Better Options for Underwater Homeowners

While Ohio’s economy has begun its recovery the Realty Trac in January reported that over 25% of Northeast Ohio homeowners remain underwater, owing lenders more than their home is worth. Statewide the percentage is slightly lower but enough to keep Ohio among the top ten states in the U.S. for underwater and delinquent mortgages.

Historically, home mortgage borrowers, especially those who had fallen behind on their home mortgage or who had marginal credit scores had few good options and there was little lawyers could do help clients in such situations. One of the positive outcomes of the aftermath of the great recession is that there now exist a variety of tools to assist mortgage borrowers who are delinquent on their mortgage or who owe much more than the value of their property.

As we enter 2015 developing case law regarding state court foreclosure and federal bankruptcy law coupled with strong new federal regulations that govern mortgage loan servicers gives lawyers representing delinquent or underwater homeowners a variety of useful tools to create positive outcomes for such clients.

All of these legal tools can put such borrowers in position to take advantage of greatly improved workout mechanisms like loan modifications and debtor in possession plans through a Chapter 13 bankruptcy. Mortgage lenders have increasingly realized one important economic fact, that the “net present value” of a loan modification with a payment that is affordable to the homeowner and where the principal balance is reduced to an amount that is more closely reconciled to the value of the collateral home (therefore creating an economic incentive for the homeowner to stay current on payments) is often higher than the net present value of a liquidation through foreclosure and sheriff’s sale.

This is particularly true because Ohio is one of 14 States in the country where foreclosures are conducted judicially. This means that Ohio homeowners are fortunate to have the opportunity to avail themselves of the strong due process proceedings of a common pleas court lawsuit before their home or rental property can be taken to satisfy a mortgage delinquency. The time it takes a mortgage loan servicer to file, serve and prosecute a well defended case can often provide a homeowner facing foreclosure with enough breathing room to reorganize their finances or to take advantage of federally subsidized and proprietary loan modification solutions that have, since 2008 become much more available to homeowners.

Fellow litigators who have not defended homeowners in foreclosure are often surprised to hear that there are viable defenses to a mortgage foreclosure lawsuit. Such defenses include:

-Defenses to reformation of mortgage claims due to sloppy loan origination practices in the run up to the 2008 mortgage meltdown.

-Issues related to the standing of the plaintiff actually conducting the foreclosure.

-Failure to properly accelerate mortgage notes.

-Failure to comply with HUD or VA regulations governing the acceleration and foreclosure of government insured mortgages.

Successfully arguing such issues will not only potentially slow or stop the foreclosure process, but put additional pressure on the lender to arrive at a negotiated outcome more favorable to the homeowner. While the Ohio Supreme Court has severely limited the ability of homeowners to attack foreclosure judgments after they are entered, there is strong precedent emerging for borrowers who answer and defend within the 28 day answer period.

Another lesson learned from the 2008 financial melt down is that mortgage loan servicers often fail to meet their duties to homeowners causing or exacerbating mortgage delinquency problems. In 2012 the National Mortgage Settlement, negotiated between State Attorneys General, The U.S. Justice Department and most of the major mortgage loan servicers identified the problem and set out standards of conduct for such servicers. In 2014, the Consumer Finance Protection Bureau issued a new scheme of regulations under the Federal Truth in Lending Act (TILA) and the Real Estate Settlement Protection Act (RESPA) that codified conduct standards for such servicers and created a private right of action for borrowers against mortgage loan servicers who fail to meet those standards. Now borrowers in dispute with their mortgage lender can bring an action in Federal Court seeking statutory and actual damages and shifting attorneys fees when a mortgage lender fails to meet those standards.

Many of the actions prohibited by RESPA regulation X involve conduct by lender-plaintiffs in state court foreclosure actions. Borrowers with counsel in the state court proceedings who are knowledgeable about both state court defenses and potential federal claims greatly increase the likelihood of a positive litigated or negotiated outcome.

Finally, the last few years have spurred a great deal of litigation in Federal Bankruptcy Court regarding home mortgage loans. The opportunity to bring a mortgage loan current over a 36 to 60 month chapter 13 plan has always been available, but emerging case law surrounding the ability to cram mortgage loans down to the value of the collateral in certain circumstances offers additional potential leverage for mortgage loan borrowers who seek the protection of Bankruptcy Court.

The bottom line is that in 2015 there are many more options for underwater or delinquent mortgage loan borrowers than ever before. Assisting such homeowners in rationalizing their mortgage obligation to the value of their home is not only good for the client, but the community as a whole because keeping our community’s housing stock in the hands of individual homeowners who have the financial wherewithal to pay their mortgage and taxes and keep their property in good condition leads to strong neighborhoods and the potential for increased property values that will take Ohio out of the ignominious position of being among leading states for underwater and delinquent mortgages.

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