American Homeowners Fighting Foreclosures

American homeowners are starting to fight back when lenders force foreclosure proceedings.

Many lenders say they are willing to work with homeowners to keep them in their homes, but in practice voluntary loan modifications are extremely rare.

Even the very narrowly focused government mortgage relief program is dependent on the willingness of banks to voluntarily comply with what amounts to a government backed loan modification. Nothing compels these lenders to comply, and often the lender and the servicing entity are separate financial institutions. Servicing arms are notorious for rejecting loan mod requests and going straight for foreclosure.

Things are changing though.

In 2006 a Cleveland judge ruled against a group of investment lenders trying to foreclose on 14 properties because they could not produce the mortgage notes for them. Because so many mortgages (especially subprime mortgages) have been sold, then resold, the sold again, it is not uncommon for lenders to have lost the original note. Usually the lender just inserts a clause in the foreclosure asking to "re-establish the note" and explaining that it has been lost. Technically, only the holder of the note can legally foreclose on any given property.

This attempt to 're-establish the note' worked out for lenders for awhile, but now that foreclosure has reached epidemic proportions in the U.S. judges are starting to rule against lenders if the borrower requests a court hearing or sues and the lender can't produce the note. This is especially true in communities like Cleveland where entire suburban developments have been decimated by foreclosures that did not have to happen.

Borrowers use strategies like insisting the lender 'produce the note' and going through legal channels to force this outcome, because it buys time and gives them leverage to negotiate a loan modification. Many homes go into foreclosure when a subprime adjustable rate mortgage resets,  making the monthly payment unaffordable. The lender could refi but won't, and everyone loses.

In many cases subprime lenders sold mortgages to borrowers by promising that if regular payments were made during the initial 'teaser' rate period on the loan, the borrower could come back and refinance to better terms, (having shown the lender that they could indeed qualify for conventional terms and rates by responsibly meeting their subprime obligations). Yet when the teaser rates started to expire, many of the original lenders had already gone belly up, and the new lender was not willing to modify the terms or refinance.

While no written promise to refi at a future date was included in the closing paperwork for these loans (or anywhere), the lenders were by any standard acting in bad faith. They knew the terms were horrible, and they didn't really care. Often clients who qualified for better terms were put into subprime mortgages anyway because it was easier or more profitable for the broker. People who normally would have been serving up french fries were brokering mortgages at the height of the bubble. Let's just say, "mistakes were made."

Borrowers are now using those mistakes as refi leverage. 'Produce the note' strategies have worked, as have mortgage audits. A mortgage audit is a process whereby the borrower (often with the help of a legal or mortgage professional) reviews all the closing paperwork for signs of federal lending and disclosure violations. (Some RESPA violations come with a mandatory $10,000 fine to the lender.) The idea behind an audit is to pile up evidence against the lender that will be so costly to that entity if pursued that the lender drops the foreclosure and modifies the loan.

With lenders starting to 'dump' foreclosed properties on cities by not following through with the sheriff's auction of subprime properties, it makes sense for borrowers to fight.

Actually, it makes sense for everybody to fight.

Meanwhile, foreign investors can still pick up U.S. real estate at foreclosure auctions for a song.  Foreclosures are snowballing so fast that in some areas homes get no bids at all at repeat auctions. So investors who have a plan and want these properties can get in very, very low.

Many homeowners just want to be able to stay put. During the Great Depression, farmers in the Dust Bowl used to get together and buy up each other's properties for $1 at foreclosure auction, just so they could help each other keep their farms.

Foreign investors looking for cheap rental property might take a cue from them and try a similar gambit: Buy the homes at sheriff's auction, rent them back to the original owners, and then sell them back when the economy recovers. Foreclosure fraud proceeds this way: the promise to rent then sell the property back to the owner at some future date. But in the fraudulent scenario the 'rescuer' cashes out the equity and disappears.

Using the same strategy as a buying/renting approach could actually work.