Chicago Foreclosure Lawyer Blog

The title of this post may read a bit like a poorly-worded law school exam question. Generally, a good answer to this question is, "It depends." However, in the context of notes that are secured by a mortgage (every home loan in the U.S.), I think the answer hinges on the terms of the note and what has happened to the note since it was made.

This post by Adam Levitin got me thinking about this issue again. He mentions about halfway into the post that notes might not be negotiable. This isn't the first time I've encountered this argument.

Here's some brief background. In order to facilitate commerce, the majority of U.S. States have adopted various versions of the Uniform Commercial Code (UCC). The UCC's various articles apply to things like the sale of goods (Article 2), negotiable instruments (Article 3), and secured transactions (Article 9). Since every state (except Louisiana, the last I checked) follows the UCC, you can be relatively certain that the laws relating to transactions covered by the UCC will be consistent from state-to-state.

Promissory notes are generally considered to be negotiable instruments. This means that they can be transferred from person-to-person by delivery and indorsement. For example: Dave writes a check to Steve for $100. The check is payable to Steve. If Steve indorses the back of the check with his signature, the document is "indorsed in blank." This means that anyone in possession of the check can now go cash it. However, if Steve indorses the back with his signature and the statement, "Pay to the order of Mary," then only Mary can cash the check.

We call the indorsement to a particular person or entity a special indorsement, the signature only indorsement is known as a blank indorsement. Sometimes a blank indorsement reads as "Pay to the order of _________________ /s/ Signature." Foreclosing lenders frequently submit copies of notes that are indorsed in blank. In theory, a loan originator should be able to blank indorse a promissory note and then deliver it to another bank. Upon delivery of the blank indorsed note, the new bank becomes the "holder" of the note and may enforce it against the maker of the note, the borrower. Some consumer defense practitioners (I am one of them) are skeptical about these kinds of indorsements. Often, a lender will present a copy of a note that bears no indorsements. When the defense of standing is raised, an indorsed-in-blank copy magically appears.

Seems a bit fishy, right? In many cases, it may be that the note has always been indorsed in blank and the wrong copy was attached to the foreclosure complaint. On the other hand, given last year's revelations about robosigning, I would tend to doubt those indorsements.

So what about negotiability? Are these notes negotiable? It depends who you ask. Article 9 of the UCC governs secured transactions. The sale of a promissory note is one of those transactions governed by Article 9. So if a loan has been securitized, it has gone through at least two "true sales" of the note. It would sound like Article 9 would apply in that situation. Under Article 9, notes cannot be negotiated. They must be assigned for value. In that case, a non-original lender seeking to enforce a blank indorsed note cannot rely solely on the blank indorsement. Instead, that lender would need to prove that the note was assigned to it for value.

At the same time, Article 3 says that notes are negotiable via indorsement and delivery. The lender has a blank indorsed note. QED, right? Wrong.

Notes are only negotiable instruments if they contain an unconditional promise to pay a specific sum of money on or by a specific date. There are exceptions to this rule that allow for interest and mortgages, etc. However, as far as payments are concerned, adding additional requirements defeats the note's negotiability. Take a look at a standard home loan note -- the Freddie and Fannie uniform note. It contains a provision that states the borrower must notify the lender in writing that he is making a pre-payment if he is paying more than the monthly payment. This is technically an additional undertaking.

That additional undertaking would theoretically destroy the note's negotiability. Once a note is non-negotiable, no amount of indorsements in the world can revive negotiability. If these notes aren't negotiable, then lenders have a much tougher evidentiary burden to meet when proving that they have the power to enforce the note against a borrower. Instead of simply showing that they are the holder of a blank indorsed or the named payee of a special indorsed note, they must show that the note was assigned for value.

Here's the tricky part: without commemorative assignments and other dubious documents, most lenders cannot prove an assignment for value took place. Why? Because these Freddie and Fannie uniform notes are generally tied to a uniform mortgage that involves Mortgage Electronic Registration Systems, Inc. (MERS). MERS was created to take the paperwork out of assigning mortgages and notes. As such, lenders generally cannot prove a chain of title from the originating lender to the lender seeking to enforce the note against the borrower.

I will now provide a reality check: I don't know of anyone making this argument in Illinois state courts. I also don't know of anyone who has won on this argument in Illinois state courts. I am tempted to try it, but am waiting for the right case. The tough part is convincing a judge who is used to thinking in terms of negotiability that what has been commonly accepted practice is actually completely ineffective. We shall see.

If you've had success with this argument, please feel free to share it in the comments.

The Supreme Judicial Court of Massachusetts recently issued an opinion in Bevilacqua v. Rodriguez. The case comes on the heels of the court's earlier opinion in U.S. Bank v. Ibanez. In Ibanez, the court held that a foreclosure action taken by a party without the jurisdiction and authority to carry out the same is void.

In Bevilacqua, the court followed its ruling in Ibanez. It noted that although Bevilacqua was in possession of a quit claim deed from U.S. Bank, U.S. Bank's authority to take a foreclosure action was in question. The main reason that U.S. Bank's standing was at issue was because of the use of back-dated or "commemorative" assignments and deeds. Let's take a look at the sequence of events:

1. Original homeowner executes a mortgage and note in favor of MERS as nominee for Finance America on March 18, 2005.
2. At some point after that, he defaulted on the loan.
3. U.S. Bank executes a foreclosure deed on June 29, 2006.
4. On July 21, 2006, MERS assigned the mortgage interest in the property to U.S. Bank
5. On October 9, 2006, U.S. Bank issued itself a "confirmatory foreclosure deed."
6. On October 17, 2006, U.S. Bank quit claimed the property to Bevilacqua.

Apparently, Bevilacqua took possession of the property, and then filed a "try title" action on April 12, 2010. A "try title" action is similar to a quiet title action in Illinois. Essentially, the petitioner seeks to establish that he or she has an unfettered interest in a piece of real property.

In general, this remedy is sought when there is an adverse claim to the land, not when the chain of title between one party and the party seeking the quiet title judgment is in question. The court noted this obvious Catch-22 and denied Bevilacqua's try title action.

So will this case have a major impact on Illinois foreclosures?

The theory behind the case likely will not have a major impact. Massachusetts is a title theory state, not a lien theory state like Illinois. This means that borrowers in Massachusetts do not take title to their homes until their loan is paid off. On the other hand, Illinois home owners have title to their homes once they purchase the home. The lender has a lien against the property that remains until the loan is paid off. Essentially, the set of facts that led to Bevilacqua's claim cannot occur in Illinois.

But what about homes purchased at foreclosure sales? Won't they be effected? Most likely not. Illinois courts have recognized that in order for the state's judicial foreclosure process to function smoothly, buyers at foreclosure sales need to be certain that their purchase will be honored and unclouded by other claims to title. Unless the individual who purchased the property at auction was aware of a substantial issue with the foreclosing lender's ability to foreclose, the purchase will generally be honored.

Moreover, given the recent appellate decision in MERS v. Barnes, it would seem that any homeowner subject to a default judgment of foreclosure would effectively waive any claims to the property due to the foreclosing lender's lack of capacity to sue.

So why even write this blog post about the Bevilacqua case? Because it demonstrates that courts are no longer honoring the "retroactive" or "commemorative" use of assignments. Clearly, an assignment is only effective from the date is was signed. Executing a document well after the assignment was allegedly made does not perfect that prior assignment. This distinction is very relevant for Illinois home owners facing foreclosure, especially when being sued by a party that is not the original lender.

On the whole, this is another example of things changing in courts nationwide. As the mainstream media continues to cover the wrongdoing of mortgage lenders and servicers, it becomes increasingly difficult for judges to ignore the elephant in the room.

Todd Zywicki has an op-ed piece at Forbes.com that advocates rushing to a settlement regarding the robo-signing scandal. While the good professor states that he believes wrongdoers should be punished, he downplays the impact of robosigning:

At its worst, robo-signing is not an issue of whether someone has the right to foreclose--the borrowers invariably admit that they haven't made payments in months or years and have no intention of trying to bring their payment up to date--but which of several parties have the right to foreclose. That's a problem that needs sorting out, to be sure. But the virtual absence of real victims makes it highly unlikely that delinquent homeowners will receive more in court than they could under the proposed agreement.

This is, at best, a misunderstanding of the deeper issues. At worst, it is a serious whitewashing of the true impact of robosigning. In addition to muddying the "who has the right to foreclose" waters, robosigning represents fraud upon the court system. Moreover, it is simply one flavor of servicer abuses, which include telling borrowers that they had to be in default to qualify for a HAMP modification. Stringing a borrower along with the promise of a permanent modification, only to move forward with a foreclosure proceeding. The true harm behind these practices is that borrowers end up deeper in debt than if they had simply filed a Chapter 7 bankruptcy, severed their personal liability on the loan, and walked away from the property.

One more time for emphasis: honest borrowers attempting to save their homes actually harmed themselves more than if they had simply make a business decision to cut a bad investment loose.

He further argues that while the settlement talks have dragged on, time to foreclosure has increased. This is true, however, his subsequent conclusion is more than a bit disingenuous:

Most important, of course, allowing the non-paying resident to occupy the house indefinitely prevents it from being owned by someone else who will pay. Thus, while delay certainly aids some borrowers who are underwater, it also keeps non-paying borrowers in the house while keeping out new owners, to the detriment of those seeking homes and the operation of the housing market more generally.

Many of these non-paying residents wanted to pay. They attempted to navigate the ramshackle world of servicer red tape only to discover that their documents were repeatedly lost and promises of help were empty. Moreover, the vast inventory of empty REO properties indicates that we are not wanting for supply. There is likely even demand. Where we are running into problems is that a traditional 20% down, 80% financed mortgage is out of the reach of many Americans. If lenders won't issue loans, we won't see housing sold to anyone but speculators and investors who want to have a turn at playing landlord or house flipper.

Prof. Zywicki concludes his column by claiming that the extent of the harm is known, that nobody has been truly harmed, and that therefore we should simply sign off on the settlement to allow a housing recovery to begin:

But for a year now, class-action lawyers, attorneys general, reporters, and housing advocates have searched in vain for multitudes of wronged homeowners and have come up largely empty-handed. The size and scope of the problem is now well known and it seems straightforward to sign on to a final settlement that wraps up most of the claims, helps some genuinely needy borrowers, and protects lenders from still additional liability arising out of the same conduct. By contrast, walking away from the settlement will prolong uncertainty for little or no gain and at great cost to would-be homeowners and blighted neighborhoods that are caught in the current limbo.

Unfortunately, he fails to see the true impact of the various settlement proposals that have leaked to the press: a blanket release of all claims in exchange for $20 billion and a promise to really, truly, this-time-for-sure stop robosigning is a highly lopsided settlement. As I noted above, robosigning was merely one part of the problem. The deeper problem is just now coming to light, with many consumer defense attorneys saying, "I told you so." The behavior of our institutional lenders has gone well beyond robosigning and hackneyed attempts at loss mitigation services.

One only needs to look to the billions of dollars of HAMP money left on the table to realize that servicers were acting in their own interests, not those of the borrowers or the investors. This craven disregard for the well-being of the overall housing market is not lost on those with boots-on-the-ground experience in consumer defense work.

The argument that, "he signed the papers, therefore he must owe someone," is a truism that belies a deeper, underlying issue -- financial services institutions have long gouged consumers in the name of bigger profits. By treating the foreclosure crisis as a pile of paperwork to process as quickly as possible, we ignore the rights of consumers in the name of efficiency.

While borrowers may not be entirely blameless, the institutions that sold them a hunk of gilded lead must also shoulder some responsibility. But for the lending frenzy of the early 00's, we wouldn't be facing such a glut of foreclosures right now. One side of the equation made out like bandits, the other is just being kicked out. Rushing to a settlement won't fix the underlying problems. Banks were happy to take on ridiculous amounts of risk when it was profitable. Lamenting the "prolonged uncertainty" created by the crisis is merely handwaving and obfuscation.

Ultimately, every tax payer is a victim of the housing crisis -- our tax dollars propped up institutional lenders and investment banks. The tax dollars earmarked for propping up homeowners were never spent, largely due to inaction and malfeasance on the part of the mortgage servicers. There's plenty of harm and blame to go around -- a blanket settlement will simply concentrate the "harm" on home owners.

I've written about the "just walk away" movement before. I've pointed out that the "safety in numbers" theory is flawed -- there may be too many people to come after right now, but lenders have quite some time (seven years or more, depending on the facts), to come after you for a cash judgment. I've pointed out that the effect on your credit and ability to rent may be greater than you think.

This latest "walk away" article at the Huffington Post has given me something new to talk about. Ryan J. Downey opens his article with a great attention-grabber:

I made my last mortgage payment on November 1, 2009.

Bank Of America changed the locks on my house on September 29, 2011.

Almost two years mortgage payment/rent-free? Sign me up!

Before you start making origami cranes out of your mortgage statements, let's take a closer look at his article. Page one describes Mr. Downey's failed American Dream with the bravado of 20/20 hindsight. While recounting his tale, which is all-too-familiar for many Americans, he quips about the inefficiencies of First Franklin's staff, the lack of assistance from Washington, and other issues.

He is 100% correct. Too big to fail has become too big to function. Trying to obtain a loan modification or other assistance from a lender or servicer has been and continues to be a Byzantine process full of red-tape and incompetency. So far so good, right?

Downey debunks the "moral hazard" arguments we've all heard in the media. He does it succinctly and to great effect:

The banks call it "writing off a bad investment." But when a private citizen does it, we're scum? Please.

I have made the same points on this very blog. So why do I think this article could be misleading? The answer lies on page two.

Downey's home was located in Riverside, California. California is a non-recourse state. This means that banks can only repossess your home, they cannot pursue for a deficiency judgment. Again, they cannot collect a single red cent from you. There may be exceptions to this rule, but I am not a California attorney.

On the other hand, Illinois is a recourse state. The Downeys of Downers Grove are personally liable if they default on their underwater mortgages. That liability will take the form of a deficiency judgment. In the case of a wholly underwater second mortgage, it may take the form of a lawsuit for the full value of the second mortgage.

To make matters worse, you can never be sure whether you will be pursued or not. While the common folklore in Cook County, Illinois is that lenders don't pursue deficiencies in Chicago, don't expect this to hold true for very long. Bank of America just imposed a $5/month fee for using your debit card. As the #OccupyWallStreet movement gains steam, the financial sector is screaming about class warfare. And well they should, because they know their own creation.

There will come a day in the not-too-distant future when lenders will aggressively seek deficiency judgments. You see, the folks who walked away early are starting to recover their credit. They may even find the means to purchase a new home, albeit one at a realistic value and a more traditional loan structure. Those people will have properties ripe for a judgment lien.

The people just entering foreclosure now may find themselves ending the process with a wounded bank on the other side of the "v." Have you ever seen a huge animal that is injured, scared, and angry? Expect similar behavior from lenders as they scramble to recover whatever they can to keep their balance sheets in the black.

To reign the invective back in a bit, much of the "walk away" movement is founded on real frustration and an accurate picture of what's happening for the haves vs. the have-nots. A lot of these folks live in states that provide them immunity beyond a shattered credit score and the loss of their home. Illinois does not.

There are three sure-fire ways to protect yourself in Illinois: 1) Deed In Lieu of Foreclosure; 2) Consent Foreclosure; and 3) Bankruptcy. If you are ready to ditch your home and don't want to risk a deficiency, those are your best options.

Simply walking away in Illinois is a bad idea. It may work for some, but in the end, truly managed risk requires a bit more effort.

A big hat tip goes out to Yves Smith of Naked Capitalism for posting this article. It turns out that there are two lawsuits pending against JPMorgan Chase, both of which have disturbingly similar fact patterns.

Both cases have been filed in U.S. District Courts in Alabama. Barnett v. Chase Home Loan Servicing, L.L.C. was filed on May 16, 2011 in the U.S. District Court for the Northern District of Alabama, Eastern Division. Barlow v. Chase Home Finance, L.L.C. was filed on August 17, 2011 in the U.S. District Court for the Southern District of Alabama.

In both cases, home owners who were current on their mortgages had their homes destroyed by fires. During the recovery process, their insurance companies paid Chase in full, satisfying the loans. At that point, Chase should have released its liens and reported the loans as paid in full.

Allegedly, that didn't happen.

In the Barnett case, Chase took an insurance payout from State Farm, but failed to apply it to the Barnett's loan balance. It instead began calling them about delinquent payments while it held the funds in a suspense account. Chase also filed a foreclosure action against the Barnetts. They were left unable to obtain financing to rebuild because of Chase's adverse credit reporting and the pending foreclosure lawsuit.

In the Barlow case, Chase took an insurance payout from Alpha Mutual Insurance company. It then refused the insurance company's check and demanded certified funds. Once those funds were tendered, it did not apply the funds to the loan balance. It placed the funds in a suspense account and assigned the loan to Chase Home Finance, LLC. Chase Home Finance then initiated foreclosure proceedings against the Barlows.

I won't get into the further details of the cases, Yves' article does a great job of that as it is. I would rather focus on the concept of "pattern and practice." Pattern and practice is a legal term of art that tends to describe systemic behavior. It is significant because it can affect the kinds of damages available to an injured party.

Let's take a look at the two cases mentioned in this post. Their fact patterns are very similar. In both cases, it appears that something just isn't working properly at Chase. It could be that they have some buggy software. Perhaps there isn't a good policy for handling situations where a mortgaged home is destroyed and the loan is paid off via an insurance payout. Certainly, the United States is utterly exempt from natural disasters and no insurance company has ever had to pay out on a policy since 1776.

At the end of the day, we're left with a big indication that Chase has made a business decision regarding this kind of systemic failure -- maybe it is a software issue, and fixing the glitch would cost more than settling a few lawsuits here and there. Maybe it is an organizational problem, which would also be a costly fix. It seems rather clear that Chase has made this behavior part of its business model.

How is all of this relevant? Punitive damages. Punitive damages can be awarded in some lawsuits, and are generally considered an extreme remedy. Punitive damages are not meant to repay a specific financial harm. They are intended to punish bad behavior. I highly doubt that these two cases are just coincidences. I'm willing to bet that this has happened hundreds of times over the years. Clearly, Chase isn't going to stop when its biggest risk is settling a few lawsuits here and there.

That's where the punitive damages come in. Awarding the plaintiffs a few million dollars is still a drop in the bucket for Chase, but it hurts a bit more. If enough lawsuits went to trial and received a punitive damages award, we'd probably see Chase take some steps to remedy its failings.

Pattern and practice evidence is a powerful tool for any litigator. In the fight to protect consumers from less-than-scrupulous creditors, it is especially relevant. Being in debt can make you feel isolated. Collection calls are embarrassing, even more so when your creditors call your employer. You may feel like you're the only one in your situation.

You aren't alone. This is why it is important that people fight for their rights. Every time a creditor does something wrong, it's another bit of evidence that may establish a pattern and practice of the behavior -- a systemic issue that can only be corrected by a more punitive remedy.

I recently discussed document fraud in the context of MERS and briefly mentioned the GMAC/Ally document fraud revelations.

In that context, Abigail C. Field hits it out of the park with this blog post. She draws a great parallel -- GMAC/Ally is pursuing a whistleblower who took a position with the company with the apparent intention of digging up internal documents that demonstrated what was happening at GMAC/Ally. At the same time, GMAC/Ally continues to engage in document fraud.

Whether GMAC/Ally has a right to pursue this whistleblower is irrelevant. It is obvious that something is rotten in the mortgage lending industry. On a daily basis, I see documents that are as suspect as a three dollar bill. The main challenge for attorneys defending foreclosure cases is educating local judges about the issues.

In Illinois, our Mortgage Foreclosure Law sets forth the minimum pleading requirements for a foreclosure complaint. If a lender does not comply with the law's requirements, the case is improperly pled and will be dismissed. However, many lender's attorneys try to claim that satisfying the minimum pleading requirements is all that they must do to win their cases.

This cannot be further from the truth. There is limited case law on this subject. Why? Before the housing boom and bust we didn't see the volume of foreclosure cases we see now. There weren't as many cases filed, which means there weren't many defended cases, which means that there were even fewer cases appealed. Without appeals, there's not very much case law generated.

For Illinois attorneys seeking to defend mortgage foreclosure lawsuits, it is important to remember that the IMFL's minimum pleading requirements are just the cost of entry. They are like the bouncer outside a nightclub. If you meet the standards, you get in. If you don't, you're out on the street. However, once inside, you must still follow the other rules of conduct. If you don't, you're out on the street and possibly a bit roughed up.

A foreclosure lawsuit is no different. Just because a plaintiff got in the door doesn't mean that it is entitled to remain. Regardless of what some local judges may think, if the plaintiff does not have the authority to enforce the mortgage and note against the home owner, the plaintiff has absolutely no business bringing the foreclosure action.

In light of the rampant document fraud in the mortgage lending and servicing industry, it is important to scrutinize every single document filed by the plaintiff. If you have a question about the authenticity of a document, demand to see the original. If you still have questions, depose the person who signed it.

The attitude in the trenches (at least on the plaintiff's side) seems to be: "They signed the papers; they owe someone the money." We need to be 110% sure that if a home owner is losing his home, the proper plaintiff is taking it away. If a lender cannot prove that it owns the loan by producing legitimate documents, that lender cannot enforce the loan obligation.

A foreclosure is much different than a credit card case. While both can have an effect on your client, the former can put your client out in the street. We need to take the time to educate our local judges. If they don't buy the argument, try it again in another case. Keep on pushing. Appeal where you can.

At very least, don't take any document at face value. That value may be zero.

If you live in Chicago and have a mortgage, there is a 47% chance that your home is worth less than the mortgage balance. The most recent projections indicate that the housing market won't begin to recover until 2014 at the outside earliest. Some economists are noting that we may be headed for a double-dip recession. Although some home owners may be able to weather the storm, many are going to be stuck with negative equity for much longer than the next three years.

When a home is underwater, mortgage payments can seem futile -- payments towards principal are merely nudging the property towards a break-even point; they are not building equity. If you believe the media, so-called "strategic default" is a big thing these days. Let's ignore the fact that nobody can properly define the term, and focus on concrete options available to Illinois home owners who are underwater on their mortgages.

1. Keep Paying

If your home is only marginally underwater, and you're in an area that is seeing fewer foreclosures, it may make good business sense to stay put. Home owners best served by staying put likely purchased their homes before the real estate bubble took off and did not refinance their homes during the bubble. This type of home owner will likely have stable income as well.

Obviously, this would be the best option as it avoids any negative impact on the home owner's credit. It also keeps the home owner out of bankruptcy and out of foreclosure.

2. Walk Away

Simply walking away from the property is the diametric opposite of option number 1. When the media discusses strategic default, it seems to be discussing this option. However, it sometimes lumps the other options in with this one.

The walk away is simple. Stop paying the mortgage. Move out of the property. Some people mail the keys to the bank. At some point, the bank will foreclose on the property. The way this option is described, the worst-case scenario is almost always a negative impact on the home owner's credit score.

That is not the case. Simply walking away from a mortgage can have other penalties associated with it. When a property is underwater, it is almost guaranteed that a foreclosure auction will not recover the value of the mortgage. In general, properties sell for less than their market value at a sheriff's sale. If a property's market value is significantly less than the value of the loan, a sheriff's sale will not even come close to recovering the loan's value.

So why should the person who walked away care? Isn't it the bank's problem? Yes, if you live in what is known as a "non-recourse" state, the bank is out of luck.

Illinois is a "recourse" state. This means that the bank can pursue a foreclosed home owner for what is known as a deficiency judgment. This deficiency is the difference between the amount owed on the loan and the amount obtained at the sheriff's sale. Once a bank obtains a deficiency judgment, it can put a lien on other property that you may own. It can proceed to garnish your wages. It can freeze your assets while it determines just how much of your money it can obtain to satisfy its judgment.

Suffice it to say that walking away in Illinois is not as hassle-free as it may seem.

3. Deed In Lieu of Foreclosure

The deed in lieu of foreclosure is a remedy available to Illinois home owners. The deed in lieu is created by the Illinois Mortgage Foreclosure Law. You can find the statutory language at 735 ILCS 5/15-1401. Some federal programs like HAFA also provide a deed in lieu option. Some lenders may also make this option available to home owners in states without a statutory version of the remedy.

A deed in lieu of foreclosure avoids the filing of a foreclosure lawsuit. Although the borrower may be in default, or close to defaulting, it is nothing like simply walking away from the property. The deed in lieu of foreclosure protects the home owner from the negative credit reporting associated with a foreclosure lawsuit. It also protects the owner from a potential deficiency action on the underlying loan. The deed in lieu wipes out the entire debt obligation.

The deed in lieu may not be a great option for underwater home owners. While some underwater homes may only have one mortgage, many have multiple mortgages. The presence of a second or third mortgage makes a deed in lieu of foreclosure all but unattainable.

If there is only one mortgage on the property, most lenders require that the property be listed for sale for 90 days before granting a deed in lieu. The lender will also want to see financial disclosures that demonstrate a financial hardship. If you are able to make your mortgage payments, but simply do not see the sense in paying off negative equity, you may not be eligible for a deed in lieu of foreclosure.

4. Consent Foreclosure

In a consent foreclosure, the home owner has been sued by the lender. However, instead of proceeding forward with the foreclosure lawsuit, the lender and home owner agree to settle the matter. The home owner files a stipulation of consent to foreclosure. In return, the lender takes back the property and agrees to waive the right to later pursue the home owner for a deficiency judgment.

This remedy is very similar to a deed in lieu of foreclosure. It is also created by the Illinois Mortgage Foreclosure Law. You can find the entirety of the statute section at 735 ILCS 5/15-1402. There are some key differences.

The first major difference is that a consent foreclosure causes a judgment to be entered against the home owner. This will have a more adverse credit impact than a deed in lieu. However, it is entirely possible to obtain a consent foreclosure, even with other mortgages on the property.

The second and third position lenders can object to the consent foreclosure, but if the property is significantly underwater, their position won't be much different than if the property went to sale normally. This is because there will not be any funds remaining to pay the second and third mortgages. It is important to note that the consent foreclosure only protects the home owner from liability as to the first mortgage. Any second or third mortgage may still pursue the home owner for the balance due on those loans.

If you anticipate opting for a consent foreclosure, it is best to request on as soon as you are served with a summons. If you are represented by counsel, make sure your attorney send the request as soon as possible. This way, you avoid being denied a consent foreclosure because the lender has too much money invested in the foreclosure process.

5. Bankruptcy

The U.S. Bankruptcy Code affords home owners the opportunity to surrender a property as part of a bankruptcy. Under Chapter 7 or Chapter 13, the home owner may elect to surrender the property. One also gets the benefit of discharging other consumer debts.

Chapter 13 may afford underwater home owners the opportunity to strip second and third liens off the property, paying them back as if they were repaying a credit card debt. This tactic may restore equity to an underwater property.

Before considering a Chapter 13 bankruptcy as a means of lien stripping, it is important to consult with a bankruptcy attorney in your area. Different courts allow different things, and lien stripping may not be available to you.

Conclusion

No matter how you proceed, there are many options that could be defined as "strategic default." Aside from lien stripping, the end result is always the same -- the bank ends up in possession of the property. Ignore the people that claim mortgages are a moral obligation. At the end of the day, the only true difference is that most reasonable options involve a minimization of home owner liability, while a true strategic default can result in judgments against the home owner. Those judgments have a rather lengthy shelf-life and can be collected upon in several ways.

It is likely a good idea to consult with a licensed attorney before seriously pursuing any of the above options. Know your options and the possible impact before you act.

Normally, I don't make a big deal about the development of case law in other states. I am starting to notice that the rate at which favorable rulings are reported is increasing. Part of this no doubt relates to the media and its motivations -- foreclosure news is relevant for many people. Some of it is due to bloggers who chronicle every last case.

I also think some of this is due to the fact that more people are stepping up and defending their foreclosures. When you combine the increased litigation with the media blitz, you get an environment where judges are more likely to consider the arguments of home owners. It also doesn't hurt when major foreclosure firms either admit to wrongdoing or are caught doing something wrong.

60 Minutes just recently did this story (video link) about the foreclosure crisis. I highly recommend watching. Regular readers of this blog won't be shocked, but it is some solid reporting.

Credit Slips has a good post entitled, "Servicemen and Debt: Know Your Rights." The post is a decent summary of the Servicemembers Civil Relief Act (SCRA) and its effect on the rights of those entering the military, those called to active duty, and those who are already deployed.

In addition to the SCRA, The Illinois Mortgage Foreclosure Law (IMFL) provides an additional layer of protection to service members. 735 ILCS 5/15-1501.5 provides that any service member facing foreclosure that was deployed during the previous 12 months is entitled to a 90 day stay of the foreclosure proceedings. The extra three months can be vital, especially if there is a loan modification pending.

This provision is an expansion of the SCRA's protections. The SCRA requires a similar protection, but only for 90 days after discharge from active duty. Under the SCRA, if a person is in military service, or has been discharged within the last 90 days, a court is to stay pending civil actions for no less than 90 days.

The SCRA also protects deployed service members by requiring any plaintiff seeking a default judgment to demonstrate that the defendant is not currently on active military duty. If the defendant is in the military and on active duty, the court will appoint an attorney to represent the defendant's interests.

For more information on the SCRA, you can look here.

Thirty-eight percent of mortgages are underwater. Many people may be wondering whether they are one of the homeowners below sea level. Other home owners may be facing a foreclosure lawsuit and want to know whether their homes are worth keeping.

Websites like Zillow.com are a useful resource for determining a ballpark home value. However, Zillow isn't always accurate. To get a better picture of your home's value, the best practice is to consult with a real estate agent. A real estate agent can give you a valuation of your home based on time on the market as well as comparable properties in the area.

Once you know your home's value, you can make a more informed decision about your options. As always, consulting with a licensed attorney can't hurt either.

This article describes how a homeowner in Utah managed to get his house "free and clear," the fabled brass ring of foreclosure defense.

Don't jump up and run to your nearest foreclosure defense attorney's office just yet. This case hinges on some intricate points of Utah state law. In Utah, mortgages are secured by deeds of trust. The trustee generally knows who holds title to the property. In this case, none of the named parties had any idea who had an interest in the mortgage. In fact, they even filed pleadings with the court that indicated as much.

How did everything get so mixed up? MERS held the note and mortgage as nominee for the original lender. Because MERS never records documents with county recorders, there was no paper trail indicating who held the mortgage and note, nor who had held the mortgage and note.

In the end, the home owner got his house free and clear of any mortgage. However, that person is still liable to someone who owns the note. Whether that entity is aware that it owns the note and has the wherewithal to sue him is another matter. Perhaps we will see a follow-up article one day.

There has been some significant crowing about the recent decision issued by the Supreme Judicial Court of Massachusetts. The January 7, 2011 ruling issued in U.S. Bank, N.A. v. Ibanez has been hailed as groundbreaking and a serious shot in the gut to mortgage lenders. Having read the opinion (once you click on the link, select "opinions"), I have a feeling that Friday was a slow news day.

The Ibanez ruling is significant because the highest court in the state of Massachusetts decided to enforce the rule of law. Aside from that, the ruling seems to be much ado about nothing. Read on for my analysis.

Continue reading "The Massachusetts Ruling -- What It Really Means" »

According to this Huffington Post article, a California man won $7,595 from Bank of America in a small claims action. The basis? His damages resulting from his eighteen-month trial loan modification. Dave Graham, the home owner in question, made his trial payments for eighteen months before Bank of America denied his permanent modification, then demanded that he make up the difference between the trial payments and his normal payment.

This is not an uncommon scenario, and is something that many of our clients have experienced when pursuing a loan modification on their own. It is certainly unconscionable for a bank to accept partial payments for a long period of time without verifying a person's eligibility for a permanent modification. It is even more unconscionable for a bank to do so when it has absolutely no intention of issuing the permanent loan modification.

Although small claims courts are designed to save people the costs of attorney's fees, one can still hire an attorney to take a case to small claims court. While this method won't save a house, it can get a jilted home owner a pound of flesh they wouldn't otherwise get. Given the relaxed rules of many small claims courts, this may be a way that people can get some DIY revenge on their lenders.

L. Randall Wray recently wrote an article for the Huffington Post that gives his breakdown as to why many mortgages and notes handled by MERS are no longer properly securitized debts. This is a wrap-up to the series he wrote earlier this month.

For the most part, I agree with Prof. Wray's analysis. MERS does create very serious problems for the mortgage lending industry. However, I don't think those problems will result in a large number of homes becoming foreclosure-proof. (Not his phrase, but many will infer this from his analysis.) The problem lies in proving that some of his premises are true for a specific mortgage and note.

While industry practices and common usage are persuasive, the true slam-dunk would be to demonstrate that the mortgage was assigned without properly negotiating the note, or that the note was negotiated without an assignment of the mortgage. This is difficult to prove, as we've discovered. It is possible to gin up documents after the fact. Given that many home owners do not defend their foreclosures, it is impossible to know how many homes are foreclosed upon that were supposedly "foreclosure-proof."

Moreover, even though Prof. Wray's analysis is persuasive, it still has to get past the trial-level judges. That analysis must persuade judges in each state, as well. Even then, there won't be significant case law without some well-fought and hard-won appeals. To get those appeals, there need to be people actively defending cases. Someone also has to fund the appeals process. Sometimes the client gets a settlement and walks away instead of appealing an unfortunate ruling.

The short version: To see the Professor's analysis become a reality, more people need to protect their homes and their rights by hiring an attorney and fighting.

Update: One last comment here -- even if a mortgage is voided by separation from the note, the personal obligation under the note remains. If the lender successfully sues to enforce the note, it can place a judgment lien against the home, likely guaranteeing that the home cannot be sold until the debt is repaid. Which, really, puts most people back into the situation they were in at the outset.

Just days after I wrote about Secretary Geithner's stance on supporting legal aid groups with TARP funds, the Huffington Post reports that he supports the use of TARP funds to support legal aid groups.

Apparently, it is Geithner's opinion that, while TARP didn't allow the use of funds for legal aid, he supports a bill recently introduced by Rep. Marcy Kaptur (D-Ohio) that would do just that. Even though the bill doesn't approve new funds, just a new allocation of existing TARP funds, members of the GOP are already voicing opposition. Why?

"This bill re-opens the TARP bailout fund for 'legal aid' programs, which could result in millions of taxpayer dollars being pumped into groups similar to ACORN," Boehner spokesman Michael Steel told HuffPost.

Same as it ever was . . .