Should a borrower in foreclosure make some payments on her mortgage even if she cannot pay off all her arrears?

Each borrower must decide that question for herself; attorney Katz cannot provide the answer. But certain considerations may influence the decision:

Some borrowers believe that they have a moral obligation to pay part of their mortgage debt even if they cannot afford to pay the entire amount due.

That is admirable. But it will not stop foreclosure, and the borrower will probably receive nothing in return for her payments―she will simply lose the money she pays. That is because property sold at a foreclosure sale usually fetches the amount of the mortgage debt and no more, so there is no surplus to go to the borrower. Making some mortgage payments but not all of them, therefore, usually brings no benefit to the borrower.

Yet some judges respect a borrower in foreclosure who pays something. Conversely, a judge will sometimes rule against a borrower even if she has a good legal defense―because the judge disapproves of the borrower’s living on her property for free for a long period.

A way to resolve the dilemma is for the borrower to escrow the part payments of her mortgage instead of giving them to the mortgage-holder. The borrower can then wait to tender the money to the mortgage-holder until she is sure she will receive some benefit for doing so. When a judge agrees to oversee a settlement between the borrower and the mortgage-holder, for example, or the mortgage-holder promises to grant a loan reduction, then the borrower can release the funds. Thus a borrower’s escrowing part payment of her mortgage arrears can allow her to do the right thing and not live on her property for free, while ensuring that she gets something in return for her money.

Can attorney Katz guaranty that he will obtain enough of a loan reduction to let the client keep her home?

No. Katz can show a prospective client what he has achieved in court in other foreclosure cases; and he can describe loan reductions that lenders have granted in the past. He can truly say that in every foreclosure case he has handled, filing an answer for the borrower has delayed foreclosure, and has usually made the lender more willing to allow a loan reduction. Katz can also say that his technique for opposing foreclosure is to give the mortgage-holder an incentive to make a loan reduction―because if the lender does not do so, it will face a strong defense to foreclosure and possible borrower’s counterclaims.

But Katz cannot promise a particular result in a particular case. Each case is unique, and there are too many variables―like how large the borrower’s income is, who the lender is, who the judge is, and what property is involved―for Katz to be able to guaranty a favorable outcome in every case.

Can a borrower do anything to protect herself if she is behind in her mortgage payments but foreclosure proceedings have not yet been brought?

A mortgage borrower need not wait fatalistically for her property to be foreclosed on. She can take steps to protect herself, such as by rescinding her loan under the Truth-in-Lending Act or New York Banking Law § 6-l, or by suing the mortgage-holder and other parties if they have violated the law (which they usually have).

A recent case illustrates that strategy. A borrower with a wife and child wanted to keep his house but had missed several mortgage payments. Katz therefore had him rescind his mortgage under the Truth-in-Lending Act, and also had him sue the mortgage-holder and the original lender for violating state and federal law. In particular, the borrower charged racial discrimination in lending and furnishing housing, which can merit a large jury award. Those steps were taken before foreclosure proceedings had been commenced.

Soon afterward the investment trust that owned the mortgage brought a foreclosure suit. But around the same time, the trust’s chief counsel called attorney Katz offering to settle both cases by lowering the mortgage debt. As of September 2008 the parties are trying to reach an agreement.  But settlement negotiations would almost certainly not have started so soon after the foreclosure suit was filed if the borrower had not taken the initiative, and rescinded his mortgage and sued the mortgage-holder. Because of those actions, the mortgage-holder faces the possibility of a large jury award against it, so it should be motivated to reduce the mortgage debt enough to let the borrower keep his home.

Thus a borrower anticipating foreclosure proceedings need not wait passively to lose her home. She can take the initiative and gain some control over the situation.

Is a short sale worthwhile?

A short sale allows a borrower who is behind in her mortgage payments to sell the property for less than the borrower’s total mortgage indebtedness, but to have that sale discharge her total indebtedness. The borrower thus walks away no longer owning the property, but no longer owing any money.

The drawback is that the borrower loses her home. Attorney Katz typically helps people keep their homes, not lose them. Nevertheless, he can offer help to some borrowers seeking a short sale: If a mortgage-holder sets a short-sale price so high that no buyers are interested, Katz may be able to find grounds for defending the borrower against foreclosure and bringing counterclaims, with a view to persuading the mortgage-holder to lower the short-sale price.

Can declaring chapter 13 bankruptcy lower mortgage debt?

Ordinarily chapter 13 bankruptcy cannot reduce a borrower’s mortgage debt, though there are bills in Congress that would change that. But as of now, only other types of debt, like credit cards and auto loans, can be “crammed down” (that is, can have the amount owed lowered by the bankruptcy judge). What chapter 13 can do is consolidate a borrower’s mortgage debt, and give her a payoff schedule allowing her several years to get caught up in her missed mortgage payments.

But the rule that chapter 13 bankruptcy cannot reduce mortgage indebtedness has an exception. That is that a debtor can bring claims for misconduct against third parties, such as the seller, a broker, or a construction contractor, and those claims can be used to reduce the debtor’s mortgage obligation.

Request a free consultation:

Attorney Stephen A. Katz is available to defend mortgage borrowers in foreclosure. His fees are reasonable. He provides a free initial consultation.

Attoryney Katz can be contacted at 1-800-251-3529.