Defenses to Foreclosure

Challenge a foreclosure by bringing a defense such as unconscionability or lender mistake.

Until recently, successful defenses against foreclosure were relatively rare. But that is changing rapidly more homeowners are successfully challenging foreclosure actions.

This sea change is due, in large part, to the unearthing of more and more evidence that the real estate industry has been rife with fraudulent and predatory lending practices. Because of this evidence, courts that once rubber-stamped foreclosure actions are now beginning to shift their sympathies towards homeowners.

Homeowners and their attorneys are taking advantage of this change in judicial attitude, and challenging foreclosure actions in many different ways. Here's a review of some of the most common defenses to foreclosure, and how to raise them in court. (To learn about other ways to avoid foreclosure, read Nolo's article How to Avoid Foreclosure.)

How to Raise a Defense to Foreclosure

In order to raise a defense to the foreclosure action, you must bring the issue before a judge. This is automatic in about half the states, where foreclosures are typically accomplished through civil lawsuits and judicial foreclosure orders.

In the other states, foreclosures typically take place outside of court (these are called non-judicial foreclosures) and you have no automatic means to mount a legal challenge. To have your defenses ruled on by a judge in these states, you have to file a lawsuit alleging that the foreclosure is illegal for some reason and asking the court to put the foreclosure on hold pending the court's review of the case. (To learn more about judicial and non-judicial foreclosures, read Nolo's article How Foreclosure Works.)

Common Foreclosure Defenses

As courts are increasingly sympathetic to challenges to foreclosure actions, attorneys across the country are raising many different types of defenses. Below is a description of the most common of these.

The Terms of the Mortgage Are Unconscionable

Over the years, attorneys have used a branch of law called "equity" to come up with a panoply of approaches to defending against foreclosure. The equity branch of law focuses on fairness in situations where a legal statute doesn't provide adequate relief. It usually isn't enough to simply claim that the foreclosure is unfair; rather, you have to come up with a specific justification for your position that has previously been recognized by the courts.

One such justification is a principle known as unconscionability that is, the terms of your mortgage, or the circumstances surrounding it, are so unfair that they "shock the conscience of the judge." In one case where this defense was successful the borrower spoke very little English, was pressured to agree to a loan that he obviously couldn't repay, was not represented by an attorney, and was unaware of the harsh terms attached to the loan (such as an unaffordable balloon payment ).

You Are a Servicemember on Active Duty

If you're on active military duty, the Servicemembers Civil Relief Act (SCRA) provides you with special protections. Most importantly, if you took out your mortgage before you were on active duty, your foreclosure must take place in court even if foreclosures in your state customarily occur outside of court. If a foreclosure is initiated while you're on active duty, you can automatically receive a nine-month postponement of the proceeding by requesting it from the court in writing.

The Foreclosing Party Didn't Follow State Procedures

In some cases, the foreclosing party doesn't follow state procedural requirements for bringing a foreclosure action (for example, it fails to properly serve on you a Notice of Default required by state law). If this happens, you may be able to challenge the foreclosure. If your challenge is successful, the court will issue an order requiring the foreclosing party to start over. (To learn more about foreclosure procedures, read Nolo's article How Foreclosure Works.)

Virtually all judges will overlook errors that are inconsequential, such as the misspelling of a name. Similarly, if the foreclosing party's error doesn't actually cause you any harm, it may not be worth fighting over. More serious violations will get a more serious response from the court.

The Foreclosing Party Can't Prove It Owns the Mortgage

In federal courts (where some large lenders prefer to bring their foreclosure actions), only the mortgage holder (the owner or someone acting on the owner's behalf) may bring the action. If your mortgage, like many, has been sold and bought by many different banks, lenders, and investors, proving just who owns it can be difficult for the last holder in the chain.

Though state courts are usually looser than federal courts about who can bring a foreclosure action, appropriate documentation of who owns the mortgage must nevertheless be presented, and this is often difficult for the foreclosing party to do.

The Mortgage Servicer Made a Serious Mistake

Mortgage servicers (entities who contract with banks and other lenders to receive and disburse mortgage payments and enforce the terms of the mortgage) make mistakes all the time when they're dealing with borrowers. A study by law professor Katherine M. Porter showed that in 1,700 Chapter 13 bankruptcy cases, a majority of the claims submitted by mortgage owners had errors. (Misbehavior and Mistake in Bankruptcy Mortgage Claims, Texas Law Review 2008.)

You may be able to challenge the foreclosure based on mistakes such as:

• crediting your payments to the wrong party (so you weren't, in fact, delinquent to the extent asserted by the foreclosing party)
• imposing excessive fees or fees not authorized by the lender or owner, or
• substantially overstating the amount you must pay to reinstate your mortgage.

Mistakes on the amount you must pay to reinstate your mortgage are especially serious. This is because an overstated amount may deprive you of the main remedy available to keep your home. For example, if the mortgage holder says you owe $4,500 to reinstate (perhaps because it imposes unreasonable costs and fees), when in fact you owe only $3,000, you may not have been able to take advantage of reinstatement (say you could have afforded $3,000, but not $4,500).

The Original Lender Engaged in Unfair Lending Practices

You may be able to fight your foreclosure by proving that your lender violated a federal or state law designed to protect borrowers from illegal lending practices. Two federal laws protect against unfair lending practices associated with residential mortgages and loans: the Truth in Lending Act (TILA) and an amendment to TILA commonly termed the Home Ownership and Equity Protection Act (HOEPA). TILA applies to all loans. HOEPA only applies to "high cost" loans certain loans that have an unusually high interest rate or that come with unusually high up-front processing fees.

Lenders violate TILA when they don't make certain disclosures in the mortgage documents, including the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and more.

In the case of loans covered by HOEPA, lenders must comply with various notice provisions and are prohibited from using certain mortgage terms, such as balloon payments in loans with terms of less than five years.

The right to rescind the loan. TILA and HOEPA provide a number of remedies for the borrower if these laws are violated. However, the key remedy in foreclosure actions is the borrower's ability to retroactively cancel or rescind the loan. This is referred to as the right to an "extended rescission." Unfortunately, the right to an extended rescission under these federal laws applies only if the loan is a second or third mortgage that you used for purposes other than buying or building your home (for instance you used it to pay off your unsecured credit card debt). Also, the violation must be considered "material" (that is, significant or substantial).

State-law remedies for "high-cost" loans. A few states have special protections for people facing foreclosure on "high-cost" mortgages. If your state is one of these, and the lender has violated any of its provisions, you might be able to raise that violation as a defense in your foreclosure case.

To learn more about these defenses, and other ways to avoid foreclosure, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).