Myths and Facts
It is a myth that lawyers can wave a wand and with a phone call or nasty letter “stop” foreclosure. We have no magical powers. It is a fact that foreclosure can be stopped – but the only sure way to do so is to file a lawsuit and successfully persuade a judge to issue a temporary restraining order prior to the foreclosure sale. After the sale occurs, the remedy that remains – a suit for wrongful foreclosure – is slightly different. Relief may be limited to a money judgment if the property was sold at foreclosure to a third party for cash (a bona fide purchaser or “BFP”). If that occurs, the possibility that the property itself can be recovered by the borrower is near zero.
Clients will often report that they have been engaged in reinstatement negotiations with the lender – usually consisting of numerous phone calls and messages – and ask if that is sufficient to avoid a scheduled foreclosure. The answer is a resounding “No.” Unless there is payment of the arrearage and a signed reinstatement agreement, the foreclosure will almost certainly go forward – even if the client is talking settlement with the lender just the day before. Note that reinstatement agreements must be in writing and signed by both parties. Phone calls mean nothing in this business.
Clients will sometimes state that they don’t want to sue the lender; they just want to get a restraining order to stop the foreclosure. The lawyer must reply “Sorry, it doesn’t work that way.” In order to get a restraining order, there must be an underlying suit, i.e., you must file an actual lawsuit before requesting a TRO – even if it is done the same day. For more information, see our companion article on this site entitled Texas Litigation – An Introduction.
Filing Suit to Stop Foreclosure
So why don’t more people sue to stop a foreclosure? The answer is simple: money. Filing suit and obtaining injunctive relief is expensive, and most lawyers will not do it for less than $5,000 (plus about $500 in costs) up front, and many require $10,000. Then there is the matter of the necessary bond (see the paragraph on injunctions, below) since the TRO is not enforceable unless supported by a bond. A person in financial distress may have difficulty coming up with this sort of cash, but here’s the blunt truth: if you cannot readily write a $5,500 retainer check to your attorney you have no business litigating in the expensive world of county and district court.
There is an additional issue: a borrower must have grounds for legal action or possibly face penalties for filing a frivolous suit. What constitute “grounds?” Perhaps notice of default from the lender or the lender’s attorney has been defective in some way; perhaps the borrower has an email from an employee of the lender promising to refrain from foreclosing while negotiations are taking place.
The Case of the Missing Loan Documents
A popular cause of action is to allege that the entity that is threatening foreclosure is not the legal owner and holder of the note against the property or cannot produce a copy of the original note, deed of trust, assignment of note, and the like. There are seminar speakers making the rounds today who argue that foreclosures can be challenged because the lender is required to have the original note and original deed of trust in hand – and many do not. This is not true. It is settled by case law that the lender need not have the original deed of trust; and ownership of the note can be proved by circumstantial evidence (e.g., payment for it) if necessary. Nevertheless, this approach can occasionally be useful in buying time, particularly if the borrower has exercised his rights under the Fair Debt Collection Practices Act and demanded proof of the debt within 30 days of the first notice. The borrower’s attorney can then argue to the judge that a TRO should be granted until true ownership of the note can be established.
In September of 2010, it was discovered by plaintiffs’ lawyers that employees of Ally (a mortgage loan servicer) were signing affidavits saying that their documents and loan balances were true without first reading these documents and verifying the information. These affidavits were presented to courts of law to support judicial foreclosure actions. One such employee signed as many as 10,000 affidavits in a month. The following month, Bank of America temporarily ceased foreclosures in 23 states. These “paperwork defects” sound awful, and they are, but the truth is that they will only delay the foreclosure process – not stop it altogether. The lender’s attorney can go back and get new affidavits or use other methods to prove up the debt, so the process may be slowed by such obstacles but not (in most cases) stopped altogether.
The point is that missing documents and defects in the lender’s file are not a fatal “gotcha” that allows the borrower to walk away from the mortgage and declare his property free of the lien – particularly since it is obvious to everyone, including the judge, that the borrower ceased paying his mortgage obligations some time ago. As the saying goes, “No one lives for free.”
Injunctive Relief (TRO’s and TI’s)
Injunctions are a complicated area and difficult for lawyers to explain to clients, so it would be useful at this point to review the law and procedure pertaining to injunctive relief. Firstly, an injunction is designed to prevent to prevent another party from taking certain action, such as foreclosure, that will cause irreparable harm to the person seeking a temporary restraining order or (See Rule 680, TRCP). A temporary restraining order (TRO) is a form of emergency, equitable relief that is good up to 14 days. It is granted (if at all) after notice to both sides and a hearing in ancillary court where both attorneys argue whether or not the TRO should issue. Clients do not testify at this hearing and usually are not even present.
A temporary injunction (TI) – which is the next step after a TRO expires – requires a more thorough hearing – usually a “mini-trial” at which the applicant must introduce evidence and testimony that shows a likelihood of prevailing upon the merits at trial. If granted, a TI usually remains in effect for the duration of the litigation.
The final step is a permanent injunction which is granted as part of a judgment and is usually indefinite in duration.
The “Clean Hands” Doctrine
Injunctions are considered to be “equitable” relief, short-term measures to maintain the status quo as a matter of fairness to all. If a borrower comes to court asking for a TRO to stop a foreclosure, and he has not made payments on the note for a year, you may expect that the judge will be less than enthusiastic about granting the request.
A Cash or Surety Bond is Required
Note that a bond is always required if a TRO or TI is granted – if no bond is posted, the order is invalid. The applicant for the TRO is usually granted a very short time to get this done.
Why a bond? The bond is designed to protect the interests of the party against whom the injunctive relief is awarded. The amount can be nominal or significant. Bonds in the amount of $5,000, $10,000, or $20,000 are common, although the amount can be set much higher. This is discretionary with the judge, and judges can be whimsical on this issue – I have seen bonds as low as $100, but that is less common. The bottom line is that the client needs to be prepared to post the bond in cash or be able to get a surety bond from a bondsman (this usually requires putting up collateral).
An applicant for a TRO or TI needs to be prepared to post the cash (which is refundable if the applicant prevails in the case) within 24 hours of the hearing or use a bondsman to do so. Bondsmen will require 10-20% of the bond amount as a non-refundable premium as well as collateral (e.g., a lien on real estate). Do not ask your attorney to seek a TRO or TI unless you have substantial resources with which to post a bond.
Ancillary Court Issues Injunctions
District judges (at least in Harris County) preside over the ancillary court in rotating terms of two weeks. Whether an injunction can be obtained depends on many factors, including the attitude of the judge presiding over ancillary court at the time. The outcome of an application for an injunction is never guaranteed. An application for an injunction adds a significant layer of complexity and expense to a lawsuit.
Can I get my property back?
As noted above, a post-sale wrongful foreclosure suit will not usually result in getting the property back if it was sold to a bona fide purchaser (rather than being purchased by the lender).
There are, however, two instances where Texas borrowers have a “right of redemption:”
(1) in cases where the property was sold for unpaid taxes, there is a 2 year redemption period for homestead property and 6 months for non-homestead property; and
(2) if a homeowners association forecloses an assessment lien, Prop. Code Sec. 209.011 provides that the homeowner may redeem the property until no “later than the 180th day after the date the association mails written notice of the sale to the owner and the lienholder under Sec. 209.101.” A lienholder also has a right of redemption in these circumstances “before 90 days after the date the association mails written notice . . . and only if the lot owner has not previously redeemed.” Note that an HOA is not permitted to foreclose on a homeowner if its lien is solely for fines assessed by the association or attorney’s fees. These provisions are part of the Texas Residential Property Owners Protection Act designed to reign in the once (and continuing) arbitrary power of HOA’s (Chapter 209 of the Code).
Wrongful Foreclosure Suits
Even if the property is not recoverable, it may be worthwhile to seek a money judgment against the lender – particularly if some sort of fraud can be proven, which would open the door to exemplary (treble) damages plus attorney’s fees. If a wrongful foreclosure suit is being considered, it should be filed quickly so that notice of the suit (called a “notice of lis pendens”) can be filed in the real property records. The real property records give constructive notice to the world of whatever is filed there. If the lender was the successful bidder, this notice may effectively prevent the lender from transferring the property to a bona fide purchaser. Again, once that transfer to a BFP takes place, it is unlikely that the borrower will ever recover the property.
The suit should allege that the loan documents (e.g., the note and deed of trust) were defective in some way; that the notices leading up to the foreclosure were defective or were sent to the wrong address; that there was some impropriety in the sale itself; or that the lender acted negligently or fraudulently.
Required Foreclosure Notices
What foreclosure notices are required? The answer to this question often involves placing the deed of trust side-by-side with the Property Code in order to determine what specific requirements exist. Usually, two certified mail notices to the borrower are required, the first being a “Notice of Default and Intent to Accelerate” which gives formal notice of the default and affords an opportunity for the borrower to cure it. The cure period must be at least 20 days for a homestead, although if the deed of trust is on the FNMA form, 30 days’ must be given (Note that SB 766 and SB 472, which did not make it out of committee in the 81st Legislature, would have extended the 20 day period. It is likely this legislation will be revived in the future).
The second required notice is a notice of acceleration – basically stating that the debtor failed to timely cure the default, and therefore the note is declared to be immediately due and payable. It is common for lawyers to include in this second letter a Notice of Trustee’s Sale which states the time and place of the anticipated sale.
As to the foreclosure sale itself, these are governed by Sec. 51.002 et seq. of the Texas Property Code and are held on the first Tuesday of each month between the hours of 10:00 a.m. and 4:00 p.m. at the courthouse of the county in which the property is located. There is no required “script” that must be read by the trustee, but certain formalities must be observed for a valid sale.
Note that there is no requirement that the sales price be fair. A sale cannot be set aside because the consideration paid is allegedly inadequate because it is less than market value (Sauceda v. GMAC Mortg. Corp., 268 S.W.3d 135, 139 [Tex. App. – Corpus Christi 2008, no pet.]). To prevail in a suit based on inadequate sale price, three elements must be proven: (1) grossly inadequate consideration; (2) defective foreclosure notices or sale; and (3) a causal connection between the defect and the inadequate consideration. The bottom line is that if the notices and sale were correctly done, then the sale will be valid even though the sales price was lower than market value.
A related but different court action is available under Prop. Code Sec. 51.004 which provides that a borrower “may bring an action in the district court in the county in which the real property is located for a determination of the fair market value of the real property as of the date of the foreclosure sale.” If the court finds that the fair market value is greater than the sale price, then the borrower is entitled to an offset against any deficiency claimed by the lender.
Another Alternative: Deeding the Property to the Lender
If you are unable to stop an imminent foreclosure, you have to take a cold, hard look at your options. It may be prudent to take action to minimize the damage – a “deed in lieu of foreclosure,” which is a specialized instrument designed to transfer property to the lender in satisfaction of a debt and in exchange for a full and complete release. This has traditionally occurred when both parties expressly give their consent. However, since few if any lenders nowdays will agree to this arrangement, an unconventional approach might call for deeding property to the lender anyway – even if the lender does not expressly agree in advance to discharge and release the debt – since only the grantor (not the grantee) signs a deed.
What are the benefits of doing this? For the answer, one must look at the three primary after-effects of foreclosure: negative credit impact for seven years; the potential for a deficiency lawsuit by the lender (“deficiency” being defined as the difference between the unpaid note amount and the amount the lender receives at the foreclosure sale); and, often worst of all, the prospect that the IRS will deem the deficiency amount to be ordinary income that is taxable to the borrower. That could be a whopping amount (deficiencies in the $100,000 range are not uncommon now) and the borrower would have to take that amount as ordinary income all in one year. The IRS consequences could therefore be the worst aspect of the foreclosure process.
Deeding the property to the lender, so long as the deed includes specific clauses and recitals favorable to the borrower, could mitigate these ill effects. See our companion article on this site, Deeding Property to the Lender.
Bottom line? If in doubt about whether or not a foreclosure is going to occur, file suit and get a temporary restraining order to stop it. “Wait and see” is the worst possible strategy in this case, since it is always more difficult to correct the situation after the foreclosure sale has occurred. The judge will likely ask (without much sympathy) “Why, since you knew about these various alleged defects, did you not take action to stop the foreclosure?”
Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. Although we will respect your confidentiality, this firm does not represent you unless and until it is retained and agrees in writing to do so.
THIS DOCUMENT IS NOT INTENDED TO BE USED, NOR CAN IT BE RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES IMPOSED UNDER UNITED STATE FEDERAL TAX LAWS. THIS DOCUMENT DOES NOT CONSTITUTE DOES NOT CONSTITUTE A TAX OPINION OR OTHER ADVICE TO WHICH CIRCULAR 230 IS RELATED.
Copyright © 2010 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization.More information is available at his websites, http://www.LoneStarLandLaw.com, http://www.TexasSeriesLLC.com., and http://www.TexasAssetProtection.com