If you’ve defaulted on your mortgage, your lender has the right to start the foreclosure process. Foreclosures that happen outside the court are called nonjudicial foreclosures. But even with nonjudicial foreclosures, you still have legal rights and defenses against the foreclosure proceeding.
If you’ve defaulted on your mortgage, your lender has the right to start the foreclosure process. In some states, this must go through the court system but in others, it doesn’t. Foreclosures that happen outside the court are called nonjudicial foreclosures. But even with nonjudicial foreclosures, you still have legal rights and defenses against the foreclosure proceeding. One important defense is that the lender didn’t follow the required procedures. Another is that they didn’t have a valid legal reason to foreclose.
If either of these happens to you, you can file a wrongful foreclosure action in court against the mortgage lender, the mortgage servicer, the holder of the note, and/or the trustee. In most states, you also have the legal right to ask for a court order to stop the foreclosure process when you file your action for wrongful foreclosure.
Wrongful Foreclosure Causes
Wrongful foreclosures don’t often happen intentionally or because the lender wants to spite the borrower. More frequently, they’re a matter of miscommunication between the lender and borrower or mismanagement of the mortgage including mistakes. For example, a lender might incorrectly calculate interest rate adjustments or incorrectly apply your mortgage payment.
This is why it’s important for you to keep records of your payments and communications with your lender and to review everything the lender sends you. It’s easy to assume lenders always get things right, but since this isn’t always true, make sure you review your monthly statements and report errors as soon as you see them.
Other reasons that lead to wrongful foreclosure include:
Failing to apply your mortgage payments correctly;
Making inaccurate adjustments to your interest rate or escrow account;
Failing to honor your forbearance agreement;
Failing to cancel your private mortgage insurance promptly;
Foreclosing earlier than allowed by recent federal protections put in place due to the COVID-19 pandemic;
Engaging in practices that violate the 1968 Truth in Lending Act (TILA)
Failing to comply with your loan modification agreement; and/or
Failing to give you timely notices you are entitled to receive under federal and state law, such as a notice of default a pre-foreclosure breach notice, and a notice of special protections you may have if you are in the military.
Each state also has laws that protect borrowers from unfair and deceptive acts and practices. If your mortgage lender engages in unfair business practices, for example, you may have a viable defense to a foreclosure action. Similarly, if your mortgage lender breaches the terms of your loan agreement or promissory note, you may have a valid defense. As the homeowner, you have the right to demand that the mortgage lender produce the promissory note to prove that they have the legal right to seek foreclosure.
In some cases, mortgage lenders may also engage in intentional wrongdoing, such as using a fraudulent affidavit in the foreclosure process. You may also raise a defense for negligent or intentional infliction of emotional distress, and if you prevail, you may be entitled to actual and punitive damages. It is wise to consult a wrongful foreclosure attorney to see what legal defenses may apply to you.
Proving a Wrongful Foreclosure Lawsuit
It's very difficult to prove wrongful foreclosure lawsuits. You must prove that the mortgage lender owed you a legal duty, breached that duty, and that the breach caused some kind of injury or loss. This injury or loss is called damages. You must show what those damages are. If you’re able to prove all three things and that the mortgage lender didn’t operate in good faith, you can apply for a dismissal of the foreclosure. You may also be able to sue the lender for those damages. If you win, you’ll get compensation.
As you can see, proving a wrongful foreclosure lawsuit requires a lot. And since there are also many different reasons a wrongful foreclosure may occur, it will take some strategy and legal knowledge to figure out your best defense. Given all this, it’s best to seek advice from an experienced foreclosure attorney.
Stopping Foreclosure With an Injunction
Though nonjudicial foreclosures happen more quickly than judicial foreclosures, there are still several steps before a foreclosure sale or auction. Any time before this sale, you can apply for an order with the court — called an injunction — to have the foreclosure stopped until the lawsuit is complete. A judge will only issue an injunction if they believe the borrower is entitled to it and that without the borrower will experience irreparable harm.
If you choose to file a lawsuit against your mortgage lender for wrongful foreclosure, it’s important to do so within your state's statute of limitations. This is essentially the timeline you have to bring a case. Each state’s statute of limitations will be different. In California, for example, the statute of limitations to bring a wrongful foreclosure action is generally three years.
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Recent Wrongful Foreclosure Cases
As mentioned, wrongful foreclosure lawsuits are difficult cases to win. But some recent wrongful foreclosure cases have suggested a pattern with mortgage lenders.
Florida banks, such as Wells Fargo, have made home loan modification agreements with homeowners that allow them to pay a lower mortgage payment for a period of time. These agreements are a form of loss mitigation, which lenders offer to borrowers to avoid foreclosure. That’s because the foreclosure process can be costly and time-consuming for both borrowers and lenders.
In the case of Wells Fargo, the borrowers made the lower payments as agreed. Then the bank agreed to modify their mortgage loans permanently instead of foreclosing. Instead of following through with the agreement, though, the bank took the payments then refused to honor the permanent modification agreement. As a result, the homeowners’ properties were wrongfully foreclosed.
A California homeowner sought punitive damages against Wells Fargo for another loan modification issue. The homeowner complained that Wells Fargo deliberately made a modification agreement but never intended to follow through with it.
Compensation for Wrongful Foreclosure
If you decide to sue your lender for wrongful foreclosure and you win, you may be entitled to several forms of compensation, including compensation for:
The loss in value of your property
A decrease in your credit score due to the foreclosure
The difficulty caused by having to move to find a new school and neighborhood
You may also be entitled to punitive damages if you can prove the mortgage lender’s actions were fraudulent or their conduct was harmful. The federal government caps punitive damages in these cases at nine times the value of damages proven in court. So if a wrongful foreclosure lawsuit claimed $50,000 in damages, the maximum punitive compensation would be capped at $450,000.
Though nonjudicial foreclosures happen outside the court system, as a homeowner you still have legal rights. Specifically, if the lender did not follow the proper procedures or acted unlawfully, you can bring a wrongful foreclosure case against them in court. A judge may issue an injunction, or order, to stop the foreclosure process during this time, assuming the foreclosure sale hasn’t begun.
These cases are very difficult to win, and you’ll need to have a strong defense. It’s often best to consult with an experienced attorney who can help you build a strong case and prove everything that’s required by the court. If you’re successful in court, you may be able to win compensation for damages.