One of the laws that give homeowners the most protection against mortgage lending abuses is the Truth in Lending Act (TILA). This act is designed to provide borrowers with adequate disclosures and to force lenders to make accurate disclosures of the cost of borrowing money. In many cases, if a mortgage company sells a loan to an investor or other lender, the new loan hold can still be held liable for any violations of the Act.

Mortgage servicing companies, however, operate in their own legal world far outside the bounds of morals, ethics, or prohibitions against evil, predatory actions. As many homeowners have discovered once they are pushed into foreclosure, they may have few remedies against mortgage servicing abuse. Another loophole in lending laws that servicers take advantage of is that TILA may not even apply to them.

While claims under the Truth in Lending Act can be powerful defenses to foreclosure and force banks to rescind loans completely, servicers are not treated as assignees of mortgage loans under the terms of the law. Unless the mortgage servicing company is also assigned ownership of the loan itself, the Act does not apply to it, and homeowners can not use violations of the law as defenses in a foreclosure case.

Even in some cases where the mortgage servicer does acquire the loan, it may not be treated as the assignee under the conditions of TILA. If the company acquires the mortgage solely for administrative purposes and convenience in the course of servicing the loan, it does not count as assignee. The only action the company has to take is to identify the actual owner if the borrowers request in writing.

Two cases may indicate that the servicing company does count as the assignee of the mortgage, despite its insistence that it does not. The first is if the company takes an interest in the loan beyond convenience of administration. The second case is if the company represents itself to the homeowners as the actual owner of the mortgage. In either case, the Truth in Lending Act may apply.

One final instance that homeowners may wish to research when defending foreclosure against a servicer is if the loan balance was misrepresented. In this case, there may be a violation of the TILA provision that requires properly disclosing account balances and other variable rate adjustments. When the servicer improperly charges servicing-related fees to a borrower's account, there may be a violation of TILA.

Unfortunately, homeowners may be best served by suing the owner of the loan directly when trying to stop foreclosure, if there are significant TILA violations. The servicing company may be joined to the lawsuit, but just going after the servicer based on TILA violations may result in the homeowners' claims being tossed out due to the inapplicability of the law itself. While there may be violations, the servicer is immune from liability.

Without question, one of the enablers in many fraudulent mortgage lending schemes has been a crooked appraiser willing to give a property any value that the Realtor, mortgage broker, or lender wanted. The real estate bubble could not have been inflated to such a high level without the complicity of many appraisers who threw all conservatism out the window and began giving properties ridiculous values in order to help secure loans.

Now, with the housing market collapsing all around us, these appraisers have had to go back to valuing homes at more reasonable levels. However, this leaves many homeowners out in the cold, having received inflated appraisals just a few years ago and now finding out their homes were never worth that amount. What recourse, though, do these borrowers have, especially when they fall into foreclosure ?

The degree of appraisal inflation and fraud has been found to be astronomical in too many cases already. Homeowners have discovered that their home's value was inflated by up to 1,000% of its non-bubble price. The typical mortgage insured by the Federal Housing Administration (FHA) is inflated by 30-50% in order to raise prices of property on first-time home buyers and low income borrowers.

So clearly, there is a problem with a large number of appraisals, but homeowners may have trouble holding the individual appraiser or his company liable for the inflated value. However, there are a number of different claims that can be brought against an appraiser that blatantly misrepresented the actual fair market value of a home, especially if the borrowers relied on that appraisal in their decision to buy or refinance.

The most obvious claim borrowers may be able to bring against an appraiser is fraud due to the misrepresentation of the home's value. While valuing a home is sometimes just as much art as science, obviously using inappropriate comparable sales or making unreasonable adjustments to justify a higher value can be a clear case of fraud.

The only problem with this claim that homeowners may find is that the conditions may be hard to meet. For example, the borrowers will need to show all nine elements are present for a fraud claim to be made. Unfortunately, this may be easier said than done, and homeowners may want to contact an attorney to discuss the potential of a fraud case in more depth. These nine elements are the following:

• representation of an existing fact
• the fact is material
• the representation of the fact is false
• the speaker knows it is false
• the speaker intends the listener acts on the knowledge
• the listener is ignorant of the falsity
• the listener relies on the truth of the fact
• the listener has a right to rely on it
• damages are suffered by the listener

Far more promising as a claim against appraisers is state Unfair and Deceptive Acts and Practices (UDAP) statutes. This claim is also somewhat easier to make. The reliance on the misrepresentation does not have to be show, and some of the other conditions are also loosened. Homeowners should contact a lawyer or do some research on their state's UDAP laws, however, to find out all of the relevant information.

There are also a number of other claims that can be made against an appraiser, either in or out of foreclosure. Depending on the circumstances of the case, some of these include violations of state licensing laws, civil conspiracy, fraudulent concealment, and civil RICO claims. Again, it may be in the homeowners' best interests to speak with legal counsel or research these issues in depth before making a claim.

Far too many homeowners were given the most expensive mortgages they qualified for and their home values were inflated to justify the large loans. Appraisers played a role in these transactions, and many of the most corrupt may have engaged in acts that carry significant legal liability. Especially in cases where a lender pushes homeowners into foreclosure, doing some research on these issues and holding the appraiser accountable may be called for.

One of the reasons that lenders do not like when homeowners file for bankruptcy to stop foreclosure is that the automatic stay prohibits the bank from moving forward with the foreclosure process. The bank may have to give up some of the eventual profits of selling the home at auction and reselling it later if the borrowers are able to get back on track through the bankruptcy process.

In retaliation for the filing of bankruptcy by a borrower, banks and their lawyers have read ambiguous contract clauses to allow the imposition of ridiculous junk fees on accounts. The fee most likely to be junk is when lenders charge monitoring fees to a mortgage when homeowners file for protection, even if they file a Chapter 7 which does not actually effect the lender's lien on the property.

Of course, these fees are not even adequately disclosed to borrowers as they are charged. Monitoring fees once a homeowner enters bankruptcy may be assessed on an escrow account or taken from the suspense account. A suspense account is a tactic used by banks to hold payments from borrowers but not credit these payments to the account, and is often used during foreclosure to take payments but technically refuse them.

Many lenders attempt to justify these charges through the clause in the mortgage contract that allows the bank to charge to the homeowner any costs for litigation. But these clauses are written with the maximum amount of ambiguity and do not even seem to permit such junks fees as a cost to monitor the bankruptcy process. Even based on the language of such clauses, though, the fees may be prohibited.

For instance, litigation clauses in mortgage documents may only allow the imposition of fees on accounts when the lawsuit affects the property or the lien, which is not the case for bankruptcy proceedings. Also, the litigation must be to enforce the lender's rights, and a bankruptcy is not an action to enforce the rights of the lender, and so a monitoring fee may not be allowed by the mortgage contract.

Also, attempting to collect fees from borrowers who are in bankruptcy may be a violation of the automatic stay. Especially if the lender tries to obtain payment of the fee directly from the homeowners, the stay may be violated. Another section of the bankruptcy code prohibits collecting fees not authorized by the plan as well as failing to credit payments made under the plan. Banks, in imposing monitoring fees, may violate this section.

Finally, lenders that impose these bankruptcy junk fees may also be violating state unfair and deceptive acts and practices statutes. Relying on ambiguous contract language is a potential violation, while charging fees not authorized by the contract is another. Homeowners attempting to file bankruptcy to stop foreclosure should be aware of these abuses that lenders state are authorized by the loan documents but really are not.

It seems that, with every action a homeowner takes to defend against foreclosure or get back on track with the mortgage, the lender makes it more difficult and imposes more junk fees. The fact that the lenders state that they do not want to own properties and would rather work with borrowers is contradicted by almost all of their actions, even in cases where homeowners have no other option than filing bankruptcy.

When homeowners begin to fall behind on their mortgage, almost immediately, the bank begins adding numerous fees to the balance. A default of a couple months can balloon into a total amount behind equaling nearly half a year's worth of principal and interest payments. This is a result of the lender or servicing company adding as many and as high of fees as they can get away with by law.

But for the borrowers who are trying to get back on track with their loan payments, it can be almost impossible to determine how much money is actually owed. One reason for this is simply that lenders do a terrible job keeping records and accurate calculations of these fees. But another important cause for the confusion in fees is that servicing companies and their lawyers just make them up as they go along.

Late fees are almost always charged as soon as the grace period expires on a monthly payment. However, the amount of the charge is limited by several factors, including the following:

• The date on which the fee can be charged to the account
• The dollar amount of the fee charged
• The percentage of payment allowed to be assessed as a fee
• The amount of the monthly payment on which the fee can be charged
• The event which triggers the imposition of the late fee

There are also a number of other factors which can affect how late fees are charged to borrowers. If the loan documents and state law allow for different late fees, it is often the maximum allowed by state law that can be used by the lender. However, the company may charge the higher amount allowed in the contract, and it will be up to the borrowers to fight this later on and have the fees reduced.

Also, if the state laws allowed for a certain percentage (for example, 5%) to be charged as a late fee when the contract was written, what happens if the laws are later changed? If the law later allows only a 4% maximum late fee, there are two potential limits that apply to the account if the borrowers default during the period state laws allow only 4% to be charged. In these cases, courts have decided that the limit allowed at the time the contract was executed is to be applied.

One practice that servicing companies may engage is but which is prohibited by law is pyramiding of late fees. New regulations will outright prohibit this action again, but laws and the courts have yet to stop crooked mortgage servicers from preying upon borrowers.

Pyramiding late fees refers to applying payments first to late fees and past due amounts, and then charging additional late fees on the current payment. This action results in late fees and interest being applied to an account over and over again, despite previous late fees having been assessed on a particular payment already. According to the Federal Trade Commission, pyramiding of late fees is unfair to consumers.

Of course, despite the fact that the FTC regards pyramiding of late fees as an unfair act, another government agency, Fannie Mae, specifically authorizes servicers to engage in the activity. However, the Fannie Mae guidelines that authorize the lender to "hold as unapplied" payments that are sent in without the late fee should not be taken to mean it overrides other federal laws and regulations. Even though it may seem that servicers can engage in the act due to the Fannie Mae guidelines, the FTC opinion should be preferred.

Finally, homeowners or their attorneys attempting to stop foreclosure need to examine the actual mortgage contract to determine how and when late fees may be assessed. Any limits placed in the contract relating to default and extra charges should be complied with by the lender before any fees are assessed. Thus, the charges can only be applied if they are authorized by the contract and are not in violation of applicable state laws.

There are a number of legal defenses to foreclosure that homeowners may have in relation to the imposition of late fees. Some may be full defenses to a foreclosure lawsuit, while others may serve to reduce or limit the amount owed on the mortgage. These include, breach of contract, violation of state usury laws, violations of state unfair and deceptive acts and practices statutes, unjust enrichment, breach of fiduciary duty, and breach of good faith and fair dealing.

Unfortunately, late fees are only one of the many ways that lenders can apply more charges to a borrower's account and eat up any equity in the property. A future article will look at a whole range of other charges that servicing companies add on to the balance of a loan, and which are ripe for abuse against homeowners. Late fees, though, should be carefully scrutinized by borrowers and their attorneys.

With the government's overreaction to the financial crisis, there are thousands of pages of new regulations covering the investment banking, mortgage lending, loan servicing, student loan, credit card, and every other financial industry. All of these new rules will create more burdens on consumers, who will have to deal with even more confusing disclosures and higher costs of borrowing.

The lenders, of course, will just ignore these laws as they have all of the other regulations on the books. If they do not just ignore them, they will rely on the incomprehensibility of the laws to confuse loan applicants and keep them in a perpetual state of confusion about the lending process. Instead of dealing with borrowers on a rational level, these new laws will make the lending process even more difficult.

For instance, one of the most common calls to fix the crisis is to have more disclosure, as if the book-length package of disclosures homeowners receive when buying or refinancing is not enough paperwork. But new amendments to the Real Estate Settlement Procedures Act will allow third-party payments not to be disclosed at their actual cost. Instead, they may be disclosed at an average price. So much for transparency.

However, some of the new regulations allow for more statutory and other damages to be awarded to homeowners if lenders violate certain acts, as well as broadens the range of certain regulations. The Truth in Lending Act now applies to private student loans over $25,000. Previously, there was a TILA exemption to private student loans over $25,000. Student loans guaranteed by the federal government, however, are still exempt.

In terms of statutory damage issues relating to mortgage transactions, the Mortgage Disclosure Improvement Act amends the law to require more timely disclosures to borrowers. As of July 30, 2009, lenders must give good faith estimates of certain costs to borrowers within three business days of receiving a loan application. If disclosures are not made, courts may find the new laws will make it easier to grant statutory damages.

New laws are also in place relating to the loan servicing industry, which has always been plagued by crooked profit incentives that make it worthwhile to push homeowners into foreclosure. After October 1, 2009, servicers are prohibited from engaging in the following abuse tactics against borrowers:

• Failing to respond to payoff requests within a reasonable amount of time
• Pyramiding of late fees
• Failing to credit payments as of the date they are received

There are simply so many new laws coming into effect in the next year and a half that it is almost impossible to keep up. Homeowners facing foreclosure or attempting to apply for new credit lines will find even more burdens and higher costs, if they are able to qualify at all. And lenders will be passing along their higher costs of compliance to borrowers. Will any of these new laws change how banks operate? Probably not.

There has never been a shortage of regulations to put the brakes on bad lending or abuse practices by creditors. But the main problem has been the implicit guarantees that the federal government has given to companies that get huge by preying on people. With companies being bailed out as a result of failure, it makes economic sense to violate or ignore laws, and the new regulations do not change this.

In the past couple decades, since the government essentially created the abuse-encouraging mortgage servicing industry, there has been a wave of lawsuits against these servicers for a range of activities. Obviously, there is a systemic problem and homeowners need to be aware of it before they are taken advantage of. While there are a whole host of abuse practices these companies engage in, this article will look at five of the most common.

As ridiculous as it sounds, many mortgage servicers misapply customer payments. While they receive the full amount of a payment, they either do not apply it, apply it to the wrong account, or only credit a partial payment. For instance, a payment of $1550 may translate into $1150, creating a $400 per month shortfall that, over time, leads the owners into foreclosure. It may take months or years for the borrowers to recognize the issue and get it corrected, if ever.

Similar to misapplying payments is when a servicing company will just add late fees and property inspection charges related to a default when the homeowners have made all of their payments on time. This can be an outright lie and it is almost impossible to get the companies to admit to this and fix the problem. Instead, the borrowers may have to pay hundreds or thousands of dollars of these junk charges to get their loan current again, or face a fraudulent foreclosure.

Another clerical and record keeping error the companies make is when they force place insurance on a home that already has adequate insurance. The servicer will determine that the level of coverage is not adequate and will buy a policy through an insurer that is much more expensive than what the borrowers could get on their own. Even sending proof of adequate insurance is usually not enough to get the force placed policy removed, and the cost of this policy is passed along to the owners.

Closely related to claiming insurance policies have lapsed and forcing new charges on borrowers is the issue of servicers not paying property taxes. This has occasionally gone so far that the homeowners lost their property at a tax sale, and the servicing company ended up buying the home for just a few thousand dollars. The company keeps the escrow payments for itself, has government-imposed fees placed on the house until it is auctioned, and then buys and resells the house for a huge profit.

Finally, fraudulent mortgage servicing companies often engage in abusive collection practices against their victims. Requesting a simple payoff statement may lead to mass confusion as the servicer and its lawyers make up numbers that change by tens or hundreds of thousands of dollars by the week. Some courts have even found these companies making up payoff figures out of thin air, as they do not even have previous payment histories on loans that they purchase the rights to service on.

When homeowners feel that they are being taken advantage of by a bank or servicing company, they are often right to trust their intuitions. From imposing junk fees and forcing insurance on borrowers, to simply making up numbers out of thin air, the lack of due diligence in many mortgage transactions is astounding. The most important act homeowners can take in these types of situations is documenting the abusive actions and their attempts to fix the situation before the house is lost to foreclosure.

Regulation Z, commonly known as the Truth in Lending Act, is supposedly designed to protect home buyers and owners from unfair and deceptive practices by mortgage lenders. Various regulations must be adhered to by the banks, mostly in regards to disclosure requirements. New amendments coming into effect on October 1, 2009, however, show just how ineffective laws are in restraining financial companies.

There are three main practices that the new rules prohibit lenders from engaging in for any mortgage applications taken after October 1, 2009. While it may seem painfully obvious why lenders should not engage in these acts voluntarily, it is no secret that the subprime industry was built on them. With the new amendments to the Truth in Lending Act, the following actions by lenders are no longer allowed.

First, banks can not make a loan regardless of the loan applicants' ability to pay back the mortgage from any other income than can be generated by the home's value. Thus, banks can not hand out mortgages to people without jobs or income, and then allow them to flip the property a few months later to avoid going into foreclosure. This scheme only works with artificial pumping up of a housing market.

Second, if a bank fails to verify income and assets that the homeowners are relying on to repay the loan, they have violated the new amendments. Of course, there seems to be no sane reason why a lender would not go to the trouble of making sure the people it gives money to have a real ability to pay back the loan. However, the banks did engage in this practice, and it is now prohibited.

Finally, the banks are no longer allowed to change prepayment penalties, except under certain circumstances. While this practice of increasing prepayment penalties was not as much a contributing factor to the subprime crisis as not verifying income, it does make it more difficult to sell a house. Huge prepayment penalties make it necessary to sell at a higher price than if the penalty was not present or increased later on.

The subtle hint Congress is sending to the banks is essentially a public relations message. In any kind of capitalist, free market economy, the banks would not have made all these poor lending decisions to begin with. There would have been no good reason to take on the huge risk of making and securitizing loans that would never be paid back, putting the financial companies themselves at risk of bankruptcy.

However, the banks knew for certain that, if the bubble ever burst, they would be bailed out by the politicians. So they engaged in practices like handing out inflated Federal Reserve money to homeowners and then, once the real estate market collapsed, began to receive taxpayer-stolen funds almost immediately. One bailout after another was given to Wall Street investment firms and commercial banks.

But the bailouts were not popular with homeowners, the people of America in general, or foreign investors in US debt. So Congress, instead of denying bailouts to the banks, has instead come up with a set of new regulations designed to limit how much more money the taxpayers will be forced to give Wall Street in the future for this particular scheme called "subprime loans."

Congress is telling the banks, "Here is the money you blackmailed us for after destroying the economy, but you can no longer engage in these particular frauds." But if the bailout had never been implicit, or even acted upon, these new regulations would be totally unnecessary. Banks have incentives not to defraud depositors, borrowers, and investors. But with guarantees in case of loss, those incentives disappeared.

One of the biggest boons of the mortgage servicing industry was the securitization of mortgages beginning in the 1970s. With lenders selling off newly originated loans, the servicing industry grew as the investors in mortgages did not want to deal with the administration of collecting payments, dealing with refinances and title issues, and foreclosing on homes when necessary.

Until the 1970s when securitizing mortgages after origination became more common, there were few banks that sold their loans into the secondary market. Instead, lenders held onto the loans they made and collected the interest. If they sold the loans at all, the original lender would often retain the right to collect and apply the payments, in effect becoming the servicers themselves.

All of this began to change, however, during the late 1980s, and the growth of the mortgage servicing industry was a direct result of the government's response to the Savings and Loan crisis of the late 1980s and early 1990s. These institutions had made so many bad loans that the federal government created a whole new bureaucracy to deal with the fallout and dispose of properties.

The Resolution Trust Corporation was created in 1989 by the first Bush administration to sort out the assets of failed Savings and Loans and begin to sell them to investors. However, one decision that the RTC made when selling the assets of these bankruptcy banks made a huge impact on the structure of the mortgage industry and almost single-handedly created the servicing industry as it is today.

This decision was to sell the loan portfolios of the S&Ls and the rights to service these loans separately. Until this point, there was really no specialization in the mortgage lending industry for companies just to retain the servicing rights on loans. But with the RTC selling rights to collect payments separately from the loan portfolios themselves, the mortgage servicing industry was given a huge shot in the arm.

In fact, the predatory nature of the mortgage servicing industry, where servicers are encouraged to add more fees and charges to a loan, including driving homeowners into foreclosure, was created by the Resolution Trust Corporation. Although the industry has done a poor job of policing itself and attempting to reduce the incentives for abuse, the government is responsible for the frauds perpetrated on homeowners.

Today, mortgages are bought and sold numerous times, and the servicing rights are also transferred from one company to another. But while the servicer's name may change, the abuse practices always remain the same. Borrowers with more equity are routinely targeted for forced insurance, misplaced payments, missed property tax payments, and other coercive practices.

Unfortunately, too many homeowners are relying on the government to fix the problems in the housing market. But the last time the feds attempted to do this, by creating the mortgage servicing industry's practices, the end result was homeowners being taken advantage of and pushed into foreclosure. Without the RTC's pricing model for servicers, fewer homeowners would be losing their homes now.

Homeowners who have been blatantly taken advantage of during the mortgage process may have a defense to foreclosure based on the unconscionable contract. There are a number of factors that can point to unconscionability in a loan, and homeowners should do their research or hire a qualified attorney to help them, but the following list of five signs to watch out for may be a starting point for borrowers.

One clear sign a loan may be unconscionable is if the borrowers have a limited awareness or understanding of the language the contract is written in, and was unable to read the documents well. This gives lenders an opportunity to include terms and conditions in the loan that unfairly burden the homeowners. Mortgage companies have an obligation to make sure the borrowers understand enough of the language in order to sign the contract and know what it means.

Lenders that knew (or should have known) that the borrowers taking out loans could not afford to pay them back may be guilty of entering into an unconscionable contract. Many subprime loans were made using the unfounded assumption that homeowners would magically double their incomes in the space of a year. Other mortgages were made where the monthly payment was just a few dollars less than the total amount of income the borrowers received each month.

Another sign of unconscionability may be in cases where the borrowers are not represented at the closing of the mortgage transaction by an attorney, but the lenders have one that rushes the process. Combined with other factors, such as the ones listed in this article, there may be an indication of the lender attempting to rush the closing process and intimidate the homeowners.

If terms are changed in the mortgage at the last minute, and these changes negatively impact the borrowers, the loan may be unconscionable. While most loans change many times from the qualification stage to closing, last minute changes that increase the cost of credit or place large burdens on the homeowners may indicate unconscioinability. For instance, requiring one year of interest to be paid in advance and not disclosing this condition until closing may be a sign.

Finally, if homeowners apply for a loan and receive few, if any, benefits from the transaction, it may be unconscionable. For instance, if borrowers refinance and receive a higher monthly payment but no cash out or consolidation or any other benefit, the transaction is obviously unfair. But lenders may be able to get away with this by making large promises and then eating up any funds through fees, processing charges, and other administrative costs.

The main sign of an unconscionable contract is that it contains terms that are unfair to one party. For many mortgages given to people who had no ability to pay back the loans or were based on fraudulent appraisals or forged income documents, this may be a huge issue. As well, homeowners may be able to bring this issue into court when defending a foreclosure or attempting to stop a trustee sale.

Some homeowners, when they originally purchase their home or refinance, are pushed into an expensive "credit insurance" policy. Despite how they are sold to the borrowers, though, these schemes can often just be one more way that lenders enrich themselves by taking advantage of the financial ignorance of most borrowers. Abusive credit insurance can also be used as a defense against a foreclosure lawsuit.

But what is credit insurance? There are two common types of it -- a credit life policy and a credit disability or accident and health policy. Both can be abused by lenders when they force expensive policies on borrowers who may receive little or no benefit from them. Although some policies may be advisable in some cases, expensive policies that have limited or no benefit for the borrowers are a sign of abuse.

Credit life policies will pay off the existing mortgage in the event the covered person dies. Credit disability coverage is designed to be used by borrowers to pay their monthly mortgage expenses in the event of a disability or other interruption in income due to health reasons. Both can be quite helpful for homeowners in certain situations, but these types of insurance are also offered cheaper through other sources.

One reason that other insurance providers may offer such policies cheaper is that the lender, when it pushes homeowners into a credit insurance policy, is often compensated directly by the insurer. The insurance company pays the mortgage origination company for placing the insurance, which gives lenders incentives to recommend the highest-cost policy available.

The potential abuse of such policies comes from the way that the creditors (the mortgage lenders) benefits from the sale of the insurance. Lenders receive a commission, in most cases, determined by a percentage of the total premium the borrowers have to pay. The higher and more expensive the coverage, the more then bank gets paid by the insurer. Of course, this means that the highest cost coverage is offered.

Also, borrowers who purchase a credit insurance policy voluntarily may have the premiums added to the balance of their loan amount. This means that the bank will be able to charge interest on the insurance policy premiums, thereby increasing the cost even more over the life of the loan. This raises the effective interest rate of the loan and increases the profit of the loan to the bank.

While most homeowners may just not be aware of how these policies work and the lenders' incentive in offering them, the practices described above may not be outright abuses. However, some borrowers have been pressured into paying for insurance policies where they are ineligible to receive any benefits under the terms of the policy. This is an obvious abuse and mortgage companies can be held responsible for it.

However, the most important point for homeowners to remember is that they have a choice with these policies. If the lender is forcing them into one, they can always go with a different bank or lower coverage amount. A future article will look at how the insurers inappropriately deny benefits even for borrowers who have adequate coverage, as well as legal claims against the lenders and insurers.

When homeowners originally obtain their mortgage, there are a huge number of players with roles in the qualifying, financing, real estate transfer, and funding process. If any of these companies or individuals collude to defraud the borrowers, or otherwise force them into a loan with severely negative terms, there may be a case to be made for misconduct, unfair lending, or predatory lending, especially in the case of foreclosure.

With refinance or construction loans, and sometimes with purchase money mortgages, there may be a case of creditor overreaching. This can happen when mortgage companies fund a loan that is in their best interests but provides no real benefit to the borrowers. Lenders that make loans just to generate fees may be engaging in overreaching, and homeowners may have a defense to foreclosure if they received no benefit from the loan.

There are two main types of creditor overreaching. The first involves circumstances where a mortgage costs substantially more than the benefits the homeowners get from the loan. The second type of overreaching occurs when the terms and conditions were misrepresented, or important disclosures were not given to the borrowers before they took on the loan. Both of these can be evidence of lender misconduct.

Mortgage brokers can also be held accountable for misconduct in the mortgage transaction, especially if they are considered an agent of the lender. In these cases, misconduct or misrepresentations by the broker may be raised as defenses to a foreclosure lawsuit or power of sale. As well, brokers who were unlicensed at the time the loan was made may have facilitated a mortgage that is completely void.

Appraisers who take part in defrauding homeowners or lenders can also be held responsible for their actions, and these issues may be raised as defenses in foreclosure. During the real estate bubble, home values were often inflated as much as 1,000% percent above their true market level. Especially in subprime or FHA-insured loans was this practice common, and may represent unfair and deceptive acts and practices.

In many cases, homeowners may be able to raise defenses based on their state's Unfair and Deceptive Acts and Practices laws (UDAP laws). Each state differs a little in their definitions of what constitutes these types of actions. However, borrowers may be able to have their loan balance reduced significantly, force a renegotiation of a mortgage through loan modification, or have the mortgage voided or rescinded completely.

Of course, it may also be better to speak with a lawyer who is versed in these types of violations before defending the foreclosure entirely. If homeowners feel that they have been severely taken advantage of by their lender, the broker, the appraiser, or any other party in the mortgage transaction, though, they may wish to research this area of their state law further to determine if the lender has engaged in predatory lending.

One of the factors that has had the greatest impact on the subprime mortgage frenzy and the deterioration of lending standards in the mortgage market was the transferring of risk. The securitization process of mortgage loans took responsibility for the performance of mortgages out of the hands of the lenders and put it in the hands of thousands of investors located in areas around the world.

The result of this was that lending standards virtually disappeared during the real estate boom of the early twenty-first century. With the Federal Reserve pushing interest rates to artificially low levels through massive amounts of inflation, all that cheap money had to go somewhere. And it went into the housing market through the mechanisms of subprime loans, inflated property values, and unfair lending practices.

The decade of the 1970s witnessed the beginnings of the push towards mortgage securitization, as lenders moved away from the practice originating and holding loans. Instead, mortgage companies would originate and immediately turn around and sell the loans. In this way, they could quickly generate more money for additional loans, while investors had residential real estate loans to provide monthly income.

However, the main profit source for loan origination companies also shifted with the advent of securitization. Banks had been in the practice of deriving profits through taking in money and lending it out at higher rates of interest than what they paid to get deposits. With mortgages being securitized in higher numbers, though, interest income was replaced with fee income.

Origination companies received their profits from the creation of these loans and the packaging and selling of them to other companies and investors. The investors in the mortgage securities, on the other hand, now received the interest income from the loans. Thus, the banks making the loans had little incentive to ensure the loans were good for the long term once the loans were made and they received their fees.

The practice of securitizing mortgages, though, also created incentives for banks to make loans that could never be paid back. Once the pool of credit-worthy customers had been exhausted, there was left a large number of people without stable income or good credit. But with all of the cheap money flooding into the housing market from the Federal Reserve, the subprime market was vastly expanded.

Homeowners and banks both share part of the blame in fueling the housing market bubble, but all that money came straight from the inflation caused by artificially low interest rates. Securitization allowed banks to hide the risk of the bad loans for a number of years as real estate prices kept rising. For a few years, it worked, but the flood of money began to slow down and property values stopped rising.

Once property values stopped rising and actually began falling, the entire subprime mortgage market collapsed under its own weight. Hundreds of lenders went out of business, Wall Street transformed from predatory investment banks into bankrupt bailed out institutions preying on the economy at large, and the securities created during the boom all began to smell very toxic.

The government, though, quickly stepped in to make the investment banks as whole as possible, by forcing other companies to take them over, providing inflation-created incentives, or simply handing over tens of billions of dollars to banks and financial companies. This was just the latest and largest in a long line of federal bailouts of the financial industry, but all of the investment banks relied on the federal backstop against failure.

Without the transference of risk to the rest of the world and the reliance on the federal government for artificially low interest rates and a guarantee against failure, the subprime market and housing bubble could not have reached the heights they did. But all of these factors created huge non-market incentives for unfair lending and borrowing, with the economy in general now suffering the fallout.

When homeowners fall into foreclosure and the bank or trustee has a public auction of the home scheduled to satisfy the debt, there are various duties that must be met for the sale to be valid. One that is not very well known or publicized, and one that banks may violate repeatedly, is the duty to exercise good faith and diligence in conducting the sheriff sale or trustee sale of the borrowers' property.

This means that lenders in a judicial foreclosure state or trustees in a nonjudicial foreclosure state must do their best to protect the homeowners' rights under the loan documents. Borrowers have a number of such rights that lenders need to observe in order for a sale to be valid. If any are violated, the homeowners may be able to have the auction rescinded, delay the eviction, or sue the lender for damages.

There are three main duties that mortgage companies and trustees have towards homeowners. These are as follows:

• The lender must remain at arm's length with the purchaser at the auction,
• The lender must conduct the sheriff or trustee's sale fairly,
• The lender must make a reasonable effort to get a fair market price for the sale of the property, and
• The lender must limit expenses of the auction to a reasonable amount.

If any of these duties to the borrowers are not met, the homeowners may have grounds to sue the lender for damages or to have the sale reversed.

However, despite the duties the lender has towards the homeowner and despite the potential penalties for not meeting these obligations, lenders routinely fail to meet them. Banks and trustees have little incentive to advertise the auction of a home in any but the most cursory manner, as they know there will be few bidders at the auction. But this may be a violation of the duty to obtain a fair price.

Some courts have held banks responsible for low bid prices at auctions, especially if the lender is the sole bidder at the sheriff sale and then turns around and resells the property at a higher price soon after. If the lender buys the property for cheap with no equity returned to the borrowers, and then sells the property to a third party and takes the profits for itself, the former owners may be able to sue for this difference.

Because banks often sell homes soon after the auction for more than they purchased the properties for at the public sale, this may indicate that they know they can get higher prices at foreclosure sales. But homeowners can not just let their lenders get away with stealing their equity. The banks force the sale of the home and then, despite having the duty to advertise the sale and obtain a fair price, just cover the unpaid mortgage and take higher profits later on.

While not every homeowner will be able to stop foreclosure, sell the home at a fair price on his own, or qualify for a loan modification or other solution, the courts have ruled that the banks have a duty to attempt to obtain a fair price in the forced sale of a home. When banks do not do this, as in 75-95% of auctions where the lender is the only bidder and only bids as little as possible, borrowers may want to examine how they can recoup the equity in their homes that the bank had a duty to attempt to obtain for them.

In states that allow a nonjudicial foreclosure through a power of sale clause in a deed of trust, homeowners find that their properties are sold out from under them without a hearing or chance to defend themselves. In fact, it is up to the borrowers to bring a lawsuit into court against the lender and they then have the burden of proof in showing that the foreclosure should not go forward.

Although the courts have ruled that, in order to take away someone's significant interest in property, notice and a hearing are required, only a bit of notice is given to homeowners facing nonjudicial foreclosure. No meaningful hearing is given to the borrowers. State laws in nonjudicial states allow the sale of a property to satisfy a foreclosure as long as the trustee follows the regulations concerning notice.

And while this issue may seem to violate the due process protections given to individuals under the United States Constitution, the Supreme Court has found that due process protections only come into play when there is a state actor in the deprivation of property. Because a deed of trust and promissory note are executed between two private parties (homeowners and lenders), there is no automatic due process protection.

In the court case Flagg Brothers, Inc. v. Brooks, the Supreme Court found that there is no due process violation if there is no state action. Settlement of disputes between a lender and a borrower through a forced sale of property does not create state action. This is true even in the case of a sheriff sale or trustee sale of a property -- the fact that state laws determine how the foreclosure proceeds does not create state action.

However, homeowners facing foreclosure may have a defense against nonjudicial proceedings in two situations. The first is if a government agency is the foreclosing mortgagee. For instance, if HUD, the FHA, the VA, or a similar agency of the government owns the mortgage and is suing for foreclosure, then a state actor is involved in the deprivation of property, and the borrowers should be given due process protection.

The second situation in which homeowners may be able to assert due process protections is if the state foreclosure laws require that a government official participate in the process. A number of court cases have examined this issue, and many have found that significant state official involvement in the foreclosure process gives homeowners due process protections.

For instance, in Vermont's strict foreclosure process, state action can determine a whole range of issues relating to the disposal of the property, and homeowners are given due process protections. Another court found that state action is created even when a town clerk is required to record a lis pendens on a property facing foreclosure. Depending on the responsibilities given to such government officials, homeowners may be able to assert due process protection.

However, on the other hand, some involvement by state officials does not create due process protections for borrowers. For instance, courts have found that the involvement of a county sheriff in the sale of a property through nonjudicial foreclosure does not create state action. Similarly, the use of a county recorder in the auction does not automatically give due process protections to homeowners.

Homeowners facing foreclosure in nonjudicial process states have always had a more difficult time defending foreclosure than if they lived in a judicial state. Banks are more able to begin foreclosure without having to prove they even own the loan, let alone have a strong enough case to take the house back. While borrowers have few protections against predatory actions of banks, government action in the foreclosure sale may give them more protections.

In all the years I have been doing title research and helping people find out what is going on with their mortgage so they can avoid foreclosure, one name keeps popping up again and again. That name is MERS, short for the Mortgage Electronic Registration System. What this company is and what it does is a bit unclear, but many homeowners have had this company attached to their mortgage somewhere along the line.

MERS functions as a clearinghouse and computer registry that was established to track ownership changes in mortgages. Originally, it was designed to make the assignment and transfer of ownership of mortgages easier, especially in bulk transactions. MERS can be the assignee of record with counties, and any future transfers are only tracked in the MERS database.

However, homeowners who have a loan that is assigned to MERS will find it difficult to determine which lender actually owns their mortgage. MERS does not give borrowers the names of the true owner of a note, and will only disclose the servicing company taking care of the mortgage. From the servicer they can learn which company or institutions owns the mortgage, though.

The status of the Mortgage Electronic Registration System, though, is somewhat unclear when it comes to foreclosure actions. At least one court has held that MERS is not a real party in interest because it has no legal or beneficial interest in the mortgage or note. It is the mortgagee, but not the holder of the loan. MERS is also not a trustee, and is considered only a nominee for the holder of the mortgage.

However, MERS claims that it has the right to foreclose on mortgages in its system under its own name, due to its status as a nominee. On the other hand, some courts have decided that, since MERS does not actually own the note Homeowners attempting to defend against a foreclosure lawsuit brought by MERS in its own name may have the best chance of success in states where the holder of the mortgage is an indispensable party to the lawsuit. Since MERS does not hold the actual paperwork, it can not show that it owns the mortgage. The entire prospect of a company that does not own a mortgage suing for foreclosure may be an indication of a wrongful foreclosure, as well.

In nonjudicial foreclosure states, MERS may also have trouble enforcing a power of sale clause in a deed of trust. It does not actually own the deed of trust, so may not have the authority to begin foreclosure proceedings against borrowers. Especially since the company claims not to have any beneficial interest in the debt, there may be no ability to start foreclosure on a property.

As more homeowners find themselves in foreclosure, more cases will be defended in court, and the Mortgage Electronic Registration System may be forced to define what its actual status and interests are in a note. Unfortunately, the company's status is quite a bit unclear right now, and even in foreclosure notices, MERS defines itself differently from sentence to sentence.

When a mortgage company begins foreclosing on a property, most homeowners just assume that the bank really owns their loan and is able to prove it and take their home away. But this is not always the case, as banks assign and sell loans all the time without proper documentation, giving borrowers another defense to foreclosure.

Many more homeowners today than just a few years ago are raising defenses to foreclosure lawsuits based on the issue of the real party in interest. Typically, this is the party that possesses the right it is seeking to enforce. If a lender is not assigned a loan and mortgage properly, the issue may be raised by the borrowers.

A mortgage is composed of two parts. The first is the promissory note, which is the borrowers' responsibility for paying back the debt it takes out through a bank or other lender. The second part of the mortgage is the security interest the lender takes in the homeowners' property, which is made up of the mortgage or deed of trust.

In terms of a foreclosure lawsuit, courts have typically held that the lender or institution that has been assigned the note and mortgage is the party in interest. The servicing company or trustee may not be counted as the real party in interest, and the lender that was assigned the note must prove that it has the legal standing to foreclose on the property.

In fact, the assignee must be assigned both the mortgage and the promissory note. The debt itself is the primary obligation to pay, while the mortgage contract represents only a security interest in the property. Neither can be transferred without the other, because, if the lender can not show is has an interest in the debt by having the note assigned to it, it has no standing to foreclose on the mortgage.

A number of foreclosure lawsuits state that the foreclosing lender has lost the original note or mortgage, or it has been destroyed or is otherwise unaccounted for. In such cases, the lawsuit may still go forward, as long as the amount of the debt can be established by extrinsic evidence. In Mitchell Bank v. Schanke, the court ruled that the lender can move ahead in foreclosure without producing the note, as long as it can prove the underlying debt that is secured by the mortgage documents.

Homeowners may be able to delay a foreclosure for a significant length of time by raising the issue of who is the real party in interest. With so many lenders going out of business or being absorbed by other companies, and the securitization of the mortgage industry over the past decade, it can be almost impossible to tell which company owns a mortgage.

The foreclosure crisis is an epidemic that is affecting every region in the United States, and while the current crisis outweighs most declines in the real estate market up until this point in history, foreclosures will always follow the dream of home ownership for many Americans. Typically it only takes 3-6 missed payments for a bank or lender to initiate foreclosure proceedings on a property. Because so many Americans are out of work and house prices continue to decline, many purchasers from the beginning and middle of the decade are finding payments to be unmanageable and are stuck under a wave of debt.

The Obama administration is doing what it can with the problem it inherited in many ways. On top of the skyrocketing number of loans in or going into default, the credit markets are essentially broken, with credit becoming almost impossible to access, even for the most credit-worthy borrowers. No one knows who is to blame for the current state of the market, but it is clear that conditions are bad for both lender and borrower, and is especially difficult on the homeowner who sees that future mortgage payments will be too high to manage, but cannot refinance or sell their property in time for a price that will get them out of the situation.

As long as Americans dream of home ownership, foreclosures will be soon to follow. While credit was easy to access 5 and 10 years ago, that well has dried up, and the market is correcting in a very severe manner affecting even those with good credit that had little to do with the current housing crisis. Property values have ceased to increase, and many are lucky to sell for a price they paid as long as 5 years ago. The bottom line is that foreclosure and borrower default is a part of home buying. The luckiest people who can pay for a property still have to worry about defaulting on tax bills, association fees and construction liens. It is an issue that goes hand in hand with real estate investing, just as potential gains and losses are part of investing in stocks or commodities.

However, never before has our federal reserve and banking system been flooded with so many defaults at once. Many banks are desperately trying to sell off those toxic assets to clean up their balance sheets, but are finding that the market for these products is so low that the bank could risk going under if they were to realize these massive losses in home value. There are many investors and bottom-feeding real estate investors who are interested in purchasing the properties at 50 cents on the dollar or less, but most banks are being given quite a bit of lead-way by the federal government, and many think have not been forced to feel the pain of the market as others have. This reluctance to accept where the market will be for these assets is part of the problem, and as long as banks sit on the properties as REO’s the slower the nation’s housing recovery time will be.

If you are in foreclosure or feel that your upcoming payments are going to be too difficult to manage, consult with a loan modification company as soon as possible, or contact your lender and see what options are available. It is better to find out sooner rather than later so that you are prepared for what is to come. You can still find time to stay in your property, and if you have missed payments, your lender may be able to provide time with which to work with you to get back on track.

If you are a homeowner with mortgage payments that are becoming hard to manage, or are in foreclosure, consult with a loan modification company today. You may be eligible for a refinance or could be able to buy some time to get back on track. The US government is encouraging lenders to work with struggling homeowners to help them stay in their homes. With falling property prices in most regions in the United States, refinance is becoming more and more difficult for borrowers who could potentially owe more than what their property is worth, or more than what the price the property was purchased for as little as 3 years ago.

This is a problem facing many American households, and even those not in or near to loan default are feeling the pain of the housing decline. When a property goes into foreclosure, typically the bank or lender wants to sell it as soon as possible because they do not want to deal with the day-to-day management of the asset, and would much rather prefer to sell it to get it off its balance sheet. When you have so many properties going into default in many neighborhoods across the country, even stable homes with owners that paying on-time are affected by comparable sales that are coming in far lower because of distressed sellers in the market. This makes selling very difficult because those owners are competing with properties that are priced very aggressively by banks and lenders who are basically fire selling these assets.

Because interest rates are now on the rise, the Obama administration is in an even more precarious position when it comes to limiting the amount of borrowers in default. Although the US government is now encouraging banks to works with struggling borrowers, higher interest rates are making their job much more difficult. With low interest rates, homeowners are more encouraged to refinance into more manageable monthly payments, thus making it easier to afford their homes and have time to get caught up on missed payments if they were behind. It also makes it easier for real estate investors to have more deals make sense with cheaper money to be borrowed, instead of the increasing cost of money today. Combine this with a credit market that is basically dried up and you have a very difficult environment with which to trade properties. This makes things even more difficult on those homeowners trying to sell their properties – the buyer pool is virtually non-existent due to the difficulty of obtaining a mortgage, and on top of that they are competing with comparable properties that are selling for fractions of what they were purchased for earlier in the decade.

Last week rates on the 30-year fixed rate mortgages rose to 5.79% from 5% just weeks earlier. This spike in rates has cooled hopes of refinancing for thousands of homeowners, and for those with adjustable-rates, their monthly payments are now that much higher and hard to handle. As bond yields continue to spike, mortgage rates have continued their upward trend. Earlier in the spring mortgage rates fell below 5% which was the lowest decline in 50 years.

If you are behind on payments or facing foreclosure, it is not too late to find a solution. There are hundreds of foreclosure help services that are competing for your business, and are capable of modifying your loan or consolidating your bills into one monthly payment. Many are offering services with no up-front fees, and are able to work with you and your lender to buy some time to help you get back on track.

If your home is listed on the market with a Realtor, you are most likely competing with other similar homes in the area. Because the housing market is in such a difficult period, it is likely that your home could be sitting on the market for months before seeing any interest or offers. Buyers are taking their time these days, and have many options to choose from. Not only that, but it is more difficult than ever for an average borrower to get approved for a home loan. Banks and mortgage companiesare underwater on many of the risky loans that were made 5 years ago, and the thought of taking on more risk is a very hard sell in today’s market.

The first thing to do is to make sure that your home is priced competitively. If you list the property for a price that you know is high or above the market prices for recent sales, your home simply will not sell in today’s market. You can be optimistic and some regions of the country are in better shape than others, but the time has long passed when you could list a property for a high or optimistic figure and bank on seeing offers within a week or two. It could take months before you realize there is no activity and only then will it become clear that your property is overpriced. So – list your property competitively! The first offer you get might be the best one, and properties that sit on the market for a long time have stigmas attached to them after a while, and it is easy to deter a home buyer from your property because of an unusually long market time or listing history.

A licensed Realtor can help you with pricing the property appropriately, and do not blame them if they think it is worth more than you do because they are probably right. Most Realtors understand how difficult this period is for home sellers, and it is not in their best interest to tell you a home is worth less than you think. Remember, their commission is higher the higher the property sells for, so they have no reason to tell you the home is worth less than it is. Many Realtors would prefer to sell a property quickly, so you do want to make sure that the sales comparables or appraisals are checking out and accurate based on summary of your property. But the sooner you sell your property the faster you may be able to capitalize on the next purchase, and instead of being taken advantage of you can get a property for a great price as most home are being discounted as much as 20-30% of the market listing prices.It is a good way to turn lemons into lemonade and instead of losing wealth and facing foreclosure, you can buy at a discount and sell when the market shows signs of recovery or stabilization.

When homeowners begin to consider working with an attorney to defend their foreclosure in court, they often feel overwhelmed by the amount of nonsense and bureaucracy they are forced to deal with. But whether they are defending a bank's lawsuit against them, or initiating their own to stop an auction under a power of sale clause, there are three main categories of defense that borrowers can consider.

The first type of defense against a foreclosure by a mortgage company involves challenging the validity of the loan documents themselves. If the original mortgage or deed of trust was not drafted or executed legitimately, homeowners may be able to have the entire transaction rescinded, depending on the laws involved. In other cases, borrowers may question whether the lender suing them actually owns the note -- if not, there is no real valid contract between the two parties. Also, if there is a defect in the paperwork or illegal clauses, the mortgage may not be valid. Banks often violate state and federal law when creating mortgage, and it may be worth the time for borrowers to consult with an attorney about these issues.

Second, homeowners fighting foreclosure in court may rely on defenses that raise the issue of misconduct by the mortgage lender. Misconduct and predatory lending do not have concrete definitions, but a loan may be considered predatory based on numerous characteristics of it. If the borrowers were approved with no income verification or were given an interest rate that the bank knew the owners would not be able to pay, there may be a defense against foreclosure based on misconduct. Also, if the appraisal was inflated and the bank knowingly accepted the unreasonably high value, and gave the owners a loan based on the value of the home instead of what they could actually afford, it may be a case of predatory lending.

The final category of legal defense against foreclosure involves cases where the lender does not follow the required procedures before the sheriff sale. Every state and county has different rules that the bank's attorneys or the trustee must follow in order to foreclose on a house and have it sold at a public auction. Courts take for granted that the bank meets all of these requirements adequately, but homeowners may raise as a defense the failure to follow all the guidelines. In fact, lenders routinely violate the local laws and regulations, and the attorneys do not care to follow them because they know the banks own the courts anyway, for the most part. But procedural violations can be raised as a defense against foreclosure.

By focusing on these three types of legal defenses, homeowners may be able to drill down further and really specify the issues that affect their mortgage. Even if they just raise the defenses to force the bank to negotiate a loan modification or give them more time to sell or move out, education about lending laws is never a waste. As well, homeowners may decide to mount a full defense or hire a knowledgeable lawyer to help them.

For mortgages owned by HUD (not just insured or guaranteed by the agency), a type of nonjudicial foreclosure may be pursued even if the state in which the property is located requires judicial foreclosure procedures to be used. The statute is called "Single Family Mortgage Foreclosure" and it replaces applicable state law. Even if no power of sale clause is included in the mortgage contract, HUD may use the nonjudicial foreclosure process.

This clause clearly seems to go against the right to contract, as it negates certain aspects of mortgage contracts used by borrowers and lenders. There may also be unlawful taking issues when the federal government affects foreclosure laws and redemption rights. In addition, there is no required pre-foreclosure meeting or hearing for the borrowers.

In order to sue homeowners for foreclosure and obtain a judgment against them, the lender must prove three aspects of its case:

1. There is a valid mortgage between the lender and borrowers
2. The homeowners are in default of the mortgage contract
3. Foreclosure procedures have been followed according to the law

If the bank does not follow the foreclosure procedures for notice or court requirements, even a sheriff sale may later be voided.

One positive aspect of the judicial foreclosure process is that homeowners can raise claims against the lender that would otherwise have been barred by statute of limitations regulations. For instance, even if the statute of limitations for Truth in Lending Act violations has passed, borrowers may still raise these issues in a defense of a foreclosure case. But if the foreclosure is through nonjudicial procedures, these claims may not be allowed by the court.

All states allow homeowners the right to redeem their property by paying off the loan in full (plus interest, costs, and other applicable fees) prior to the sale of the house. Nineteen states give borrowers the right to reinstate their mortgage by curing the default and paying the amount past due plus applicable costs and fees. This must be done before the sheriff sale of the property in order to be accepted by the lender.

When homeowners file bankruptcy to stop foreclosure or delay a sale, they do not give up substantive or procedural defenses to the bank's attempts to take their home.

In many cases, the mortgage company does not strictly follow the pre-foreclosure procedures dictated by state and local laws. In these cases, courts have found that strict compliance is necessary for a foreclosure to go forward. Foreclosure is such a harsh remedy to the problem that these strict requirements are necessary for lenders to follow.

If a lender accepts late payments from a homeowner, it may be waiving its right to accelerate the mortgage later on in the case of default. Courts have found that allow late payments and not insisting on future on-time payments may be a waiver of the right to accelerate. The state of Maine goes even further than this and states that accepting a payment after foreclosure procedures have been started but before the right of redemption ends is considered a waiver of the right to foreclose on the home at all.

When a mortgage is insured or guaranteed by the Federal Housing Administration (FHA), an agency overseen by the Department of Housing and Urban Development (HUD), servicing companies must follow HUD servicing guidelines. Some of these regulations involve the foreclosure process on a such a property, and failure to follow the guidelines may be used by homeowners to defend their foreclosure in court.

The following is a list and brief description of some of the court cases that have involved HUD and FHA loans that were improperly serviced, ones that were decided in favor of homeowners, and ones in which borrowers facing foreclosure were denied claims. Knowing some of the background of these cases may help homeowners decide if their loan is being properly serviced, or if it is worth their time to apply for an FHA loan.

One of the requirements to foreclose on a HUD loan is that the servicer must attempt to hold a face-to-face meeting with the homeowners before three payments have been missed. In Banker's Life v. Denton, homeowners raised the failure to hold the meeting as a defense against foreclosure. Also, the servicer did not send the request for the meeting via certified mail or attempt to visit the borrowers at the property. The court found for the owners in this case.

Notices of default must also be sent to delinquent borrowers in accordance with the HUD regulations. In Federal National Mortgage Ass'n v. Moore, homeowners raised the argument that the lender had not sent out a notice of default that was in compliance with HUD's regulations. The notice sent, according to the borrowers, was not valid because it was on a form that was not "approved by the Secretary" of HUD and was not sent in a timely manner as the regulations require.

Since these two cases had been decided, HUD's regulations have changed, but the language of the preforeclosure servicing, including notice requirements and review guidelines, have remained the same. In fact, another court case, Mellon Mortgage Co. v. Larios, decided that the requirements are the same now as they were before the statue was revised. Lenders failing to comply with these guidelines can still be used as a defense against foreclosure.

The face-to-face meeting with homeowners is also an important aspect of foreclosing on a mortgage backed by HUD. The minimum requirement to comply with this regulation is visiting the borrowers at home and sending at least one letter via certified mail. The issue came up in Washington Mutual Bank v. Mahaffey, and the lender was denied summary judgment because it had not sent the letter, even though someone had been sent to the property to visit the homeowners.

Of course, this is not to imply that every homeowner will win a case and successfully defend against foreclosure. Courts have also ruled against borrowers who raised issues regarding servicing. In Miller v. G.E. Capital Mortgage Servs., Inc., the court ruled that private citizens have no right to sue for violations of HUD's loss mitigation provisions. The law, according to the court, is meant to focus on regulation of lenders -- not creating rights for borrowers facing foreclosure.

Also, courts have found that the language included in deeds of trust insured by the FHA are not negotiated contractual terms. Instead, they are imposed by the FHA on both the borrowers and lenders, and the borrowers may not raise defenses in relation to breach of contract if lenders fail to follow the FHA guidelines. This case was decided in Wells Fargo Home Mortgage, Inc. v. Neal. If the homeowners and mortgage company can not bargain for that aspect of the contract, there can be no breach of the contract.

Homeowners, their loss mitigation professionals, and their foreclosure attorneys should become aware of some of the issues involved with HUD loans if they have a mortgage insured by the FHA or are considering taking advantage of the new government programs. While some protections may be offered to borrowers, others seem to be taken away by the courts if there is a question about a foreclosure. Knowing the issues through previously-decided court cases can help educate borrowers.

Most homeowners facing foreclosure will have to deal with either a judicial foreclosure or the nonjudicial type, as these are the two most common methods that states allow lenders to take back properties. However, a few states still allow two different methods, one called strict foreclosure and the other called foreclosure by entry and possession. While they are used in only a minority of cases, borrowers should be aware of them.

In strict foreclosure states, once the homeowners have fallen behind, the lender goes into court and obtains an order that states the borrowers are in default of the mortgage contract. At this point, the judge is able to transfer the title to the property directly to the lender, without there ever being a foreclosure auction or involvement by the sheriffs department in conducting a sale.

Title to the property is transferred through court order directly from the homeowners to the bank, without a sale. Homeowners are usually given the right to redeem the property by paying the balance due on the loan, but the court decides how long this period will be for. At the end, if the property has not been redeemed, the lender owns the house and is able to have the borrowers evicted.

Obviously, strict foreclosure is an extremely unfair deal for homeowners, and the more equity they have in the property, the more unfair it becomes. A property underwater may not be a great loss to borrowers, but one that has several hundred thousand dollars in equity results in a huge transfer of wealth to the lender. Because there is no sale, there is no possibility the homeowners will receive any proceeds from their equity.

Because of the inherent inequality of the strict foreclosure process, only two states still allow them, Connecticut and Vermont. For homeowners in these two states, facing strict foreclosure can be a harrowing event, as all of their equity will simply be transferred over to the lender, which will then be able to list the property on the market and take all of the profits as their own. For making years of payments, homeowners will get nothing.

The second type of foreclosure that is used in only a small number of states is called foreclosure by entry and possession. This is allows lenders to enter into a property and take over possession for a period of time, at the end of which the lender becomes the sole owner of the house. It is also often paired with foreclosure by a power of sale, which allows lenders to sell a house at a trustee sale without initiating a lawsuit in court.

After the sale of the home through the power of sale clause, the homeowners are typically given the right to redeem the property for a period of time. However, the lender may enter the house or property and gain constructive possession. At the end of the redemption period, ownership of the house is finally transferred to the lender. This type of foreclosure is usually used to supplement a nonjudicial foreclosure.

The states that allow for a foreclosure by entry and possession are Maine, Rhode Island, New Hampshire, and Massachusetts. This is a few more states than use strict foreclosure, but the terms of this type are not as severely negative to the borrowers. In order to defend against a foreclosure by entry and possession, though, homeowners will have to initiate a lawsuit in court and attempt to obtain a temporary restraining order.

Although these two types of foreclosure are not often used by lenders, homeowners should be aware of what other tactics banks can use against them to take properties. While foreclosure by entry and possession is seemingly benign, strict foreclosure can erase homeowners' hard-earned equity in a home through nothing more than a court order. Thus, borrowers should be on guard against any legal tactics their banks may use against them.