PART III. Litigation Against the Bank

To stop the sale of your property, you must first file a lawsuit against the bank. There are only a limited number of reasons you can use to sue the bank in order to stop a foreclosure sale. With the recent foreclosure moratorium announced by major lenders this could be the perfect time to sue your lender. Contrary to what some might think about the timing, judges don't take kindly to homeowners filing a lawsuit just to stop a foreclosure. So if your lender recently announced a halt on foreclosures and you file a law suit it shows your using the judicial system as an offense, not a defense.

Banks and mortgage servicing companies often make significant mistakes during the foreclosure process.  For example,  the bank may forget to record an Assignment of Mortgage or Substitution of Trustee when it sells your loan, or might forget to record a Notice of Trustee’s Sale more than 12 months after it recorded a previous Notice of Trustee’s Sale. These type of violations will allow you to temporarily stop the sale with a TRO (temporary restraining order), and may force the lender to start the entire foreclosure process again. These violations can be determined by doing a forensic loan review (by an attorney) and analyzing these documents at the county recorder’s office.

Common Law Violations

Sometimes the bank or the mortgage servicer breaks the law when working with borrowers. This law has been created through judicial decisions in court (known as “common law”). We have listed the most common violations below:

Violation of the HAMP Program:  In March 2009, the federal government began the Home Affordability Modification Program (“HAMP”), also known as the “Making Home Affordable” (MHA) program. There have been over 90 provision changes over the past year alone. Recently it has been ruled that the homeowner applying for HAMP is a third party beneficiary for the government's program and has the right to sue the lender for not properly administering the HAMP program. If your lender is not following guidelines or doing their due diligence you might have a good case. Recently a San Diego, Ca. judge ruled in the borrowers favor saying that as a third party beneficiary they had the right to sue their lender on behalf of the government. 

In exchange for receiving $75 billion in TARP federal bail-out money, most of the major banks entered into contracts with the U.S. Treasury Department wherein the banks promised to perform “good faith” reviews of their borrowers’ loans to see if they qualified for the HAMP program.  (They are somewhat acting on our governments behalf). If the homeowner qualified, the banks agreed to modify their loans under the HAMP terms, which can mean interest rates as low as 2% (for the first five years) and mortgage payments (including property taxes and homeowner’s insurance) that do not exceed 31% of your gross monthly income. Unfortunately, you have new bank employees that don't know how to properly calculate income and they often make mistakes.Trust me, we see it all the time!

Qualifications of HAMP:  The mortgage must be on your primary residence, you must be paying more than 31% of your gross monthly income on your mortgage (including property taxes and insurance), your loan must have been issued before 01-01-09, your loan balance must not be more than $775,750, and you must be facing a financial hardship (but not necessarily behind on your loan).  Most homeowners with hardships qualify but as you know the banks are simply not doing any loan modifications under HAMP because they lose out.

The bank appear to use delay tactics to deny loan modifications. They have you make trial mod payments just to collect what they can until they pull the foreclosure trigger.They drag out the process for months and months, even years until you finally give up or you finally make a “mistake” that the bank uses to deny you.  Or if the bank puts you into a trial plan, it will drag it on forever, again until you make a mistake or become NPV negative and they now have reason to foreclose.  Or the bank claims you didn’t provide all the necessary documentation (even though you provided it six times!).  When this happens, the bank breaks it’s contract under the HAMP program with the federal government.  This gives you the borrower as the intended third-party beneficiary the legal right to sue the bank and stop the foreclosure sale.  The courts take this violation seriously, as I mentioned earlier a recent federal court decision in San Diego strongly supported the borrower’s right to sue the bank for the HAMP violations.

Breach of Contract:  If you have already entered into some type of trial plan with the bank (whether it be a HAMP or internal modification plan), you have made all necessary payments, and the bank has nevertheless either denied you or has dragged out the plan longer than the agreed-upon initial three-month period, you have the right to sue the bank for breaching its agreement with you. Additionally, we have seen the lenders send out mod agreements that homeowners have signed and returned via Fed Ex (with tracking numbers proving delivery), only to have the lender claim they were not received at all or in time and deny the approved mod. The unfortunate thing for homeowners who truly need help, and do everything they have been asked only to be declined is they will lose their home if they don't take action.

Fraud:  Fraud is much less common to find than HAMP violations but still exists in many cases.  If the bank gave you a “toxic” or predatory loan, you may be able to sue the bank and stop the sale.  By toxic I mean that you have an  Hard Money loan, Ballon Payment, Sub Prime ARM loan. The most common toxic loan is the "Option ARM", also known as a negative amortization loan where your minimum payment each month doesn’t even cover the interest component of your payment so your principal grows each month.  What doesn’t count as fraud for the purpose of stopping trustee’s sales is TILA, RESPA or HOEPA violations.  The courts simply don’t see good reason to issue a TRO if your correct interest rate wasn’t properly disclosed.

Hybrid Retainers for Lender Litigation

So now that you might think you're a victim and you want to sue your lender what's the next step? Finding a good attorney to represent you, and not cost you an arm and a leg. Some litigation attorneys want $5,000, $10,000 or even $20,000 up front retainer to initiate a lawsuit against your lender. Let's face it, most homeowners having financial problems simply don't have these resources. For this reason a hybrid retainer with a qualified attorney would make sense. Not just some cookie cutter lawsuit from a junior attorney trying to make a buck, but a heavy hitter that's willing to work on a contingency basis and just partially cover their hard cost along the way.

Read PART I:    Foreclosure Timeline and Eviction Process - Foreclosure Information (PART I of III)
Read PART II:   Defenses Against Foreclosure - Foreclosure Information (PART II of III)