Legal defenses for the borrower who's fallen behind

Q: I am a couple of months behind on my mortgage and am concerned that I will soon receive a notice of foreclosure. Are there any steps I can take now? And are there any legal defenses should the lender begin the foreclosure process?

A: Up until a couple of years ago, I would tell people that the first step is to discuss your situation with your lender and see whether you can work out something such as a loan modification, spreading out the payments over a longer period of time or even a temporary curtailment of your payments.

I still think this is good advice. However, nowadays it is almost impossible to reach the lender and talk to a responsible person who will have authority to work with you. And even if you are able to talk with someone, they rarely will put the arrangement in writing. Too many American consumers have been misled by loan modification staffers -- lulled into a false sense of security -- only to later get that foreclosure notice.

There are a host of federal and state programs designed to assist you. You can explore some of the alternatives by going to the Department of Housing and Urban Development's Web site, http://hud.gov. In particular, you should review HUD's information on the federal Foreclosure Alternatives Program, which encourages lenders (and those who service mortgage loans) to pursue short sales and deeds in lieu of foreclosure.

Aside from those programs, I want to discuss the many defenses that you may have should you face foreclosure. But first, a strong caveat: Don't do this on your own. Retain a lawyer who understands real estate and has experience with foreclosures. If you cannot afford counsel, there are a number of organizations -- such as AARP -- that may be able to assist, or you can contact the local Bar Association for references to lawyers who will handle pro bono cases.

Perhaps the strongest defense is to demand that your lender -- or the lawyer bringing the foreclosure action -- show you the original promissory note that you signed. We all know that mortgages are sold and assigned to third parties. Typically, while you may have borrowed from XYZ lender, XYZ will sell your loan -- bundled with hundreds or even thousands of other loans -- to some other organization.

The technical term for this is securitization. Pools of mortgages, called "mortgage-backed securities," are sold to investors. This is extremely complex but in my opinion was one of the principal causes of the mortgage meltdown that, I hope, will soon come to an end.

In recent court cases, judges have actually thrown foreclosing parties out of court because they could not prove that they were the actual holder of the loan. It is not an excuse, judges have said, that lenders cannot find the original note because it is buried in some securitization pool by a holder that may not even be in business now. This is a new area of law, and not all courts have come to the same conclusion. Ultimately, the Supreme Court may have to decide this issue, but for the time being, this may be a valid defense for you to use.

Here are some other defenses your lawyer can use to challenge the foreclosure:

-- Active military duty. If you are on active duty, you have the right to have the foreclosure determined by a court instead of losing your home through a non-judicial sale at an auctioneer's office. The judge must postpone the process for up to nine months if you formally request that. Discuss your rights with your commander and with the judge advocate general where you are stationed.

-- Fair Debt Collection Practices Act. Typically, the lender's attorney will start the process by sending you a notice of foreclosure. That notice must contain language advising you that it is an attempt to collect a debt. If, within 30 days of receiving that letter, you question the amount claimed to be owed, the attorney is legally obligated to provide you more details as to how the amount was calculated.

-- Errors. Once you have received the verification, review it carefully. Lenders and their computers do make mistakes. Have all your payments been credited? Are the late fees consistent with the terms in your promissory note?

-- Force-placed insurance. Lenders properly require that you carry adequate homeowners insurance. In case of a fire or other damage to your house, the lender needs to know there will be insurance coverage either to repair the property or to pay down the outstanding mortgage loan. If your insurance is canceled, lenders will obtain a policy for you, and this is called "force-placed" coverage. Typically, the cost of this insurance is astronomical. Review the loan verification documents you receive from the attorney. Is there a charge for this insurance, and is it valid? If your lender has been escrowing for taxes and insurance, the lender was required to pay the annual insurance premium. Accordingly, you should not be charged for any additional insurance.

-- Escrow for taxes. We all have heard horror stories about lenders that did not pay the real estate tax, despite the fact that they were escrowing money monthly, or that paid the tax late and the borrower was charged the penalty and additional interest. Again, check to see whether this happened to you.

-- Truth in Lending Act. The lending law requires lenders to make certain disclosures to you before you sign the mortgage documents. Under certain conditions, you have the right to completely rescind the transaction. You should have received all of the documents you signed when you went to settlement. If not, ask the settlement lawyer or title company to immediately send you a complete copy of your settlement file. Review it carefully, though this is a technical law and your attorney should be consulted for advice.

These are but a few of the many legal defenses you might have in case you are served with a notice of foreclosure. Don't wait until the foreclosure sale takes place. Typically, at a non-judicial auction, when the "hammer falls" and the auctioneer says "sold to the highest bidder," it may be too late to complain.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. He cannot guarantee to answer all questions.