January 26, 2010

For those defending foreclosure, it is important to keep current on the property taxes and insurance on the property for at least two reasons. It is also important to investigate the status of any “escrow” or “impound” account on a mortgage loan.

“Escrow” or “impound” loans take a portion of the monthly mortgage payment and apply it to an “impound” or “escrow” to build a reserve to pay property taxes and insurance unless the borrower elected a “no impound” or “no escrow” loan, in which case the borrower is responsible for property taxes and insurance from day one. Most loans, however, are “escrow” or “impound”. The reserve is maintained at an amount in excess of future expenses so that when expenses (taxes and insurance) are billed they can be paid immediately. When a property goes into foreclosure, however, the lender or servicer has no monthly mortgage payment coming in, and thus may either (a) stop funding the reserve, or (b) fund it and seek to assess it against the borrower later.

If a borrower is in foreclosure and has an “escrow” or “impound” loan, the borrower should contact the servicer or lender or whoever maintains the reserve to ascertain its status. As long as there is a surplus, this is used to pay property taxes and insurance. When the reserve is close to being exhausted, the borrower should make arrangements with the taxing authorities to pay the property taxes and also take out an insurance policy on the property for two reasons.

The first is obvious. If the taxes are not being paid, the taxing authorities will take the property regardless of any defense being asserted to the foreclosure, and if there is no insurance and the property is destroyed through fire, flood, etc., the servicer or “lender” will seek damages for destruction of the collateral.

The second is not so obvious unless the borrower is defending a foreclosure and asserting standing, chain of title, and related defenses. In nonjudicial foreclosure states, the posting of a bond is necessary as a condition of an injunction being granted to stop a foreclosure sale. There is no such requirement in judicial states, as the foreclosure is litigated to judgment before any sale is scheduled, and thus no sale can be scheduled until the case concludes by judgment and thus there is no need for an injunction to “stop a sale”.

The calculation of the amount of the bond is a matter of evidence. A typical argument made by the servicer or “lender” is: “Well, Judge, we will have to be paying taxes and insurance on the property pending the litigation, so we need to be protected as to those expenses, and thus we need a bond for at least a year’s worth of insurance and taxes”. If the borrower takes care of the taxes and insurance, this argument goes out the window. In fact, a borrower in a case FDN is defending in Georgia was presented with this same argument by counsel for the servicer, which counsel was astonished to hear the borrower testify that she had not only paid the taxes and they were current, but that the insurance was current as well. As such, the servicer’s whole argument was rejected.

There is actually a third reason for a borrower to maintain their own insurance on the property. If there is no insurance or it lapses due to nonpayment (when the reserve is exhausted), the servicer will “force place” insurance on the property and charge the borrower double, triple, or more for the same coverage which the borrower could have obtained on their own by simply calling up an insurance company and getting their own policy. 

Another scam that the “lenders” or “servicers” try to get away with is sending the borrower a letter stating that they have assumed servicing of the loan and that the insurance which the borrower obtained at closing is “insufficient for our standards”, and if the borrower does not pony up the additional monies, the servicer will “force place” insurance. This practice is totally illegal, as one acquiring servicing or other rights to a mortgage loan has no right to unilaterally insist on increasing the amount of insurance as the borrower did not agree to this. We caught Saxon Mortgage trying to pull this nonsense several years ago, and when they were confronted with the law on assignment and assumption of contracts, they backed off. However, for those borrowers who did not challenge this practice, Saxon got away with it.

Remember, the foreclosure business is about money, and the more money the servicer or “lender” can make through inflated insurance charges, inflated “potential” expenses, and the like, the better for their balance sheet. It is a simple matter for the borrower to take the wind out of the “lender” or servicer’s sails as to these matters by making two phone calls and taking care of the taxes and insurance on their own.

Jeff Barnes, Esq., www.ForeclosureDefenseNationwide.com