Mortgage loans are often bought, sold, and securitized, and confusion sometimes arises over who is the proper party to start a foreclosure. So, one common defense to a foreclosure is that the bank—or other foreclosing entity—doesn’t have the legal right to foreclose. This defense is based on the legal principle of “standing.” It’s typically difficult to win a challenge to a foreclosure based on this standing, but not impossible.
Keep reading to learn more about a foreclosure defense based on standing and whether this defense is likely to help you keep your home.
To understand the concept of standing in a foreclosure case, you must first understand two important loan documents that you likely signed when you took out your home loan: the promissory note and the mortgage (or deed of trust).
Promissory note. The promissory note contains the borrower’s promise to repay the money borrowed. This document identifies the principal amount of the loan, as well as the repayment terms, like the interest rate and monthly payment amount. Under the Uniform Commercial Code (UCC), a note is a negotiable instrument, like a check, which may be transferred by:
Mortgage or deed of trust. The mortgage or deed of trust, on the other hand, is the document that gives the bank a security interest in the property. If a bank has a security interest in a property and the borrower defaults (stops making payments or breaches the mortgage contract in some other way), the bank may sell the property to satisfy the debt. (Get further details about the difference between a promissory note and a mortgage.) When a loan is transferred from one bank to another, an assignment of mortgage or deed of trust is usually recorded in the land records.
During the foreclosure crisis, attorneys representing homeowners were sometimes successful in delaying or derailing foreclosures on the grounds that “standing” had not been satisfactorily established due to gaps in the chain of endorsements or assignments. The legal theory involves a concept called “standing”—that is, who has the right to foreclose.
Homeowners sometimes think that in order to have standing, the foreclosing bank must produce the note as well as an assignment showing that the loan was transferred to that bank. But when a promissory note transfers from one party to another, many courts have decided that the mortgage or deed of trust that secures the loan automatically follows the note. This means that the foreclosing party doesn’t have to provide an assignment to foreclose. Often, so long as the foreclosing party has the right to enforce the note, it has standing to foreclose. (Certain states, though, do require a valid assignment before a foreclosure may proceed.)
While in the past, homeowners were regularly able to stop or delay a foreclosure by arguing that the foreclosing bank lacked standing, this argument is a more of an uphill battle these days. Now, foreclosing banks are much more careful about addressing any gaps in the paperwork before starting a foreclosure. Also, courts have heard this issue often and have decided against homeowners in many situations, making it harder to prevail on an argument based on standing.
Still, your case may be the exception. While arguing that the bank lacks standing is less likely to be successful that it once was, homeowners are occasionally able to use this defense to stop a foreclosure—even if only temporarily. For example, in a foreclosure case in late 2017, the Florida District Court of Appeal, Fifth District, found that the foreclosing party did not demonstrate proper standing at the time it started the foreclosure and reversed a final foreclosure judgment, and remanded the case for entry of an involuntary dismissal.
The requirements regarding standing in foreclosure cases vary from state to state. If you're facing a foreclosure and think the foreclosing party in your case doesn’t have the legal right to do so, consider talking to an attorney who can give you information about the laws in your state, let you know whether an argument based on standing is likely to be successful in your case, and give you advice about what to do in your particular circumstances.