In late 2008, VLW reported that legal aid lawyers were organizing to fend off foreclosures. With one in every 608 Virginia households hit with a foreclosure filing in August, there’s plenty of work for private practitioners too.
Fighting a foreclosure is an inch-by-inch, uphill battle.
Judging by reported cases, lawyers who represent homeowners have little to show for their efforts.
But the cases that show up in court don’t tell the whole story, say some advocates, who report success in using several legal theories to halt foreclosures.
These lawyers want to get out the word: a foreclosure notice is not a death sentence for that particular piece of the American dream.
It’s important for homeowners to seek help promptly, a minimum of 10 days before a scheduled foreclosure, said Richmond lawyer Henry W. McLaughlin III.
After a 30-year career in legal aid, McLaughlin opened his own firm last April, and he has stopped 95 foreclosures since then, according to the tally on his firm website.
In order to know whether he can help, he has to review the homeowner’s mortgage loan documents and all paperwork related to the foreclosure.
He is looking for possible claims under federal and state law. But filing suit is a last resort. McLaughlin and other lawyers who work foreclosure cases stress they never file suit as a stalling tactic, but only head to court when they think they have a strong case.
“I won’t take a case for delay,” said Fairfax lawyer Dena M. Roudybush, who has a full load of foreclosure cases in the Northern Virginia area. Roudybush said in an e-mail that she brings to her current practice her past experience advising national mortgage lenders and secondary market investors on compliance with mortgage banking regulations, as well as experience as general counsel for a mortgage servicing company.
“Foreclosure defense litigation hinges on some statutory or contractual violation by the investor,” she wrote. In common with McLaughlin, she pays close attention to the paperwork.
McLaughlin looks first for possible violations of the Truth in Lending Act. TILA protection covers a loan within three years, that is a refinance of a mortgage, not a business loan, where the homeowner is still in the home.
Finding a material error in mandatory TILA disclosures can get the homeowner an extended right of rescission, if the homeowner can tender the lower amount of the loan. The loan principal can be reduced under a statutory formula, which can amount to an interest-free loan, McLaughlin said.
McLaughlin is set to go to trial in Richmond U.S. District Court in December in one of his TILA cases, Larrabee v. Bank of America N.A. (VLW 010-3-270), which involves an alleged inconsistency in the loan documents. And he has several TILA cases on appeal to the 4th U.S. Circuit Court of Appeals. (See Sidebar Docket).
Next, he looks for the chance for the homeowner to demand compliance with a federal regulation that requires a lender insured by the Federal Housing Administration to hold a face-to-face meeting with the borrower before beginning foreclosure. That condition, in 24 C.F.R. § 203.604, may be a part of the contract.
McLaughlin said he has been successful in having this federal FHA claim remanded back to state court from federal courts in Richmond, Kersey v. PHH Mortgage Co. (VLW 010-3-423), as well as from federal courts in Alexandria and Norfolk.
With an FHA claim, McLaughlin says he can stop the foreclosure, remove the foreclosure costs and win a meeting with the lender.
“If the homeowner is looking at foreclosure next week, this can be a significant remedy,” he said.
McLaughlin also looks for contract claims for clients who can demonstrate they didn’t get the kind of loan modification they thought they were getting, for instance, under the federal Home Affordable Modification Program. A homeowner “may be able to sue for fraud or contract violation” if the client “has been through the loan modification process and not gotten the promised relief.”
“In some cases, the homeowner has reported to me they paid money as part of the [modification] agreement. The lender may say they didn’t get the money, but the homeowner has documentation the money was paid. Or the homeowner sends in the information for a promised loan modification, then gets a foreclosure notice. They can sue for breach of contract, he said.
McLaughlin said he also has had some success with claims that the defendant failed to send a proper 30-day cure notice, and claims challenging the validity of the appointment of the substitute trustees on deeds of trust under Virginia Code § 55-59.1. “The note could be lost or there could be an issue about the assignment,” he said.
Roudybush also works on laying out defects she sees in the foreclosure process, with the hope that the entity attempting to get the client out of the home will agree to a loan modification. Or a legitimate delay in the proceedings may give the client a chance for other solutions, short of bankruptcy.
Sometimes, it’s not the right party seeking to foreclose, she said. Looking at the actual deed of trust and documents filed, there will be no assignments in the land records.
“With all my clients, I do a full title search. On the secondary market, it doesn’t necessarily follow that if you hold the deed of trust, you also have the promissory note.”
Search the land records, “did they secure their property interest?”
There’s “a lot of sloppiness by banks and other parties involved in the process,” she said.
Roudybush said one of the biggest problems her clients face is the “perception that the homeowners pursuing these cases are deadbeats who want to live in their homes forever.” “It’s disturbing to me that anyone would accept that a homeowner would choose to go through this process,” she said in an e-mail.
Alexandria lawyer Christopher E. Brown has been challenging foreclosures on a theory that the party that is attempting to foreclose is not a “proper party” under Virginia law.
The point he tries to make is the “person who’s here before the court is not the right person.” The note itself is sold, many times over, creating layers of authority to plow through to find a proper party.
“Somebody up the line has to be the owner,” Brown said. In it’s simplest form, the argument is: “I took out my loan with Jim and Bob has shown up to sell my house,” Brown said.
But Virginia federal courts have not been receptive to what one Alexandria federal judge called a “show me the note” claim. Senior U.S. District Court Judge Claude M. Hilton said in Zambrano v. HSBC Bank USA Inc. (VLW 010-3-275), that the idea that defendants must come to court and prove their authority or “standing” to foreclose on the secured property is contrary to Virginia’s non-judicial foreclosure laws. Zambrano is just one of the foreclosure cases Brown is appealing to the 4th Circuit. (See companion article).
Even though McLaughlin’s law practice is devoted exclusively to foreclosure prevention, he refuses to cast the transaction as Snidely Whiplash throwing Little Nell out into the snow.
He likes to recall two stories from his days as a legal aid lawyer. In the first case, he won a TILA rescission for a client, but she could not tender payment after her husband died. On behalf of his client, he requested a deed in lieu of foreclosure. By return e-mail, the lender said, “Please convey our condolences to your client. We have marked the note satisfied.”
In the second case, his client was legally blind and facing foreclosure. Every time McLaughlin reviewed the paperwork with opposing counsel, who pursued review of the case up through their chain of command, they came back with, “You don’t have a case.”
But one day, something changed.
“They called and said meet me at the branch office, we’re going to deed the house back to your client. And we just delivered two bags of groceries to your client’s home.”
McLaughlin may not be getting such dramatic results nowadays, but he believes the moral of the stories holds, when he faces the people on the other side of the table. “There is a general sympathy with the homeowner….This gives me a sense of realism in trying to negotiate…. They’re doing foreclosure work because the notes are in arrears and the house is the collateral on the note.”