Consumer Alert: "Foreclosure Defense" Companies are Worthless, or Worse

Recently, several state attorneys general have begun indicting foreclosure defense firms for fraudulent or unfair business practices. Having now worked in a variety of foreclosure cases that had previously involved so-called "foreclosure defense" companies, I can say that at best, these companies provide almost no value whatsoever.

Generally speaking, the firms charge around $3,000 for what amounts to processing a few documents and asking nicely for a modification at the same phone numbers that homeowners themselves can call. The basic procedure is this: the FD firm asks the homeowner for their mortgage documents plus a "hardship letter". Next, the FD firm uses this information provided by the homeowner to send letters and make phone calls to the lender or servicer trying to get approval for a gratuitous modification. 

The FD firm has no legal power to stop foreclosure or do anything beyond asking nicely for a modification. Therefore, what I am seeing most commonly are homeowners who are astounded to discover that the servicer has filed a foreclosure complaint against them even after they have paid thousands of dollars to the FD firm which is supposedly "on the case." 

There are only two ways to stop a foreclosure suit:

First, you can litigate as a defendant in the foreclosure case, raising affirmative defenses which attack the mortgage and raise counter-claims.  This is a defensive strategy, and is difficult due to the large number of state court judges. Your assigned judge may not have had occasion to understand the validity of various issues related to mortgages.

Second, you can file bankruptcy, which immediately stops the foreclosure case, and then file a complaint in the bankruptcy case attacking the mortgage for its various failures and for damages for bad conduct on the part of the servicer or loan originator. This is an offensive strategy, and because of the way that servicers work, gets the fastest attention from an intelligent human being than any other strategy.

New Obama "HAMP" Plan Also Fails

According to this Reuters story:

Estimates of loans moving through the Home Affordable Refinance Program, using Fannie and Freddie, have also fallen short.

"While generally accepted estimates were that around 1.5 to 2 million borrowers might avail themselves of this program, with many more potentially eligible, to date only about 13,000 loans have been completed according to press reports," Jay Brinkmann, MBA's chief economist, said in a statement.

Though the loans created under this program should increase, volume is unlikely to come near forecasts, he said.

In my experience in my practice, the HAMP seeks to accomplish fixed lower monthly payments through what I would characterize as "creative financing" techniques, such as extending the loan term to 40 years. The lenders actually can increase the principal balance owed under HAMP, by including their legal costs, arrearages, penalties and fees. 

One of my cases owes $266,000 on a house that formally appraised for $140,000. The HAMP offer would put my client into a 40-year loan for almost $290,000 at a low interest rate, and offering a lower monthly payment. For example, this couple would be paying $1,450 per month for their $140,000 home, for forty years. This couple, who are at retirement age, have no ability to increase their income and the $1,450 payment will greatly tax their anticipated social security income, if it is even feasible. 

The HAMP provides a windfall for the lender. All the loss is pushed to the homeowner. The lender agrees to take a lower interest rate, but earns interest for a longer period. In reality, what will happen is that this couple will pass away or default again long before they've re-established equity in the home. The lender will get the property back anyway. It is unclear how HAMP helps the situation except by moving the problem a few years down the road.

Sadly, these clients would be best off to declare bankruptcy and surrender the homes to the lenders, and then rent. But they love their homes and don't want to move. It is a difficult situation for an attorney who cares.

The Answer

The homeowner in scenario 2 has a better chance for a positive resolution.  In scenario 1, the homeowner, on a fixed income that barely meets non-mortgage expenses, has nothing to negotiate with. She cannot pay anything on the mortgage. The homeowner in scenario 2 at least has some things to raise in an answer (the lost note and bad property description), even if the lender is attempting to fix these problems in the complaint.

Examples of Foreclosure Scenarios

It is important to evaluate from the beginning the strength of your foreclosure options. Let's look at two examples, based on real cases I've worked on.

Scenario 1 - Poor Defensive Options. In this scenario, the homeowner has a first mortgage of $150,000, and a second mortgage of $30,000. The first has a fixed rate of 6.5%, and the second has an adjustable rate at 5.25%. This homeowner is in pre-foreclosure (that is, she hasn't stopped paying yet and no complaint has been filed). Her monthly mortgage payments including PMI are $1,100. She and her husband are both on fixed-income disability, and according to the financial paperwork she completed for me, cannot even meet their fixed expenses exclusive of the mortgage. That is, she can afford to pay $0 toward her mortgage. The home, according to Zillow, is worth $180,000 -- the same as the total of the two mortgages. Furthermore, she owes $40,000 in credit card debt (I don't make this stuff up, folks). Neither mortgage company filed their documents in public record. The homeowner's copy of the note and mortgage are unsigned.

Scenario 2 - Good Defensive Options.  My second homeowner refinanced in 2006 into a two-year interest-only balloon mortgage of $280,000.  In 2008, she entered into a modification with the mortgage company for a 30-year ARM. In February 2008, the ARM reset to 8% and she stopped paying. According to Zillow, her property is worth $180,000. She in in foreclosure (the complaint has been filed). The (new) mortgage company has lost her note and the property description was wrong - both issues are addressed in the complaint.

Analysis.  Check back for the analysis!

Foreclosure Defense - The Basics

The vast number of foreclosures filed these days works against most borrowers.  Between 2005 and 2008, historical records were set by mortgage companies in making "creative" loans to financially unsophisticated borrowers. Certain types of loans, such as interest-only short-term balloon mortgages, are considered to be extremely risky, and had previously only been made to very sophisticated borrowers such as experienced developers with substantial assets providing additional security. The reasons for this are controversial and likely to be debated for some time to come. The bottom line is, a similarly large number of these mortgages are now in default or foreclosure.

This is a serious problem for most borrowers, because it is almost impossible to get the attention of a person who works for the lender who can make a sensible decision about their account. The foreclosure train speeds down the tracks, apparently without an engineer to pull the brakes. What I mean by that is, the lenders are forced because of sheer volume to foreclose, whether a foreclosure makes business sense or not. This harms both the borrower, who gets the sharp end of the financial disaster, as well as the lender, whose pure financial investment has turned into a litigation and real estate nightmare.

Therefore, the primary objective of a foreclosure defense strategy is to get the attention of a person with decision-making authority with the lender, so that a sensible financial decision can be made regarding the borrower's circumstances (and the related circumstances of the collateral property).

Next: Examples of Foreclosure Situations