More homeowners seeking day in court, attorney says
by: J. Craig Anderson - Jun. 26, 2009 12:00 AM The Arizona Republic
A growing number of home-mortgage holders in foreclosure are taking their lenders to court, where they are posing fundamental questions about the banks' legal right to repossess their homes, said an attorney addressing a packed crowd of lawyers Thursday at the State Bar of Arizona 2009 Convention in Phoenix.
"I'm actually going to raise more issues than I have answers for, because that's what's happening here in Arizona," Tucson attorney Beverly Parker, of Southern Arizona Legal Aid, told an audience of about 200 inside a meeting room at the Arizona Biltmore Resort and Spa.
Lenders have sought to avoid expensive litigation in their efforts to foreclose on thousands of mortgage holders who have fallen behind on their payments, Parker said, opting for the non-judicial trustee's-sale process. However, in some cases, it's the homeowners facing foreclosure who are asking for their day in court, she said.
Sometimes, it's because the lender has ignored their requests to work out a loan modification or short sale. Others dispute the amount the lender says they owe, Parker said.
Courts rarely grant injunctions to stop pending foreclosures before they happen, she said, so most borrowers looking to fight off the bank have chosen Bankruptcy Court as their battleground.
Filing for personal-bankruptcy protection automatically postpones any scheduled foreclosure, giving the borrowers time to identify all parties with a financial stake in the loan and to mount an effective defense.
"One of the biggest problems is: 'Who do you sue?' " Parker said.
A federal court recently noted in one of its rulings that Arizona judges have yet to decide whether mortgage holders can sue the lender for wrongful foreclosure, Parker said.
Generally, what the borrowers want is an opportunity to negotiate better repayment terms with their lender, she said. They believe the threat of losing a wrongful-foreclosure lawsuit will persuade the lender to take their request more seriously.
A few key legal challenges to home foreclosure have been raised that, if successful, could have far-reaching effects on the way future home loans are issued and managed.
One of those challenges relates to the two-part nature of Arizona mortgages, which consists of a deed of trust and a promissory note, Parker said.
The deed holder has a legally established interest in the property, and the note holder is the party to whom the debt is legally owed.
In some cases, particularly if the loan was sold to the mortgage-backed securities market, the foreclosing lender holds the deed but not the note, Parker said. Often, the bank doesn't even know who holds the note, she said, and it may not have any written record of the note's transfer.
In essence, defense attorneys in such cases are arguing that the bank cannot foreclose for non-payment because it is not the party to whom the payment is owed.
"I used to think it was sort of a trivial issue, but it's not," Parker said.
She said she views legal challenges such as the lender's right to foreclose as tools to pressure banks to work harder on loan modifications.
In many cases, those tools have been effective, she said. "The burden of proof is on them (the lenders)," Parker said. "Once you've raised the issue, they have to address it."