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Palo Alto real estate attorney Julia Wei providing commentary & insight into trends in California real estate law & lending law, mortgages & foreclosures.

Defending Against the "Foreclosure Defense" lawsuit.

February 3rd, 2009 · 13 Comments · Uncategorized

There's a new litigation trend we've been seeing in California – the rise of the "foreclosure defense" lawsuits.

Basically these lawsuits allege that the lender no longer owns the original promissory note and therefore cannot foreclose on the borrower's property.  Of course, to keep things interesting, the lawsuit alleges all manner of violations of any lending statute they can think of from TILA to RESPA to HOEPA and the Fair Debt Collection laws.

Additionally, the mortgage broker, the appraiser and even the Realtor are roped in as defendants.

In short these cookie-cutter lawsuits are  sham lawsuits intended to extort a few more months of free rent.  The very nature of these lawsuits is offensive to law-abiding citizens who pay their bills. 

Instead, these plaintiff-homeowners in the "foreclosure defense" lawsuits have been misled by foreclosure defense gurus to believe they should be entitled to own the house "free and clear" despite not having paid off their mortgage loan.

This smacks of the same rhetoric the Mortgage Elimination folks used a few years back.  Of course, the perpetrators of the Dorean Group mortgage elimination scheme were both sentenced to over twenty years imprisonment.

The law does not support the theories espoused by these new foreclosure defense gurus and early law and motions efforts are key in discouraging these lawsuits.

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13 Comments so far ↓

  • sbd

    Your post does not represent the true facts regarding the legal defense described. To begin with, the law gives the owner and holder of the NOTE the right to foreclose on the Deed of Trust. If the loan was SOLD by the Lender to investors as pooled securities, then they do not own the NOTE and have already been paid for the money they lent.

    The real party who owns the NOTE is the Trustee of the Mortgaged Backed Security as Trustee for the investors. A lot of times, these mortgages were insured against default and the investors get paid back by that insurance. So now two parties have been paid on the NOTE and you think they should get the house too?? Who decided which bank gets this windfall, the bank? Or should it be the court that decided when neither party has the right to unjust enrichment.

    The point is that these are real issues and not frivolous. The goal here is not to get a free house, but to get the real party who can negotiate a loan on terms that the home owner can afford.

    Your link to the Dorean case is a total false comparison. That case dealt with the fraudulent recordings to remove the mortgages and create new mortgages to split the ill gotten funds.

    Here’s a perfect case of an 83 year old lady for you to read that is just outrageous.

    http://www.msfraud.org/law/lounge/Maxwell.htm

    Fairbanks claims to be the holder of a Note dated February 12, 1991 given by the Debtor and her granddaughter, Maritza Ranger (“Ranger”), to Aetna Finance Company d/b/a ITT Financial Services (“ITT”), in the original principal amount of $149,150.50, secured by a mortgage on the Debtor’s property located at 49 Stockton Street, Dorchester, Massachusetts. Fairbanks, however, cannot produce the Note and, from the existing record, discussed below, it is unclear whether it ever possessed the Note or whether it has lost, misplaced or misfiled the Note.

    Brando testified at his deposition that Fairbanks paid $129,344 for the Debtor’s loan. He admitted, however, that Fairbanks at one point claimed to have paid $175,955 for the Debtor’s loan. Indicating that the correct payment amount was $129,344, Brando added that Fairbanks paid 86.2 cents on the dollar for the loan. Later in his deposition, Brando indicated that Fairbanks has no documents in its possession to substantiate payment of that amount, and Fairbanks cannot identify any account, fund or other source of monies from which that amount was paid. Moreover, Fairbanks, through Brando, admitted that it is a debt collector under the FDCPA. It also represented itself as such in correspondence with the Debtor.

    “Nevertheless, Fairbanks, in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air. There is no other explanation for the wildly divergent figures it concocted in correspondence with the Debtor and her agents and in pleadings and documents filed with the bankruptcy court. ”

    I also suggest you read the December issue of Trial Magazine with a story titled “Homeowners bank on new ways to fight foreclosures”.

    http://www.consumerwarningnetwork.com/2008/12/12/produce-the-note-rallying-cry-to-fight-foreclosure/

    Roth said confusion about the note holder is one reason lawyers should counsel their clients to avoid loan workouts or other negotiations offered by their banks or mortgage companies.

    “Why should we renegotiate unless we know that we are negotiating with the actual holder of the note?” he said. “In fact, I think lawyers are committing malpractice if they are negotiating with an entity that is not the original holder in due course in possession of the instrument.”

  • Mahndisa

    03 07 09

    I wish you would explain why the foreclosure defenses are shams. I have seen segments in the media saying that the “Show me the NOTE” movement has picked up steam and has been effective in court due to the nature of mortgage backed securitization, it is quite difficult to figure out who truly owns the debt.

    I understand your ire in saying that some people are abusing the system to get free rent. However, there are other cases where the defense is legitimate.

    Lending institutions need to keep better records so that loopholes like ‘show me the note’ will become moot points.

    I wonder what the deluge of foreclosures and creditor lawsuits will do to the legal system, particularly in the Central Valley where I am a resident.

  • Matt

    Are you serious, you believe people going to court and trying to keep their homes are somehow behaving improper or being dishonest. While you basically describe mortgage lenders as the victim in this process. I don’t know if you realize this many people have lost their equity and jobs over the past three years. Troubled home owners taking these lenders to court because they will not offer a reasonable loan modification does not make them dishonest. You say people are just looking for a few more months of free rent, I would argue that a majority of people just want to save their home. You have a very short sighted and insensitive view of what is happening to people all around this country, but at least the banks and lenders know they have an ally in you.

  • Armando

    My wife lost her job a couple of years ago and was unable to pay her mortgage, and like many others lost her home to foreclosure. At the time she had a first and a second, now the second is coming after her with a lawsuit and the threat of garnishing her pay(small paycheck) check. What can she do to keep this from happening. It seem that the people that got us into this mess are now the one’s behind all this! What can she do?? Help!!

  • matt

    you are a fool!!!!!!!!!

  • Carlos

    Wow! If she worked for my law firm I would have taken this Blog down immediately and fired her. The case she referes to deals with fraud, conspiracy and disinterested parties. A home owner asking a loan servicer to “Produce the Note”, is a legal and prudent request that is granted and requires performance under statutory law. It is not only a standard process of litigation but, required to prove standing. I would bring a malpractice suit against my attorney if he didn’t ask for it and I would be a “ProSeFool” if I didn’t. I’m not a lawyer and I know that. What an idiot.
    Judging by the age of this initial thread, I’ll bet she doesn’t work there anymore.
    Carlos said it.

  • Julia M. Wei, Esq.

    With regard to the DirtLaw Blog, I am my own boss and I still work for me. With regard to the “Produce The Note” defense, non-judicial foreclosures in California do not require the original Note in order to conduct the sale. Additionally, a lender can bond around a lost note and still conduct the sale. The real is issue is not the Note, but actually the Substitution of Trustee and if the Trustee has the power to conduct the sale. If the Substitution has not been recorded, it is a defect easily remedied.

  • Rick V.

    Wei, oh Wei, are you conflating two very different issues Julia?

    In the case of the homeowner putting up frivolous and baseless defenses against a legitimate foreclosure is one thing. If that is the case, then yes, I agree with you.

    But, for instance, in the case I am defending and of the sort which has swamped the dockets of the nations courts and overwhelmed law enforcement, there are very many brokers who have committed the sale-leaseback-foreclosure- rescue- equity- skimming scam. (now there’s a mouthful)

    What happens so often as to have become a nationally- recognized pattern is that a broker or foreclosure rescue office makes contact with someone a couple months behind in their mortgage. Oftentimes, the victim is old, uses English as a second language, not the sharpest tool in the shed or is otherwise vulnerable.

    The Scammers promise to rescue their homes, and lead the victim through a bewildering stack of paper, misrepresenting what the documents say, or even not even showing the documents to them and simply forging their signatures.

    The victim, instead of refinancing the home and rescuing the property, end up getting all the equity stolen from them by the scammers and the title goes to the scammers. The victims are now renters in their own homes, often at rates set to ensure their near-term default.

    They are then often evicted in summary county court rental eviction actions, and the scammers use the title of the property to take out additional loans, using the property as security. Florida has an anti-deficiency statute so we see a lot of this here. The scammers take out a mortgage loan home with no intention of paying it back. They cease making payments and the lender takes the home as satisfaction, but the scammers keep the amount of the loan and cannot be touched for a shortfall in price.

    This Scam involves many of the Federal laws you have mentioned, as well as state Unfair and Deceptive Practices Act provisions. It also very often entails wire fraud and mail fraud (up tot 30 years penalty!) as well as HUD-1 Settlement Statement / Bank fraud.

    There is a big difference between the simple deadbeat and the victim of such frauds. I hope you can revisit this issue and clarify the distinction.

    Best regards,

  • Julia M. Wei, Esq.

    Rick – thanks for writing. What you describe is a genuine fraud case, and we have fought vigorously for homeowner-plaintiffs who have been the victims of such predators. California too has strict foreclosure consultant laws to address these situations.

    That type of case is a far cry from the tide of opportunistic lawsuits we have seen where homeowners would have been better served paying their mortgages rather than hiring a mill who files a complaint without regard to the validity of plaintiff’s claims.

  • Rodolfo de Hoyos

    Your statement about Produce The Note” defense, non-judicial foreclosures in California do not require the original Note in order to conduct the sale. Here By Michael Doan on May 2, 2009 in Foreclosure Defense, Recently, many California Courts have been dismissing lawsuits filed to stop non-judicial foreclosures, ruling that the non-judicial foreclosure statutes occupy the field and are exclusive as long as they are complied with. Thus, in the case where a notice of default is recorded and a lawsuit then filed in response to stop the foreclosure since the foreclosing party does not possess the underlying note, all too often the Court will simply dismiss the case and claim “2924 has no requirement to produce the note.”

    Thus, these Courts view the statutes that regulate non-judicial foreclosures as all inclusive of all the requirements and remedies in foreclosure proceedings. Indeed, California Civil Code sections 2924 through 2924k provide a comprehensive framework for the regulation of a nonjudicial foreclosure sale pursuant to a power of sale contained in a deed of trust. This comprehensive statutory scheme has three purposes: ‘“(1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.” [Citations.]’ [Citation.]” (Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238, 1249–1250 [26 Cal. Rptr. 3d 413].)

    Notwithstanding, the foreclosure statutes are not exclusive. If someone commits murder during an auction taking place under Civil Code 2924, that does not automatically mean they are immune from criminal and civil liability. Perhaps this is where some of these courts are “missing the boat.”

    For example, in Alliance Mortgage Co. v. Rothwell (1995) 10 Cal. 4th 1226, 1231 [44 Cal. Rptr. 2d 352, 900 P.2d 601], the California Supreme Court concluded that a lender who obtained the property with a full credit bid at a foreclosure sale was not precluded from suing a third party who had fraudulently induced it to make the loan. The court concluded that “ ‘the antideficiency laws were not intended to immunize wrongdoers from the consequences of their fraudulent acts’ ” and that, if the court applies a proper measure of damages, “ ‘fraud suits do not frustrate the antideficiency policies because there should be no double recovery for the beneficiary.’ ” (Id. at p. 1238.)

    Likewise, in South Bay Building Enterprises, Inc. v. Riviera Lend-Lease, Inc. [*1071] (1999) 72 Cal.App.4th 1111, 1121 [85 Cal. Rptr. 2d 647], the court held that a junior lienor retains the right to recover damages from the trustee and the beneficiary of the foreclosing lien if there have been material irregularities in the conduct of the foreclosure sale. (See also Melendrez v. D & I Investment, Inc., supra, 127 Cal.App.4th at pp. 1257–1258; Lo v. Jensen (2001) 88 Cal.App.4th 1093, 1095 [106 Cal. Rptr. 2d 443] [a trustee's sale tainted by fraud may be set aside].)

    In looking past the comprehensive statutory framework, these other Courts also considered the policies advanced by the statutory scheme, and whether those policies would be frustrated by other laws. Recently, in the case of California Golf, L.L.C. v. Cooper, 163 Cal. App. 4th 1053, 78 Cal. Rptr. 3d 153, 2008 Cal. App. LEXIS 850 (Cal. App. 2d Dist. 2008), the Appellate Court held that the remedies of 2924h were not exclusive. Of greater importance is that the Appellate Court reversed the lower court and specifically held that provisions in UCC Article 3 were allowed in the foreclosure context:

    Considering the policy interests advanced by the statutory scheme governing nonjudicial foreclosure sales, and the policy interests advanced by Commercial Code section 3312, it is clear that allowing a remedy under the latter does not undermine the former. Indeed, the two remedies are complementary and advance the same goals. The first two goals of the nonjudicial foreclosure statutes: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor and (2) to protect the debtor/trustor from a wrongful loss of the property, are not impacted by the decision that we reach. This case most certainly, however, involves the third policy interest: to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.

    This is very significant since it provides further support to lawsuits brought against foreclosing parties lacking the ability to enforce the underlying note, since those laws also arise under Article 3. Under California Commercial Code 3301, a note may only be enforced if one has actual possession of the note as a holder, or has possession of the note not as a non-holder but with holder rights.

    Just like in California Golf, enforcing 3301 operates to protect the debtor/trustor from a wrongful loss of the property. To the extent that a foreclosing party might argue that such lawsuits disrupt a quick, inexpensive, and efficient remedy against a defaulting debtor/trustor, the response is that “since there is no enforceable obligation, the foreclosing entity is not a party/creditor/beneficiary entitled to a quick, inexpensive, and efficient remedy,” but simply a declarant that recorded false documents.

    This is primarily because being entitled to foreclose non-judicially under 2924 can only take place “after a breach of the obligation for which that mortgage or transfer is a security.” Thus, 2924 by its own terms, looks outside of the statute to the actual obligation to see if there was a breach, and if the note is unenforceable under Article 3, there can simply be no breach. End of story.

    Accordingly, if there is no possession of the note or possession was not obtained until after the notice of sale was recorded, it is impossible to trigger 2924, and simple compliance with the notice requirements in 2924 does not suddenly bless the felony of grand theft of the unknown foreclosing entity. To hold otherwise would create absurd results since it would allow any person or company the right to take another persons’ home by simply recording a false notice of default and notice of sale.

    Indeed, such absurdity would allow you to foreclose on your own home again to get it back should you simply record the same false documents. Thus it is obvious that these courts improperly assume the allegations contained in the notice of default and notice of sale are truthful. Perhaps these courts simply cannot or choose not to believe such frauds are taking place due to the magnitude and volume of foreclosures in this Country at this time. One can only image the chaos that would ensue in America if the truth is known that millions of foreclosures took place unlawfully and millions more are now on hold as a result of not having the ability to enforce the underlying obligation pursuant to Article 3.

    So if you are in litigation to stop a foreclosure, you can probably expect the Court will want to immediately dismiss your case. These Courts just cannot understand how the law would allow someone to stay in a home without paying. Notwithstanding, laws cannot be broken, and Courts are not allowed to join with the foreclosing parties in breaking laws simply because “not paying doesn’t seem right.”

    Accordingly, at least for appeal purposes, be sure to argue that 2924 was never triggered since there was never any “breach of the obligation” and that Appellate Courts throughout California have routinely held that other laws do in fact apply in the non-judicial foreclosure process since the policies advanced by the statutory non-judicial foreclosure scheme are not frustrated by these other laws.

    We do have right to private action and should challenge the holder in due course party to the transaction.

    Rodolfo de Hoyos

  • Rodolfo de Hoyos

    Home Loan Protection Act gives clarity to a homeowners protections.

  • Catnerine Bryan

    Pro-bank attorneys Julia M. Wei would like to promote the fairy tale that loan consumer’s are are powerless and can have no recourse or rights against commercial predatory and deceptive lending, and label all foreclosure defense as a hopeless scams perpetuated by deadbeats trying to escape debt.
    This is simply untrue and many judges across the country (even a few local San Diego Judges) are waking up to the fact that major financial institutions, not American Property Owners, created the housing crises, when they created billions in profits by abandoning all previous lending standards and instead initiated “a warehouse lending scheme” where loans were packaged and sold downstream into securities, basically financial institutions were no longer interested in selling a sound ethical loan product that benefited the American Consumer, preferring to roll huge
    multi-million dollar lines of credit requiring massive numbers of loans to be sold. This Commercial Moral Hazard created the housing crises for profit, and resulted in massive commercial sales of unsustainable and predatory loans replacing the ethical loan product that kept our American Economy sound for hundreds of years. Until commercial predatory lending practices are routinely actions by our courts and not endorsed they will remain profitable for financial institutions, and attorneys like Pro-bank attorneys Julia M. Wei make a living at the expense of Middle America.
    Millions of homeowners across the country loosing their homes to unfair foreclosures are not scam artists Julia many are victims of smooth warehouse lending solicitors who persuaded them into signing unconscionable loan contracts without reading the fine print.
    YES STATISTICS SHOW THAT MANY OF THESE HOMEOWNER VICTIMS ARE FURTHER VICTIMIZED BY FORECLOSURE RELIEF SCAMS THAT TAKE THE LAST OF THEIR RESOURCES.
    nevertheless; to label all consumer rights against commercial predatory and deceptive lending practices as ” a foreclosure defense scam” is simply a bank attorney trick used to distract our local judiciary from a careful examination of homeowners claims in each foreclosure defense case, that is constitutionally required under the due process clauses of the 5th and 14 amendment of the U.S. Constitution.
    Wake up Julia your financial industry clients have destroyed the soundness
    of middle America’s Economy and you are proudly feeding on our downfall.

  • Helen

    OK, Julia – and all the rest of you who know the law … tell me …
    I am a California homeowner who has been fighting for the past 4 years to keep my home. We are still in it, looking for a litigating attorney due to the convoluted situation created by the lender.

    My home was purchased in 2006 with 2 loans (neither one being a 2nd), but we only had one note. My home has been sold twice by the lender. The first sale was forced to rescind because it was sold illegally outside of the date on the default notice. At the time of the first sale, I was supposedly be going through modification. As soon as that sale was rescinded, the lender immediately filed for re-sale, again selling outside the date. However, I do have proof of robo-signing substitution of trustees far beyond the sale date, and other evidence of fraud. The last sale was Sept. 4, 2008. I retained an attorney to litigate against that sale. The lender then decided to offer a 2nd loan modification under HAMP. We successfully went through the trial period, even though the amount was $100 more than our original note … we were jerked around, feeling as though we were being set up to fail. The permanent loan was offered and it was even more than the trial period. We then truly believed we were being set up to fail so we declined the permanent offer and asked the lender to re-negotiate the permanent offer; the lender declined and decided to put the house up for sale a 3rd time. We didn’t understand how the lender could foreclose a 3rd time if they had already foreclosed back in 2008 – and everything on public record at the County Recorder’s office is in their name. In 2008, the lender also filed an IRS form – “Acquisition and/or Abandonment of Real Property”, which means it is on record with the IRS that they own the property. Lo and behold, we find out at the assessor’s office that since the 2008 sale date, the assessor’s office shows us still on record as the homeowners – with no sale and no other transfer of property action since our original purchase date. We are unsure, but suspect this to be that california law states that an assessment is to be done when a property changes hands. The property’s value has declined to about $195,000.00. The lender is still listing the property under $411,000.00. I agree with one of the above-mentioned remarks, with regard to the lender having already collected insurance on our 2nd defaulted loan – and probably sold our 1st loan – as there is no trace of that and we don’t know what happened to it. We believe our lender is trying to get more off of the property, instead of working with us. We understand that lenders are not required to do loan modifications, but we also know that fraud and deception are illegal. We believe the lender is in violation of a number of other California real estate and/or foreclosure statutes.

    I understand the controversy surrounding 2924, but we believe our lender is in violation of a number of other California and fedederal real estate and/or foreclosure statutes.

    We are so very dumbfounded as to how the lender can change everything on record at the County Recorder’s office, not change the assessor’s office, and get away with a 3rd foreclosure sale date – set for this September 27, 2012??????

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