pandemic, they are buying them back up, in an effort to prevent a greater financial collapse.
In a financial crisis, you actually hold a lot of power as a borrower. This is because you get to decide whether or not you want to keep paying on a property. Of course, the bank has substantial power as well. For one thing, they can hurt your credit. Eventually, a bank can also proceed with foreclosure. When that happens, it will be a loss for the holder of the MBS, but not the bank themselves. How do you decide if you should keep your home or walk away? The decision is both financial and personal. Financially, you need to ask yourself if it is possible to actually meet the obligation of the loan. Personally, you need to ask if the home is worth trying to reclaim. Here are some factors to consider:
- How much income will I have in the future?
- How much equity do I have in my home?
- Can I sell it quickly and get my equity out of the property?
- Is the home decreasing in value?
- Are people moving out of my area for better economic potential?
- How long do I think it will before my area rebounds?
- If I lost my home, where would I move?
- If I move, will my children lose their close relationships?
- Is there something about this home that is unique that I will not be able to get back?
- Am I willing to make a big financial sacrifice in other parts of my life for this home? (e.g. no vacations for three years)
The bank has little to no incentive to work with you. When they do work with you, it’s usually because the government makes them do it. If you decide to keep your house, the first step is to talk to the bank’s loss mitigation department to negotiate new terms. This department is not meant to help you because it is designed to serve the bank’s interests. DO NOT TRUST THEM. EVERYTHING SHOULD BE IN WRITING!!!!
Here are the steps they will require:
- Fill out an application (Banks need the paperwork so they can get paid)
- Demonstrate that you can afford the new loan terms
- Prove employment with a W2
- Complete a budget
- Explain in a hardship letter why you should get this loan
Deed in Lieu of Foreclosure
Sometimes, walking away from a bad situation is the best option. Some banks, in order to save money, will take a deed and let you walk away. THIS WILL STILL HURT YOUR CREDIT. However, the damage will not be as bad, and usually, if you do a deed in lieu of foreclosure, you will be able to get a new mortgage sooner.
Never walk away from your home. There might be equity in the house. Get a real estate agent and put it up for sale. If it is underwater, a short-sale can be done. Many agents who were around between 2009 and 2015 know how to do a short sale. A short sale is when the servicer agrees for the owner to take a loss so they can get money now. I believe short sales will become far more common in the near future.
Under bankruptcy laws, you can force the bank to negotiate the terms of your loan. The courts have the power to bring the bank to the table and restructure the loan. This will hurt your credit, but it is a guaranteed way for you to keep the home. You can go to our bankruptcy page and read more about it.
Defending Your Property
In 2007, the world found out that the financial sector had been engaging in a practice of selling worthless mortgages to investors. This led to the financial crisis, which caused the central banks of the world to bail out the financial industry. What we did not do is help people. We let these institutions foreclose on people’s homes. However, during this time, some of my clients fought back. A few even won. In fact, one of my clients was awarded full equity in her home, free and clear, because of the amount of fraud committed against her. The bank ended up walking away.
This time we can’t blame it on the banks. This time, the financial collapse is the result of monetary policy on the part of the central banks. They have taken on too much debt around the world, and the concept of a fiat currency is being challenged. Also, we are being hit with the worst pandemic in 100 years. These two disasters at the same time are challenging everything we know. So, what can you do to go to war against the banks?
You will not be able to fight this war without an attorney. This war is fought in a courtroom, and you will need to pay someone to fight it for you. This is how I started out in law back in 2010: I offered to go to battle for my clients, but they had to pay me a $500 per month retainer. Even if they couldn’t pay their mortgage, they could afford $500 per month to stay in their home. Most of my clients eventually had to walk away, but some lived in their homes for two years before foreclosure.
Understand Foreclosure Law
The law allows a bank to foreclose on your property in the State of Texas. However, a bank can’t foreclose unless there is a default. To determine if there has been a default, we look at certain documents. First, the promissory note is the promise to repay the amount loaned to you. Second, the deed of trust gives the bank the right to take the property if you do not follow the terms of the promissory note. These two documents are critical when establishing the right to foreclose.
Judicial Foreclosure: Through a Court of Law
Foreclosures on home equity loans must be done through a judicial foreclosure. A home equity proceeding, under Rules 735 and 736 of the Texas Rules of Civil Procedure, governs the process by which a lender may file a verified application in the local district court seeking foreclosure of a home equity loan.
“The only issue to be determined in a Rule 736 proceeding is the right of the applicant [the lender] to obtain an order to proceed with foreclosure under the applicable law and the terms of the loan agreement, contract or lien sought to be foreclosed. A respondent [the borrower] may file a response to the application, but the response may not raise any independent claims for relief, and no discovery is permitted.”
Non-judicial foreclosure is allowed if all the terms of the deed of trust and Texas law are followed. Non-judicial foreclosures are ideal for the servicer, not the borrower. In order to do a non-judicial foreclosure the following steps must be followed:
- A notice of foreclosure must be filed with the county clerk and posted (usually titled Notice of Trustee’s Sale)
- Notice of foreclosure must be given to the borrower
- The notice must include “Notice of Default and Intent to Accelerate” and “Notice of Acceleration and Posting for Disclosure” (in the proper sequence)
The proper sequence for notice of foreclosure includes the following two certified mail notices:
- Notice of Default & Intent to Accelerate: The borrower has 21 days of statutory notice to comply with servicer’s demand. Some federal agencies require a 30-day notice for the borrower to comply. The foreclosure must be commenced within four years of the date the cause of action occurred; it is calculated from the date the Notice of Default is mailed.
- Notice of Acceleration & Posting for Foreclosure: This must specify the location of the sale, the three hour time period that the sale must take place, who the trustee will be to conduct the sale. It must also be clear and unequivocal and mailed to the address the lender has on file
It is the duty of the borrower to provide the address to the lender in writing. Non-judicial foreclosure of a dwelling owned by active-duty military personnel or anyone who was active duty military personnel within the last nine months is prohibited. Knowingly violating this law is a Class A misdemeanor.
Fair Debt Collection Practices
A foreclosure notice and demand letters are attempts to collect consumer debt; therefore, they are governed by the federal Fair Debt Collection Practices Act and the Texas Debt Collection Act.
A Federal Foreclosure Notice must contain the following information and be given both verbally and in writing:
- Name of the debtor
- Amount of the debt
- Name of the current creditor
- The debtor’s right to dispute the debt
- The debtor’s right to know the address of the original creditor
- That the collector is a debt collector and “that any information obtained will be used for that purpose.”
Borrowers have 30 days to make a written request to obtain verification of the debt.
Requirements for an Executory Contract Foreclosure
Executory contracts include any transaction that defers material action by either party that pertains to ownership or possession of real property into the future. If a tenant has paid more than 40% of the amount due or made 48 or more monthly payments, the seller must provide a 60-day notice of default and opportunity to cure the default. A non-judicial foreclosure can be used.
How to Stop Foreclosure without Filing Bankruptcy
The following explains what to do if you want to stop foreclosure but do not want to file for bankruptcy:
- File a Lawsuit: Phone call agreements with the bank are not a cause of action, and the “Show me the Note” argument does not work. The “Separation of Note and Deed of Trust” argument won’t work either.
- Lawsuits Recognized in Texas: Breach of contract, common-law fraud, statutory fraud, negligent misrepresentation, and violations of either the federal or state debt collection practices acts.
You can also have a judge issue a temporary restraining order before the sale to avoid foreclosure.
Wrongful Foreclosure Suit
A wrongful foreclosure suit is not a proper cause of action unless:
- It alleges that loan documents were defective
- Proper notice was not given
- The property was sold for a grossly inadequate sales price
The following usually happens in a wrongful foreclosure suit:
- The lender will not rush to settle because banks can’t show weakness
- The lender’s counsel will remove the case from state court to federal court
- Lenders can use Federal Rule 12(b)(6) to dismiss the case
Removal of the case by the defendant lender to federal court is allowed if there is a federal question (which there nearly always is). Removal of the case by the defendant lender to federal court is also allowed if diversity exists (if the amount in controversy exceeds $75,000 and the parties are from different states), which is also common. A lender must remove within 30 days after it is served.
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