Defenses to Foreclosure

1. Rescission

Rescission

A kind of relief that homeowners often qualify for―both homeowners in foreclosure and those that are not―is mortgage rescission. That is because many lenders carelessly violate federal or state law when they refinance a mortgage, and that can give the homeowner the right to rescind the loan, and recover interest and closing costs.

Rescission is both a defense to foreclosure and a way that some borrowers―whether they are in foreclosure or not―can lower their mortgage indebtedness.

Many homeowners have the right to rescind their mortgage loans under the federal Truth-in-Lending Act or under New York Banking Law § 6-l, because the lender violated one of those laws. Rescission means that a homeowner puts herself back in the position that she was in before she took out the loan―so that she recovers the interest and closing costs that she has paid the lender, and the lender gets back the money that it lent her.

In the past when a borrower could easily refinance her loan, a borrower who rescinded could actually give the lender all the money that she had borrowed from it, and the lender in turn had to pay her back all the interest and closing costs that she had paid it. But today with refinancing being so difficult to obtain, rescission is accomplished with a loan modification: the borrower’s mortgage indebtedness is reduced by the amount of interest and closing costs that she has paid, but no money changes hands.

Besides being a way for a borrower to reduce her mortgage indebtedness, rescission is also a complete defense to foreclosure. That is because it leaves the mortgage holder with no security interest in the borrower’s property on which it can foreclose. So rescission is a powerful tool for mortgage borrowers whether they are in foreclosure or not.

2. Technical Defects

Technical Defects in the Foreclosure Process

Another way to defeat foreclosure is to spot technical mistakes in the foreclosing party’s lawsuit that its lawyers or the lender have made. The first type of mistake often arises because law firms handle large numbers of foreclosure cases, and they may process the lawsuits carelessly. Also, foreclosure lawyers can grow sloppy because most foreclosure suits are unopposed, so they are not used to having their work scrutinized. As for lenders’ mistakes, today many mortgages have been sold to investment trusts that pool thousands of mortgages together, and the trusts often lack proper title to the individual mortgages.

Both those factors―technical errors made by foreclosing attorneys and the mortgage holders’ lacking title to the mortgage―can provide good defenses to foreclosure. Because most foreclosure actions are unopposed, those defects in the foreclosure suit usually go undetected. But an attorney who understands foreclosure law can use the defects to delay a foreclosure action or stop it completely.

3. Counterclaims

Counterclaims

A borrower often has the right to bring counterclaims―that is, to assert her own legal claims against the mortgage holder who is trying to foreclose on her property. Fraud, deceptive practices, banking-law violations, conspiracy, and racial discrimination are some of the grounds for borrowers’ counterclaims.

A borrower’s bringing valid counterclaims can make it easier for her to convince her lender to grant a loan modification. For instead of the borrower’s going to the lender hat in hand and begging for a loan reduction, she threaten the lender with liability to the borrower. Counterclaims turn the hunted into the hunter: the lender becomes a defendant in its own foreclosure lawsuit, and the borrower becomes the predator for a change! Thus counterclaims are a useful tool for defending a borrower in foreclosure.

4. Third-Party Claims

Third-Party Claims

Many borrowers also have the right to bring third-party claims in their foreclosure actions―that is, they have grounds for suing other parties besides their mortgage holder. They may have legitimate claims against the original lender (if it has sold the loan to another company), against a home-improvement contractor, or against a mortgage broker, seller, or real-estate broker. Those parties are frequently implicated in predatory-lending schemes.

5. Bankruptcy

Bankruptcy

Bankruptcy is usually not necessary in a foreclosure defense, so long as the defense is mounted early in the foreclosure process. (See menu choice, “The Danger of Delaying Opposition to Foreclosure.”) Chapter 13 bankruptcy will halta foreclosure action temporarily, but it does no more than delay the process. That is because a bankruptcy court will not allow a bankruptcy filing to continue for very long unless the borrower can afford to get caught up in her monthly payment arrears.

Bankruptcy can be the only option left if a borrower waits till the end of the foreclosure process to mount a legal defense. But if a strong defense is mounted early, bankruptcy is usually unnecessary.