Foreclosed homeowners are becoming feistier in their own defense, with more and more raising novel legal challenges to foreclosures.

Unlike in judicial foreclosure states where borrowers are automatically entitled to appear in court to contest the foreclosure complaint, in non-judicial states like Massachusetts a borrower who objects to some aspect of the foreclosure must bring their own counter-suit in order to contest the bank’s action. Few borrowers have traditionally done so.

But that may be changing, as lawyers who defend borrowers are becoming more creative and audacious in their challenges to banks. Though foreclosures are normally handled in the Land Court, lawyers are beginning to become more aggressive in pursuing other avenues of defense. Though it’s difficult to get precise numbers because Massachusetts courts do not release statistics on cases by category, an examination of superior court dockets reveals dozens of countersuits against banks filed in the past year in foreclosure cases, compared to just a handful in 2008 and 2009.

Even federal courts have seen their foreclosure caseload increase, with more than 40 foreclosure-related cases filed this year – more than double last year’s number.

Attorneys representing lenders told Banker & Tradesman that widespread coverage of national litigation against lenders has led local borrowers and their attorneys to become more aggressive in their own litigation.

Attention Grabbing

Consumer attorneys have noted the sea-change among borrowers.

“From my perspective, it’s way more common now to sue or counterclaim against the bank,” said Charles Proctor, an attorney in Oxford. After prosecuting only a handful of such cases previously in his career, in the past year and a half he’s taken on a dozen.

With the exception of declaring bankruptcy, there have historically been few ways for Massachusetts borrowers to bring foreclosure cases to court until after the foreclosure had occurred. Under Massachusetts state law, lenders must inform the Land Court of their intention to foreclosure on the property and obey all legal proscriptions regarding notifying borrowers, and arranging and announcing foreclosure sales. They must also swear that the borrower is not a member of the armed services (and therefore entitled to certain rights under the federal Service Member’s Relief Act).

The increase in filings may not have much effect on final outcomes. It’s not uncommon for down-on-their luck homeowners to represent themselves in foreclosure defense, and their lack of legal training is a significant hindrance to success. Even when the homeowner has retained a lawyer, the end – and desired – result may be merely a delay in the foreclosure process to allow time for a short sale to go through.

Consumer attorneys told Banker & Tradesman that oftentimes, with lenders generally overwhelmed and inflexible, a countersuit may be the only way to get their attention.

For one homeowner “there was a series of reasons why I thought the lender hadn’t been fair about the loan modification and why they denied it,” according to Scott Lucey, an attorney in Malden. Unable to get the lender to reconsider, he brought suit in Superior Court. “And at that point, that was the leverage we needed with the lender.”

The delay allowed the client to arrange a short sale.

Mired In Modifications

Modifications themselves may provide a fertile ground in attempting to defend borrowers from foreclosure. The federal Home Affordable Modification Program (HAMP), which almost all major banks have agreed to participate in, requires that lenders who participate in the program review all applicants for a modification.

Attorneys have seized on that requirement to argue that lenders who haven’t offered borrowers modifications shouldn’t be allowed to proceed with foreclosures. Many have been successful in obtaining temporary stays.

The controversial Ibanez decision raised questions over who and what entity actually owns a securitized mortgage note and has a right to sue. In its aftermath, issues of standing remain fertile ground for lawyers, said Kathleen C. Engel, a professor at Suffolk University Law School. Lenders that can’t prove they own proper assignments are increasingly at risk.

“How that gets resolved is very uncertain,” Engle said. “It could be that the behavior of the lender was so extreme that the court just says, ‘I’m voiding the obligations altogether,’ which has happened in some courts.”

It’s clear that lawyers are only getting more inventive in their attempts to stymie banks. Glenn Russell, a Fall River attorney, said he believes he’s discovered a new defense for borrowers which could force banks to prove they own the note before initiating foreclosures, even in non-judicial states like Massachusetts.

Russell’s strategy involves asserting that lenders need to prove they own the loan in order to file a Service Member’s Relief Act affidavit, the one part of Massachusetts proceedings where an affidavit is required. If lenders already must prove a homeowner being foreclosed upon is not a member of the military, Russell argues, then it follows they must also prove they own the note.n