FORECLOSURE FROM THE LENDERS PERSPECTIVE

Presented by: IRA RHEINGOLD National Association of Consumer Advocates Washington, D.C. ROBERT W. DOGGETT Texas Rio Grande Legal Aid, Inc. Austin

Written by and Reprinted with Permission of: G. TOMMY BASTIAN Barrett Burke Wilson Castle Daffin & Frappier, L.L.P. 15000 Surveyor Boulevard, Suite 100 Addison, Texas 75001 972.341.0500 tommyb@bbwcdf.com

State Bar of Texas ADVANCED CONSUMER AND COMMERCIAL LAW COURSE November 13 - 14, 2008 Dallas CHAPTER 19

ROBERT W. DOGGETT
4920 N. IH-35 Austin, Texas 78751 (512) 374-2725 Education May 1990 Juris Doctor, Southern Methodist University, School of Law Top Quarter Awards: Houser Award, Texas Low Income Housing Information Service (2007) Award of Appreciation, ACORN (2007) Five Who Got It Right, Richard Zitrin, 13 Widener L.J. 209 (2003) Golden Gavel Service Award (1996) A.J. Thomas, Jr. Award for Outstanding Service (1990) State Bar of Texas, Student Division, for Professionalism (1990) Southern Methodist University Outstanding Service (1990) Student Bar Association Outstanding Service (1990) May 1987 Experience 9/01 - Present Texas RioGrande Legal Aid, Inc. (Austin, Texas) (formerly Texas Rural Legal Aid) Team Leader, Foreclosure Prevention and Predatory Lending Team focuses on the prevention of home loan foreclosures and unscrupulous lending practices. Member of other teams: Private Landlord-Tenant, Federally Subsidized Housing (e.g., vouchers, public housing), Colonias and Real Property, and Homeless. Other cases of interest: FDLS appellate cases resulting in return of the children, Border wall defense. City of Dallas, City Attorneys Office (Dallas, Texas) Section Chief, Code Compliance Section Created a new strategy and formulated a new section of the city attorneys office that brought suits against property owners for significant violations of minimum housing standards and other ordinances of the City of Dallas. Court orders were obtained requiring owners to remedy all their violations of all their properties within specific deadlines, rather than thousands of unprosecuted citations. Created a new procedure for the removal of severely damaged, vacant and totally abandoned properties to prevent deterioration of neighborhood. Reviewed investigative complaints filed with the Citys Fair Housing Office. Initiated litigation against owners where cause existed that a fair housing violation occurred. Legal Services of North Texas (Dallas, Texas) Lead Attorney, Public Policy/Law Reform Division Represented low income groups in a variety of civil disputes (e.g., housing, environmental). Litigation initiated on behalf of these groups or individuals where issue affected low income people in region. Also, utilized legislative advocacy to achieve objectives. Housing Crisis Center (Dallas, Texas) Staff Attorney Assisted low income individuals with housing disputes. Priorities included evictions, utility disconnections, and extreme living conditions. Administered a B.B.A., Texas A&M University, Cum Laude

8/99 - 8/ 01

8/94 - 8/99

9/90 - 8/94

pro bono advice and referral program which recruited, trained and organized private attorneys to provide free legal services to low income people with a variety of housing disputes.

Activities: Member, Texas Foreclosure Prevention Task Force Legal Services to the Poor in Civil Matters Committee, State Bar of Texas Member, National Association of Consumer Advocates Housing Law Task Force Chair Legal Front (formerly ALERT) contributing writer Poverty Law Conference Speaker, Organizer Author Attorney Desk Reference Volunteer Attorney of Texas Low Income Housing Information Service Author, Texas Tenants Advisor (www.texashousing.org) Texas Real Estate Commission Advisory Committee on Broker Responsibility, 2008 A Study of Residential Foreclosures in Texas, Advisory Committee, 2006 (report required by HB 1582, Tex. Leg., 79th Reg. Ses.) Blog: ForeclosureBuzz.org

BIOGRAPHY Ira Rheingold is Executive Director and General Counsel of the National Association of Consumer Advocates (NACA), an organization dedicated to protecting consumers from unfair and deceptive business practices. At NACA, Mr. Rheingold has testified before both Houses of Congress on various mortgage lending and consumer finance issues, offered commentary before federal agencies charged with regulating financial service industries and protecting consumers, and helped draft amicus briefs on issues of great concern to consumers before the nations highest courts. Mr. Rheingold also manages the Institute for Foreclosure Legal Assistance, a joint project of NACA and the Center for Responsible Lending. Before coming to NACA, Mr. Rheingold worked at the Legal Assistance Foundation of Chicago as a supervisory attorney in charge of the Foreclosure Prevention and Senior Housing Projects. His responsibilities included community outreach and education, legal and policy advocacy and the development of impact litigation against predatory mortgage lenders. The major focus of his litigation practice was the representation of senior and disabled homeowners victimized by mortgage brokers, lenders and contractors who targeted minority low-income communities with high interest, high fee home equity loans. Mr. Rheingold also worked for three years as a legal services attorney in suburban Washington D.C. At that job, his primary work included welfare advocacy and homelessness prevention. Prior to becoming a legal services attorney, Mr. Rheingold worked as an advocate for low-income community groups in rural Southern Maryland. He is a graduate of Georgetown University Law Center.

G. TOMMY BASTIAN
Barrett Burke Wilson Castle Daffin & Frappier, L.L.P. 15000 Surveyor Blvd., Ste. 100 Addison, Texas 75001 (972) 341.0500 Telephone (972) 341.0734 Facsimile tommyb@bbwcdf.com

BIOGRAPHICAL INFORMATION EDUCATION B.A., Howard Payne University J.D., Texas Tech Law School U.S. Army Command & General Staff College U.S. National Defense University PROFESSIONAL ACTIVITIES Board Certified: Residential Real Estate Law, Texas Board Legal Specialization Member: American Bar Association, Real Property & Probate; Litigation Sections Member: Texas Bar Association, Real Property & Probate; Litigation Sections Member: Mortgage Bankers Association, Legislative Committee Member: Texas Mortgage Bankers Association, Vice Chair Government Relations Committee; Vice Chair Education Committee Member: Texas Land Title Association, Seminar, Judiciary and Legislative Committee; Master Indemnity Task Force Member: Supreme Court Reverse Mortgage Task Force LAW RELATED PUBLICATIONS, ACADEMIC APPOINTMENTS, AND HONORS Author: National Mortgage Service Reference Director: Texas Edition 1991-Present Author: Texas Mortgage Lending Law & Practice Deskbook: Servicing Edition 1998-Present Author: Trouble Stirs for Debt Collectors, Servicing Management, Vol. 15, No. 3, Oct. 2003 Author/Speaker: Probate When the Mortgagor is Deceased, Texas Land Title and St. Marys Law School Institute, Dec. 1992 Author/Speaker: Mortgage Foreclosure in Texas, Texas Land Title and St. Marys Law School Institute, Dec. 1993 Author: Fair Debt Collection Practices Act, State Bar of Texas Bankruptcy Advanced Course, 1997 Author/Speaker: The Republic of Texas, 27th Annual County & District Clerk Continuing Education Seminar, March 1999 Author/Speaker: Practical Foreclosure Tips for Texas Real Estate Loans, Mortgage Lending Institute, Univ. of Texas, Sept. 1999 Author/Speaker: Republic of Texas Liens, Texas Land Title & St. Marys Law School Institute, Dec. 1999 Author/Speaker: The Republic of Texas, 28th Annual County & District Clerk Continuing Education Seminar, Mar. 2000

Author/Speaker: How to Avoid Liability as a Substitute Trustee, South Texas College of Law Real Estate Law Conference, May 2000 Author/Speaker: Black Mold and the Mortgage Servicer, Texas Mortgage Bankers Seminar, Apr. 2002 Author/Speaker: 10 Ways to Avoid a Wrongful Foreclosure, South Texas Real Estate Law Conference Author/Speaker: MERS: What Is It? Texas Land Title and St. Marys Law School Institute, Dec. 2002 Author/Speaker: 78th Session Legislative Change: Texas Mortgage Bankers Association, Feb. 2003 Author/Speaker: From Demand to Sale and Everything in Between, Texas Saving & Community Bankers Associates & Independent Bankers Association, Mar. 2003 Author/Speaker: Remedies in Foreclosure, Advanced Real Estate Remedies Workshop, May 2003 Author/Speaker: Mortgage Electronic Registration System, South Texas College of Law Real Estate Conference, May 2003 Author/Speaker: Real Estate Remedies, Law Seminar International, May 2003 Author/Speaker: Texas Rules of Civil Procedure 735 & 736, Texas Association for Court Administration, Sept. 2003 Author/Speaker: Mobile Homes in Texas, Carolina Mortgage Banking Seminar, Sept. 2003 Author/Speaker: Does Foreclosure Require Bankruptcy? State Bar of Texas Advanced Consumer Bankruptcy Course, Sept. 2003 Author/Speaker: Foreclosure and Workouts Involving Farm & Ranch Issues, Texas Land Title and St. Marys Law School Institute, Dec. 2003 Author/Speaker: Farm and Ranch Foreclosures, State Bar of Texas Real Estate Advanced Course, Dec. 2003 Author/Speaker: Bankruptcy and Foreclosure, Texas Land Title DFW Regional Seminar, 2003 Author/Speaker: Manufactured Housing, Mortgage Bankers Association National Servicing Conference, Feb. 2004 Author/Speaker: Title Cures, Texas Land Title School, Mar. 2004 Author/Speaker: MERS, REOMAC Education Conference, Mar. 2004 Author/Speaker: MERS, Fidelity National Title Agents Education Seminar, June 2004 Author/Speaker: Servicemember Civil Relief Act, UT Mortgage Lending Institute, Sept. 2005 Author/Speaker: Foreclosure Primer, Texas Association of Bank Counsel, Oct. 2005 Author/Speaker: Mortgage Elimination Scams, Tax Liens, MERS, Texas Land Title Association, Oct. 2005 Author/Speaker: Foreclosure Forms, State Bar of Texas Advanced Real Estate Drafting Course, March 2006 Course Director: Advanced Real Estate Course, State Bar of Texas, June 2006 Author/Speaker: Unique Foreclosure Forms, State Bar College Summer School, July 2006

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TABLE OF CONTENTS I. II. INTRODUCTION................................................................................................................................................... 1 LEGAL OVERVIEW ............................................................................................................................................. 1 A. Historical Foreclosure References................................................................................................................... 1 B. The Strict Construction Rule ........................................................................................................................... 1 C. Effect of Foreclosure on Other Liens .............................................................................................................. 1 D. Statute of Limitations ...................................................................................................................................... 1 E. U.C.C. Does Not Apply................................................................................................................................... 2 F. Foreclosure Presumptions ............................................................................................................................... 3

III. PRE-FORECLOSURE BASICS............................................................................................................................. 3 A. Foreclosure Timeline....................................................................................................................................... 3 B. The Players ...................................................................................................................................................... 3 1. The Borrower........................................................................................................................................... 3 2. The Note Holder ...................................................................................................................................... 4 3. The Investor............................................................................................................................................. 4 4. The Mortgage Servicers........................................................................................................................... 5 5. Rating Agencies....................................................................................................................................... 6 C. Loan Documentation ....................................................................................................................................... 6 1. Deed of Trust ........................................................................................................................................... 7 2. Notes........................................................................................................................................................ 7 3. Missing Interest Rate ............................................................................................................................... 8 4. Escrow Accounts ..................................................................................................................................... 8 D. Chain of Title................................................................................................................................................... 9 1. Texas Tax Liens....................................................................................................................................... 9 2. Federal Tax Liens .................................................................................................................................. 10 3. Prior Unreleased Liens .......................................................................................................................... 10 4. Labor Liens............................................................................................................................................ 11 5. Abstract Judgments................................................................................................................................ 11 6. Constitutional Mechanics and Materialmans Liens ............................................................................ 11 7. Mechanics and Materialmans Liens.................................................................................................... 11 8. Receiverships......................................................................................................................................... 12 9. Temporary Restraining Orders and Injunctions .................................................................................... 13 10. Deceased Mortgagor.............................................................................................................................. 13 11. Republic of Texas (ROT) and Debt Elimination Scams .................................................................... 14 E. Loss Mitigation.............................................................................................................................................. 15 F. Servicing Guidelines ..................................................................................................................................... 16 G. Servicemembers Civil Relief Act................................................................................................................. 16 1. Introduction ........................................................................................................................................... 16 2. Military Status ....................................................................................................................................... 17 3. Courts and Administrative Proceedings ................................................................................................ 17 4. Person Covered...................................................................................................................................... 18 5. Significant SCRA Provisions ................................................................................................................ 18 6. Creditors Rights.................................................................................................................................... 18 7. Materially Affected................................................................................................................................ 19 8. Six Percent Cap 527 ........................................................................................................................... 19 9. Mortgage Foreclosures 533 ................................................................................................................ 20 10. Waiver of SCRA Rights 517 .............................................................................................................. 20 11. The Heart of the Act 522................................................................................................................. 20 12. Default Judgments 521 ....................................................................................................................... 21 H. Debt Collection Acts ..................................................................................................................................... 22 1. Federal Fair Debt Collection Practices Act ........................................................................................... 22 2. Texas Debt Collection Practices Act ..................................................................................................... 23 I. Qualified Written Request............................................................................................................................. 24
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IV. THE FORECLOSURE PROCESS ....................................................................................................................... 25 A. Default ........................................................................................................................................................... 25 B. Cure of Default.............................................................................................................................................. 25 C. Foreclosure Notices ....................................................................................................................................... 26 1. Mortgagors Address ............................................................................................................................. 26 2. Demand.................................................................................................................................................. 27 3. Acceleration........................................................................................................................................... 27 4. Reinstatement after Acceleration........................................................................................................... 28 5. Waiver ................................................................................................................................................... 29 6. Posting Notice, i.e., Notice of Date, Time, and Place of Foreclosure Sale ....................................... 29 7. Notice Defects ....................................................................................................................................... 30 D. Trustee ........................................................................................................................................................... 30 1. Appointment .......................................................................................................................................... 30 2. Trustees Duties..................................................................................................................................... 31 3. Trustees Deed....................................................................................................................................... 31 4. Trustee Escape Clause ........................................................................................................................... 32 5. Excess Proceeds..................................................................................................................................... 32 E. Conducting the Sale....................................................................................................................................... 32 1. Foreclosure Bid...................................................................................................................................... 33 2. Bidders Peril......................................................................................................................................... 33 3. Inadequate Consideration ...................................................................................................................... 33 4. Chilled Foreclosure Sale .................................................................................................................... 34 5. Standing to Contest Foreclosure............................................................................................................ 34 6. Injunction............................................................................................................................................... 34 F. Bad Foreclosure Sales ................................................................................................................................... 34 1. Return to Status Quo.............................................................................................................................. 35 2. Bona Fide Purchaser.............................................................................................................................. 35 3. Malpractice ............................................................................................................................................ 35 4. Emotional Distress................................................................................................................................. 35 5. DTPA..................................................................................................................................................... 36 G. Void or Voidable Sale ................................................................................................................................... 36 H. Foreclosure in the Future............................................................................................................................... 37 I. Foreclosure Accountability ........................................................................................................................... 37 V. TEXAS HOME EQUITY LOAN FORECLOSURE ............................................................................................ 37 A. Introduction ................................................................................................................................................... 37 B. Foreclosure Overview ................................................................................................................................... 38 1. Application ............................................................................................................................................ 38 2. Notice .................................................................................................................................................... 39 3. Debtors Response................................................................................................................................. 39 4. Default Order......................................................................................................................................... 39 5. Only Issue .............................................................................................................................................. 40 6. Abatement.............................................................................................................................................. 40 7. Posting and Public Sale ......................................................................................................................... 40 8. Third Party Purchasers........................................................................................................................... 40 9. Reverse Mortgages ................................................................................................................................ 40 VI. MERS (MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC.) ....................................................... 40 A. Introduction ................................................................................................................................................... 40 B. Registering Loans on MERSSystem .......................................................................................................... 42 C. Mortgage Identification Number (MIN) ....................................................................................................... 43 D. Certifying Officers......................................................................................................................................... 43 E. MERS as Assignee ........................................................................................................................................ 43 F. Mail Center.................................................................................................................................................... 43 G. Customer Service .......................................................................................................................................... 44 H. Helpful Nuggets ............................................................................................................................................ 44 I. Foreclosure .................................................................................................................................................... 44
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FORECLOSURE FROM THE LENDERS PERSPECTIVE

I. INTRODUCTION This presentation is intended to be a quick foreclosure primer for a busy attorney wrestling with a loan secured by real estate that is in default. Though this paper is written from the lenders perspective, any consumer lawyer attending the CONSUMER AND COMMERCIAL LAW COURSE 2006 should be able to use the case law referenced throughout the paper as a starting point for ideas on how to proceed, limited only by imagination and advocacy. II. LEGAL OVERVIEW If a busy lawyer has time to read only one appellate opinion concerning foreclosure, it should be First State Bank v. Keilman, 851 S.W. 2d 914 (Tex.App.Austin 1993, writ den) which touches on most issues that arise in a foreclosure. Keilman, though dated, is a foreclosure primer on the default process. A case that discusses typical counterclaims and defenses borrowers raise to stop a foreclosure, including latches, statutes of limitation, waiver, estoppel, mitigation of damages, comparative negligence, negligence, indemnity, business judgment rule, exemplary damages, ratification, and fiduciary duty, is F.D.I.C. v. Niblo, 821 F.Supp 441 (N.D.Tex.1993). A. Historical Foreclosure References When all statutes related to real property were consolidated into the Texas Property Code in 1983, the new foreclosure statute simply mirrored its predecessors dating back to 1889. Tex. Rev. Civ. Stat. Ann. art. 3810; Tex. Rev. Civ. Stat. Ann. art. 3759; and Tex. Rev. Civ. Stat. Ann. art. 1911. For an interesting summary of Texas foreclosure law beginning in 1895, see Long v. NCNB Texas Nat. Bank, 882 S.W. 2d 861-865 (Tex.App.Corpus Christi 1994, no writ) and Roedenbeck Farm v. Broussard, 124 S.W. 2d 929 (Tex.Civ.App.Beaumont 1939, writ refd) appeal dismd, 308 U.S. 514 (1939). A historical review of the case law dealing with the location where a foreclosure sale must be held is found in Segal v. Emmes Capital, LLC 155 S.W. 3d 267 (Tex.App.Houston [1st Dist.] 2004, pet. abated). B. The Strict Construction Rule Texas courts follow a strict construction rule of interpretation in foreclosure matters, because foreclosure is a harsh remedy to be resorted to only under the direst circumstances. Hiller v. Prosper Tex, Inc., 437 S.W. 2d 412 (Tex.Civ.App.Houston [1st Dist.] 1969, no writ) and Bischoff v. Rearick, 232 S.W. 2d 174 (Tex.Civ.App.El Paso 1950, writ refd n.r.e.).
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If provisions in the loan documents conflict with statutory law, the statute controls. Wylie v. Hays, 114 Tex. 46, 263 S.W. 563 (Tex.Com.App. 1924). If an irreconcilable conflict arises between the note and the security instrument, the note controls. Wells v. Smith, 144 S.W. 2d 430, 432 (Tex.Civ.App.Fort Worth 1940, writ dismd judgmt corr.). When the note, security instrument, and ancillary loan documents are executed at the same time and for the same purposes, all of the loan instruments are construed as a single document. Vista Dev. Joint Venture II v. Pacific Mutual Life Ins. Co., 822 S.W. 2d 305 (Tex.App. Houston [1st Dist] 1992, writ den). Until recently, the rule of law in foreclosure proceeding was that any provision contained in the security instrument had to be followed literally, even if the term or condition seemed unimportant or frivolous. Clarkson v. Ruiz, 108 S.W. 2d 281, 285 (Tex.Civ.App.San Antonio 1937, writ dismd); American Sav. and Loan Assn of Houston v. Musick, 517 S.W. 2d 627 (Tex.Civ.App.Houston [14th Dist.] 1974) reversed on other grounds, 531 S.W. 2d 581 (Tex.1975); and Lawson v. Gibbs, 591 S.W. 2d 292 (Tex.Civ.App.Houston [14th Dist.] 1979, writ refd n.r.e.). However, today courts appear to be more inclined to use a balancing test between the rights of the borrower and lender. For example, in a Texas bankruptcy proceeding, the court found that the terms in the loan documents could not be so rigidly construed as to prevent the enforcement of an honest obligation. In re Davis Chevrolet, Inc., 135 B.R. 29 (Bankr. N.D.Tex.1992). C. Effect of Foreclosure on Other Liens Foreclosure extinguishes the lien rights of all inferior lien holders. Hampshire v. Greeves, 104 Tex. 620, 143 S.W. 147 (Tex.1912). If a junior lien is foreclosed, the foreclosure sale purchaser takes title subject to all superior liens. 59 C.J.S. Mortgages 549 & 601 (1998). Mercer v. Bludworth, 715 S.W. 2d 693 (Tex.App.Houston [1st Dist.] 1986, writ refd n.r.e.). The purchaser of a foreclosed property is not liable for the payment of any inferior lien extinguished by the foreclosure. Blanco, Inc. v. Porras, 897 F. 2d 788 (5th Cir. 1990). D. Statute of Limitations If the statute of limitation bars enforcement of the debt, the trustee under the security agreement has no authority to conduct a foreclosure sale. Stubbs v. Lowreys Heirs, 253 S.W. 2d 312 (Tex.Civ.App. Eastland 1952, writ refd n.r.e.). The reason is that a lien is incidental to and inseparable from the debt and if the debt is barred by limitations, then enforcement of the security interest is also barred. University Sav. & Loan Assn. v. Security Lumber Co., 423 S.W. 2d 287

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(Tex. 1967). Attempted foreclosure of a debt that is obviously barred by the statute of limitation is a violation of the Fair Debt Collection Practices Act. 15 U.S.C. 1692e. The statute of limitation for enforcing an installment note is six years beginning on the date the note matures or the date the maturity of the debt is accelerated. Tex. Bus. & Com. Code 3.118(a). If a note is a demand note or has no maturity date, which makes it a demand note, the note is due from the moment the note is signed. Martin v. Ford, 853 S.W. 2d 680 (Tex.App.Texarkana 1993, reh. den). The statute of limitation for enforcing a note is six years from the date a demand for payment is made on the maker or obligor of the note. If no demand has been made to pay a note, the statute of limitations is ten years, if neither principal nor interest has been paid for a continuous period of ten years. Tex. Bus. & Com. Code 3.118(b). The statute of limitations for enforcing a security instrument begins on the date the loan matures, i.e., the date the final installment payment is due, not the date the loan goes into default. Palmer v. Palmer, 831 S.W. 2d 479 (Tex.App.Texarkana 1992, no writ) and Gabriel v. Alhabbal, 618 S.W. 2d 894 (Tex.Civ.App. Houston [1st Dist] 1981, writ refd n.r.e.). However, this also means that the four year limitations period begins to run when the lender gives notice of acceleration of the maturity of the debt in anticipation of foreclosure. Tex. Civ. Prac. & Rem. Code 16.036. There is a two-year difference between the statutes of limitation for enforcing a note (six years) and enforcing a security instrument against real property (four years). The State Bar Committee Comments make it clear that the limitation statutes for enforcing a real property security instrument are Tex. Civ. Prac. & Rem. Code 16.035 16.037 and not Tex. Bus. & Com. Code 3.118. Even though the fouryear limitation statute prevents foreclosure, the lender can still sue on the note if the six-year limitation period has not run. There is a cadre of sophisticated investors who buy property from borrowers whose loans were accelerated by the lender but never foreclosed during the four-year limitation period. These investors, who never assume the debt, then sue the lender in a quiet title suit alleging the security instrument was barred from enforcement by the four year limitations and the note by the six year statute. Even if the statute of limitations does not bar a suit on the note, most lenders will write-off the loan if they cannot enforce the deed of trust and foreclose. Therefore, with the security agreement barred from enforcement, the investor laughs all the way to the bank when the property is sold. However, before the answer date is due in the investors quiet title suit, a creative lender should file a counterclaim for foreclosure and collection of the note
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under Tex. Civ. Prac. & Rem. Code 16.069. Though there is little case law explaining Tex. Civ. Prac. & Rem. Code 16.069, the timely filing of a counterclaim may trump the limitation defense and allow the lenders to obtain a judgment for foreclosure against the property based on the default of the original note and security agreement. Even though their holdings were made obsolete by Tex. Civ. Prac. & Rem. Code 16.03, two old cases to consider for ideas on how to overcome a statute of limitation defense for a real estate loan are Central Nat. Bank v. Latham & Co., 22 S.W. 2d 765 (Tex.App.Waco 1929, writ refd) and Barlow v. Barlow, 139 S.W. 2d 139 (Tex.App.Waco 1940, no writ). The DOench Duhme doctrine bars enforcement of any undisclosed deal or agreement between the borrower and a failed financial institution if the deal or agreement was never put in writing and approved by the authorized representatives of the lender. DOench, Duhme & Co. v. Federal Deposit Ins. Corporation, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). A Texas wrongful foreclosure case that explains the application of DOench, Duhme is Bank One, Texas, N.A. v. Stewart, 967 S.W. 2d 419 (Tex.App.Houston [14th Dist.] 1998, no writ). U.C.C. Does Not Apply The Texas Business & Commerce Code does not apply to real property foreclosures. Tex. Bus. & Com. Code 9.10(c)(11) and Kimsey v. Burgin, 806 S.W. 2d 571 (Tex.App.San Antonio 1991, writ dismd). Therefore, the commercially reasonable foreclosure rule found in Tex. Bus. & Com. Code 9.610 does not apply to real property foreclosures. Pentad Joint Venture v. First Nat. Bank of La Grange, 797 S.W. 2d 92 (Tex.App.Austin 1990) and Huddleston v. Texas Commerce BankDallas, N.A., 756 S.W. 2d 343 (Tex.App.Dallas 1988, writ den). The differences in the default notices for notes secured by real property and those secured by personal property are distinguished in Bishop v. National Loan Investors, L.P., 915 S.W. 2d 241 (Tex.App.Fort Worth 1995) and Riyad Bank v. Al Gailani, 61 S.W. 3d 353 (Tex.2001). If both real and personal property are described in the security instrument, foreclosure of the real property may serve as a foreclosure of the personal property too. Tex. Bus. & Com. Code 9.604. The predecessor to Tex. Bus. & Com. Code 9.604, i.e., Tex. Bus. & Com. Code 9.501(d), was discussed in Van Brunt v. BancTexas Quorum, N.A., 804 S.W. 2d 117 (Tex.App.Dallas 1989, no writ). If a landhome loan transaction for a manufactured home goes into default and the manufactured home was never converted from personal property to real property, Tex. Bus. & Com. E.

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Code 9.604 can be the legal basis for foreclosure of both the land and the manufactured home. Foreclosure Presumptions There is a rebuttable presumption that a foreclosure sale is conducted properly. Roland v. Equitable Trust Co., 584 S.W. 2d 883 (Tex.Civ.App. San Antonio 1979, writ refd n.r.e.). If the substitute trustees deed contains an affidavit based on personal knowledge that all foreclosure prerequisites were accomplished, such recitations are prima facie evidence of the truth of the matter stated. McCallum v. Jones, 141 S.W. 1032 (Tex.Civ.App.Fort Worth 1911 writ refd.) and Cunningham v. Paschall, 135 S.W. 2d 293 (Tex.Civ.App.Fort Worth 1939 writ dis. judgm't corr.). To invoke this presumption and to ally title examiners concerns whether a foreclosure was conducted properly, most foreclosure professionals attach an affidavit to the trustee or substitute trustees deed averring the foreclosure was conducted properly. III. PRE-FORECLOSURE BASICS A. Foreclosure Timeline F.

The Players The Borrower Texas foreclosure statutes refer to the debtor but debtor is never defined. In Tex. Bus. & Com. Code 9.102(a)(28), debtor is defined as a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is the obligor. Obligor is then defined in Tex. Bus. & Com. Code 9.102(a)(60) as: a person that, with respect to an obligation secured by a security instrument or in an agricultural lien on the collateral, (i) owes payment or other performance of the obligation; (iii) or is otherwise accountable in whole or in part for payment or other performance of the obligation.
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B. 1.

The Texas Finance Code also defines obligor as a person obligated to pay a loan and includes a borrower, cosigner, or guarantor and if more than one person is obligated to pay the loan, the term refers to all persons collectively. Tex. Fin. Code 343.204. Until the mortgagee forecloses, the obligor of the debt is entitled to title, possession, and all rents and revenues of the secured property. However, if the security instrument expressly provides and most commercial deeds of trust do the lender is entitled to all rents and revenues if the loan goes into default. Otherwise, the lender must open a receivership to obtain the rents and revenues. Loving v. Milliken, 59 Tex. 423, 1883 WL 9191 (Tex.1883) and Robinson v. Smith, 133 Tex. 378, 128 S.W. 2d 27 (Tex.Com.App. 1939). It is a common practice for a borrower to sell property securing the borrowers loan with a lender with the agreement that the new buyer will assume the borrowers loan. The new buyer never signs a note but assumption language in the deed obligates the buyer to pay the sellers debt to the current lender. In this case, the buyer becomes the principal obligor and the seller becomes the surety of the note which is secured by the buyers new property. Straus v. Brooks, 136 Tex 141, 148 S.W. 2d 393 (Tex.Com.App. 1941). The assumption agreement then becomes an unconditional contract or promise to pay the debt and the assumptors liability on the note is independent of the original maker. Barber v. Federal Land Bank of Houston, 204 S.W. 2d 74, 78 (Tex.Civ.App.Texarkana 1947, writ refd n.r.e.). A borrower who assumes a debt is estopped from contesting the validity of the original note and lien. Criswell v. Southwestern Fidelity Life Ins. Co., 373 S.W. 2d 893 (Tex.Civ.App.Houston 1963, no writ). If an assumption deed recites that a certain debt is being assumed, the borrower is also estopped from claiming non-liability for the debt. Green v. White, 137 Tex. 361, 153 S.W. 2d 575, 583 (1941). The fraud of the original maker does not absolve the assumptor for liability on the note assumed. Presidential Village, Ltd. v. Lone Star Gas Co., 585 S.W. 2d 335 (Tex.Civ.App. Dallas 1979, no writ). If a borrower deeds all of the borrowers interest in a property under an assumption agreement, an argument can be made that the original borrower is not required to receive foreclosure notices, even though the borrower was never released from the debt. Fenimore v. Gonzales County Sav. & Loan Assn, 650 S.W. 2d 213 (Tex.App.San Antonio [4th Dist.] 1983, no writ) citing Burnett v. Manufacturers Hanover Trust Co., 593 S.W. 2d 755 (Tex.Civ.App.Dallas 1979, writ refd n.r.e.). The Fenimore argument is buttressed by Citizens Nat. Bank in Abilene v. Cattlemans Production Credit Assn, 617 S.W. 2d 731 (Tex.Civ.App.Waco 1981), where, in a judicial

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foreclosure suit, the court found that the original obligor was not a necessary party to the foreclosure because all of the borrowers interest in the property had been conveyed. However, if a loan is guaranteed by the U.S. Department of Veteran Affairs (VA), any borrower who sells a property under an assumption agreement is still liable on the debt until released by a written instrument. 38 U.S.C. 1817 and 38 C.F.R. 36.4323(f). A person is not liable on a note unless the person, or his agent or representative with authority to do so, authenticates the debt instrument. Tex. Bus. & Com. Code 3.401 and 6.402. In preparation for eMortgages, the term authenticate is used to accommodate the electronic execution of loan documents, instead of signed or executed. Tex. Bus. & Com. Code 9.102. The authority of an agent to authenticate a real property conveyance must be in writing. Donovan v. Mercer, 747 F.2d 304 (5th Cir. 1984) citing Tex. Prop. Code 5.021. The Note Holder By definition, note holder is the person in possession of an instrument that is drawn, issued, or endorsed to the order of the person or to a bearer in blank. Tex. Bus. & Com. Code 1.201(20). There is no presumption as to the ownership of a particular note. Tex. Bus. & Com. Code 3.201(c) and Dillard v. NCNB Texas Nat. Bank, 815 S.W. 2d 356 (Tex.App. Austin 1991, no writ). Further, there is no presumption of ownership of a note based on an assignment of the security agreement. Shepard v. Boone, 99 S.W. 3d 263 (Tex.App.Eastland 2003, no writ.) But even if a person is not the holder of a note, under common law principles of assignment, the assignee may be able to foreclose the collateral. Leavings v. Mills 175 S.W. 3d 301 (Tex.App.Houston [1st Dist.] 2004, no pet). If a subsequent note owner materially alters the terms of the debt without the makers consent, the borrowers obligation is discharged. Tex. Bus. & Com. Code 3.407(b) (1). Oehler v. Scahamel, 242 S.W. 2d 403 (Tex.Civ.App.Dallas 1951, writ refd n.r.e.). Foreclosure may be initiated by any person who obtains the unconditional endorsement of the note, i.e., the owner or by delivery and physical possession of the note, i.e., the holder. Lawson v. Gibbs, 591 S.W. 2d 292 (Tex.App.Houston [14th Dist] 1979, second motion on reh. overruled). Lawson contains an excellent analysis of the concepts of owner and holder and the rule that the lien follows the note. Lawson also discusses the principle that only the person obligated for the debt is required to receive foreclosure notices. A case that provides a Texas Business and Commerce Code analysis of the differences between the owner of a note and the holder of a note, and the nuances of enforcement of a note by either, is Jernigan
4

2.

v. Bank One Tex, N.A., 803 S.W. 2d 774 (Tex.App. Houston [14th Dist] 1991, no writ). Jernigan also provides guidance on how to offer proof of a notes ownership by affidavit with a photocopy of the note attached. The customary business practice for loans sold into the secondary market is that all notes in the securitization will be endorsed in blank and held by the bearer or holder, as those terms are defined in Tex. Bus. & Com. Code 1.201(5) and Tex. Bus. & Com. Code 1.201(21). The bearer or holder of the note in the securitization will be a mortgage servicer, who, pursuant to a servicing agreement between the mortgage servicer and investor, is the investors duly authorized agent for loan service administration, of all loans in the securitization. Generally, the mortgage servicer will be the mortgagee of record in the real property records to ensure that the servicer is the point of contact for all loan information requests not the investor. In a foreclosure, the mortgage servicer, as the authorized agent for loan service administration for the owner or holder of the note, initiates the foreclosure process. The Investor Most mortgage servicing personnel have no idea who is the owner or holder of the loans they service. The reason is most mortgage servicing software, databases, and web-based loan servicing platforms use the term investor to mean the entity that owns or holds the loan being serviced. Consequently, if it is necessary to determine who is the owner or holder of a note when communicating with a mortgage servicer, you must use the term investor if you want the servicer to understand who you mean. If a loan is secured by residential property, in all probability the loan will be securitized and the investor of the loan will be a GSE, i.e., government sponsored enterprise, such as Fannie Mae, Freddie Mac or Ginnie Mae, or a Wall Street or banking institution serving as the trustee for the pool of loans securitized. If the investor is a Wall Street or banking institution, many times the mortgage servicer will be an affiliate or subsidiary of the bank or Wall Street firm. Until recently, Freddie Mac (Federal Home Loan Mortgage Corporation or FHLMC), Fannie Mae (formerly known as the Federal National Mortgage Association or FNMA), and Ginnie Mae (Government National Mortgage Association) were the largest players in the secondary market. However, Freddie Macs and Fannie Maes accounting troubles and the introduction of esoteric loan products have opened the door for Wall Street to obtain a bigger share of the mortgage backed securities market. Mortgage backed securities (MBSs) are collateralized by a pool of real property loans that have similar loan balances, maturity dates, interest rates and 3.

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other loan terms. MBSs provide individuals, insurance companies, banks, foreign businesses and governments with a predictable income stream arising from the mortgage payments of the loans in the securitization as well as an undivided ownership interest in loans in the pool. Although repayment of the security is not guaranteed, credit enhancements, such as mortgage insurance and pool insurance, make these securities attractive. One of the attorney friendly advantages of securitization is that loan documents and commitments are standardized. Securitization has been so successful that even the Department of Veterans Affairs (VA) has begun to securitize loans. When Congress resurrected the VA vendor loan program allowing non-veterans to acquire VA foreclosed properties, Congress required the VA to finance 60 to 85 percent of the sale price. To generate the capital to make these loans, the VA sold 11,384 vendors loans in four securitizations totaling $1 billion. For a discussion of the business practices that have evolved as a result of the secondary markets role in home loan financing, see Peter M. Carrozzo, MARKETING THE AMERICAN MORTGAGE, 39 Real Property, Probate and Trust Journal 765 (Winter 2005). 4. The Mortgage Servicers As a practical matter, most people, including lawyers and judges, assume the mortgage servicer is the owner or holder of a particular home loan. This assumption seems logical because the servicer collects the monthly loan payments. Recognizing the critical role that a mortgage servicer provides in the mortgage banking industry, Tex. Prop. Code 51.0001(3) states: (3) Mortgage servicer means the last person to whom a mortgagor has been instructed by the current mortgagee to send payment for the debt secured by a security instrument. A mortgagee may be a mortgage servicer. The term mortgage servicer is also subsumed in the definition of mortgagee found in Tex. Prop. Code 51.0001(4) which provides: (4) Mortgagee means: (A) the grantee, beneficiary, owner, or holder of a security instrument; (B) a book entry system; or (C) if the security interest has been assigned of record, the last person to whom the security interest has been assigned of record. These definitions, however, fail to mention all the other loan administration activities a mortgage servicer
5

provides on a daily basis, to include responding to borrowers inquiries and complaints, calculating and collecting escrow funds for taxes and insurance, and enforcing the security instrument if the borrower defaults. If a loan goes into default, the mortgage servicer, as the mortgagees agent for loan service administration, is responsible for managing the foreclosure process. Tex. Prop. Code 51.0025 provides: A mortgage servicer may administer the foreclosure of property under Section 51.002 on behalf of the mortgagee if: (1) the mortgage servicer and the mortgagee have entered into an agreement granting the current mortgage servicer authority to service the mortgage; and (2) the notices required under Section 51.002(b) disclose that the mortgage servicer is representing the mortgagee under a servicing agreement with the mortgagee and the name of the mortgagee and: (A) the address of the mortgagee; or (B) the address of the mortgage servicer, if there is an agreement granting a mortgage servicer the authority to service the mortgage. The mortgage servicing provisions found in the Texas Property Code are not some new innovation without any legal precedent. Since January 1994, the Department of Housing and Urban Development (HUD) has required Federal Housing Administration (FHA) loans to be serviced by a mortgagee that is approved by HUD to service insured mortgages and the actions of its servicer shall be considered to be the actions of the mortgagee. 24 C.F.R. 203.502. Other definitions of servicer can be found at 15 U.S.C. 1641(f)(2) and 12 U.S.C. 2605(i). In litigation between the borrower and lender, the mortgage servicer can litigate in the servicers name on behalf of the lender, so long as an assignment is filed in the court papers in accordance with Tex. Prop. Code 12.014(b). See Graco Robotics, Inc. v. Oaklawn Bank, 914 S.W. 2d 633 (Tex.App.Texarkana 1995 reh. den) and Duke v. Brookshire Grocery Co., 568 S.W. 2d 470 (Tex.Civ.App.Texarkana 1978, no writ). The 12.014(b) principle might useful in a home equity foreclosure proceeding under Tex. R. Civ. P. 736 when there is confusion as to who should be the Applicant, after the Application has been filed. A mortgage servicer receives a fee based on the weighted-average servicing rate (WASR), which ranges between 25 to 55 basis points of the outstanding loan balance of loans serviced, where a basis point represents 1/100th of 1%. The servicer also receives ancillary income from late fees, the float on money in

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various accounts to include escrow accounts and fees from payoffs, reinstatements and forced place insurance premiums. When Wall Street learned that mortgage servicers would pay for the right to service large pools of mortgage loans, servicing rights became a valuable piece of the bundle of rights connected with a mortgage. Therefore, when a loan is sold into the secondary market, one of the financial decisions the lender makes is whether the loan will be sold with the servicing rights retained or released. The document that describes a mortgage servicers obligations to the investor and the loan administration duties and responsibilities the mortgage servicer must perform with respect to the loans serviced in a pool of loans or securitization is generally referred to as a servicing agreement. These agreements usually contain proprietary and trade secret information, and borrowers lack standing to enforce their provisions as a third party beneficiary. 767 Third Ave., LLC v. Orix Capital Markets, LLC, 26 A.D. 3d 216, 812 N.Y.S. 2d 8 (1st Dept 2006). Rating Agencies Because of the proliferation of class action lawsuits and consent orders issued against two large mortgage servicers, Fairbanks Capital Corp., now known as Select Portfolio, and Ocwen Federal Bank, FSB, wary investors have forced the rating agencies to consider whether a particular mortgage servicers performance affects the credit risk of a mortgagebacked security. If rating agencies increase the credit risk for a pool of loans based on the mortgage servicer the investor hired to handle loan administration, economics will drive the bad servicers out of business because investors will no longer hire servicers who cause the value of their mortgage backed securities to decrease. Consequently, the rating agencies, Fitch, Standard & Poor, and Moody, are starting to focus on a servicers default management, loss mitigation, and customer service activities. Included in the rating agencies new risk analysis are the servicers training programs, policies, and procedures; employee turn over rate; escrow administration; and assignment and loan release processing. In addition, rating agencies are looking at the servicers timeline management, i.e., how quickly the servicer resolves a default and the loss severity when a default is resolved. Other factors rating agencies are reviewing with respect to the servicer are: a) What incentives or bonuses are given to collectors, causing collection efforts to focus more on bonuses than on assisting the borrower; 5.

b)

c)

Does the servicer outsource different servicing functions and how is the outsource managed and monitored; The size of the servicing budget in relation to the number of loans and types of loans serviced. If not enough money is budgeted for servicing, customer complaints and lawsuits increase exponentially.

Currently, the factor that carries the most weight in analyzing a servicers performance in assessing credit risk to a securitization is how fast the servicer can foreclose a loan once it goes into default. However, Richard Koch, the Director and Analyst for Standard & Poor, believes that in the future, measuring a servicers performance on customer relations and the speed and accuracy of its responses to customer inquiries, may be the best predictor of credit risk to a securitization. If servicing of a borrowers loan is transferred to a new mortgage servicer during the life of a loan, the RESPA statute requires a very exacting disclosure and hand-off of servicing procedure between old and new servicer. 12 U.S.C. 2605 and Regulation X 3500.21. Most servicers, at least in the South, call the letter that announces the servicing transfer a howdy letter.\ C. Loan Documentation The servicer should have the note and all loan origination documents, as well as collection notes and a loan payment history for any loan scheduled for foreclosure. If a mortgage servicer complains that it does not have such documentation, remind the servicer that it is required to keep the HUD-1 or HUD-1A and all related loan origination documents for at least five years after the loan closes, whether or not the loan was transferred during the five-year period. 24 C.F.R. 3500.10(e). Mortgagees or mortgage servicers are also required to keep all Truth in Lending documents for two years after the TIL disclosures were made. 12 C.F.R. 226.25(a). The title company that closed a loan is also a valuable source of information if documentation for a loan disappears, assuming, of course, an owners or mortgagees title policy was issued. To comply with Tex. Ins. Code art 9.34 and Procedural Rule P-32, a title agency or fee attorney must retain evidence of insurability for at least 15 years after the title policy was issued. In addition, a copy of every title policy must be retained indefinitely. All information contained in the guaranty file must also be kept in hard copy form for three years and a hard copy of all the closing documents must be retained for at least three years. Approximately sixty percent of all residential loans are originated by loan brokers; therefore, it is important to know that all licensed mortgage loan brokers and loan officers must maintain legible and
6

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readily accessible loan records to include a mortgage log. 7 Tex Admin Code 80.13. Deed of Trust The recorded security instrument to be foreclosed should be examined, because it may contain handwritten or typewritten modifications, deletions, or riders that radically change the typical boiler plate language. Under the Texas Supreme Courts rules of construction, a typewritten provision has precedence over pre-printed matter. McMahon v. Christmann, 157 Tex. 403, 303 S.W. 2d 341 (1957). For example, if the loan is a Texas Veterans Land Board (VLB) loan, an inattentive foreclosure professional may miss the fact that one deed of trust secures two notes a program note and a participant note that are of equal dignity. Generally, the two notes are serviced by different mortgage servicers, which results in chaos because neither servicer knows the other exists. A common VLB loan problem arises when a loan closer attempts to obtain pay-off figures for the sale of the property. The closer contacts the holder or servicer of the participant note because its name is on the face of the security instrument. However, since all references to the program note are buried in the terms of the deed of trust or are contained in a rider, the closer fails to get the payoff for the program loan. Consequently, the program note owed to the VLB is not paid off at closing. After the loan closes and the VLB demands its money from the sale of the property, the lenders, servicers and closer realize the mistake and the finger pointing and lawsuits begin. Many times, the deed of trust to be foreclosed will have an alleged property description defect. To determine whether the description will pass muster for statute of fraud purposes, use the two-part test outlined in Pickett v. Bishop, 148 Tex. 207, 223 S.W. 2d 222 (Tex.1949) and amplified in Moudy v. Manning, 82 S.W. 3d 726 (Tex.App.San Antonio 2002, rev. den). The general test for determining the sufficiency of the land description is whether the tract can be identified with reasonable certainty by an experienced title abstractor. Zobel v. Slim, 576 S.W. 2d 362 (Tex.1978). For ideas on how to proceed with a bad property description, see Escamilla v. Estate of Escamilla by Escamilla, 921 S.W. 2d 723 (Tex.App.Corpus Christi 1996) that deals with reforming a property description as well as several collateral issues that usually arise in this type of case, such as unilateral mistake and the four-year statute of limitation. The thirty-three Texas Title Examination Standards found in Tex. Prop. Code, Title 2 Appendix 1.10-16.30, which are located in the Texas Property Code immediately following 5.151, can also be used to resolve many title issues related to mistakes
7

1.

connected with bad security instrument and deed documentation. If the deed of trust contains an arbitration clause, see In re MacGregor (FIN) Oy, 126 S.W. 3d 176 (Tex.App.Houston [1st Dist] 2003, reh. overruled, mandamus conditionally granted), and In re Kellogg Brown & Root, Inc., 166 S.W. 3d 732 (Tex 2005), which discusses the application of the federal and Texas arbitration acts. 9 U.S.C. 2 and Tex. Civ. Prac. & Rem. Code 171.001, et. seq. Assignment of the security instrument is not proof of ownership of the note. Shepard v. Boone, 99 S.W. 3d 263 (Tex.Civ.App.Eastland 2003). Therefore, the naked assignment of a deed of trust without the transfer of the note cannot support a foreclosure. However, if a person is not the holder of a note, under common-law principles of assignment a person may be able to prove ownership of the note and enforce the note by foreclosure. Leavings v. Mills, 175 S.W. 3d 301 (Tex.App.Houston [1st Dist.] 2004, no pet.). A person can encumber property for the debt of another and not be obligated for the debt. Hodges v. Roberts, 74 Tex. 517, 12 S.W. 222 (Tex. 1889). An owner of an interest in real property is not bound to search the deed records for subsequent instruments affecting title. Company v. Jack County Oil and Gas Association, 328 S.W. 2d 912 (Tex.App.Fort Worth 1964, n.r.e.). Examiners, abstractors and lawyers should be aware that lenders are becoming enamored with the cost savings associated with recording a master form deed of trust, which allows subsequent security instruments to incorporate by reference the terms and conditions of the master deed of trust. Tex. Prop. Code 13.001. Notes A case that cites and analyzes numerous other cases on how to construe the language contained in a note is EMC Mortgage Corp v. Davis, 167 S.W. 3d 406 (Tex.App.Austin 2005, reh. den). In litigation, the lender does not have to file a detailed proof of what is owned and an affidavit of the amount due is sufficient to sustain a motion for summary judgment. Martin v. First Republic Bank, 799 S.W. 2d 482 (Tex.App.Fort Worth 1990, writ den). The elements that must be established in the prove-up of a note are: (a) the note exists; (b) the plaintiff is the legal owner or holder of the note; (c) the defendant is the maker or obligor of the note; and (d) a certain balance is due under the note. Scott v. Commercial Services of Perry Inc., 121 S.W. 3d 26 (Tex.App.Tyler 2003 pet. den) and Wheeler v. Security State Bank, 159 S.W. 3d 754 (Tex.App. Texarkana 2005). For purposes of calculating the interest due under a note, no interest can be accrued from the date the borrower makes an unequivocal 2.

Foreclosure From The Lenders Perspective

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tender of payment of the note. Tex. Bus. & Com. Code 3.603(c). To obtain the information required to prove-up the note, consider the rule that all instruments involved in the transaction are incorporated by reference into one document. Estranda v. River Oaks Bank and Trust Co., 550 S.W. 2d 719 (Tex.Civ.App.Houston [14th Dist.] 1977, writ refd n.r.e.). Invariably, lenders and mortgage servicers lose notes. A guide on what to do in the lost note situation is Western Natl Bank v. Rives, 927 S.W. 2d 681 (Tex.App.Amarillo 1996, reh. den). Western Natl Bank focused on Tex. Bus. & Com. Code 3.804, which has been renumbered as Tex. Bus. & Com. Code 3.309. The rights and remedies of the holder or owner of a lost note are also outlined in Jernigan v. Bank One, Texas, N.A., 803 S.W. 2d 774 (Tex.App. Houston [14th Dist.] 1991). Using Tex. Bus. & Com. Code 3.309, an assignee of a loan from the FDIC was able to enforce the debt with only a copy of the note which had been lost in the FDICs possession. Southeast Investments, Inc. v. Clade, 1999 WL 476865, 40 U.C.C. Rep.Serv.2d 255 (N.D. Tex. July 7, 1999) affirmed in 212 F.3d 595 (5th Cir. [Tex.] 2000). For examples of presumptions that may be helpful in the prove-up of a lost note, also see Resolution Trust Corp. v. Camp, 965 F.2d 25 (5th Cir. 1992). A case that contains the actual language used in a lost note affidavit that was approved by the court is Diversified Financial Systems, Inc. v. Hill, Heard, ONeal, Gilstrap & Goetz, P.C., 99 S.W. 3d 349 (Tex.App.Fort Worth 2003). In contrast, see a lenders creative, yet unsuccessful, efforts to draft a lost note affidavit in Priesmeyer v. Pacific Southwest Bank, F.S.B., 917 S.W. 2d 937 (Tex.App.Austin 1996). Many times a foreclosure professional will have difficulty locating a financial institution that seems to have disappeared. If the lost institution was insured by the FDIC, the name and address of its successor(s) in interest may be obtained at the FDICs website at www.fdic.gov. The Federal Financial Institutions Examination Counsel also has a website at www.ffiec.gov that can be searched for the name and address of institutions that acquired the assets of failed, merged, or acquired institutions. For a document to serve as a legally enforceable note, the instrument must contain the amount of principal loaned, the maturity date, the interest rate, and the repayment terms, which are considered the material terms of a note. T.O. Stanley Boat Co. v. Bank of El Paso, 847 S.W. 2d 218 (Tex.1992). The rules of construction for notes are the same as any other type of contract. Shaver v. Schuster, 815 S.W. 2d 818 (Tex.App.Amarillo 1991, no writ). In litigation, the mortgagee does not have to specifically describe the
8

contents of a note in the pleadings, so long as the note is contained in the exhibits. Hammond v. All Wheel Drive Co., 707 S.W. 2d 734 (Tex.App.Beaumont 1986. Execution of an extension agreement pertaining to an outstanding debt is generally treated as new evidence of an existing debt. Summit Bank v. The Creative Cook, 730 S.W. 2d 343 (Tex.App.San Antonio 1987, no writ). If the borrower contends an extension agreement was in fact a novation, the borrower has the burden of proof as an affirmative defense. Allied Chem. v. DeHaven, 752 S.W. 2d 155 (Tex.App.Houston [14th Dist] 1998, writ den). A discussion of the elements that make an agreement into a novation instead of an accord is Fannucchi & Limi Farms v. United Agri Products, 414 F. 3d 1075 (9th Cir 2005). If a note is renewed and extended, either the original or renewed note can be enforced. Villarreal v. Laredo National Bank, 677 S.W. 2d 600 (Tex.App. San Antonio 1984, writ ref n.r.e.). Wrap-around notes, how they are structured and how they are enforced, are confusing to most legal practitioners. A Texas Tech Law Review article and a 1999 Dallas Court of Appeals case that can begin to unravel the complexities of a wrap-around note are Janet L. Hunter, 21 TEX. TECH L. REV. 873, 875 (1990) and Conversion Props., LLC. v. Kessler, 994 S.W. 2d 810 (Tex.App.Dallas 1999, writ den). 3. Missing Interest Rate If a note provides for interest, but no interest rate is expressed, the interest rate is the judgment rate. Tex. Bus. & Com. Code 3.112(b); Cadle Co. v. Regency Homes, Inc., 21 S.W. 3d 670 (Tex.App.Austin 2000); Amberboy v. Societe de Banque Privee, 831 S.W. 2d 793 (Tex.1992). Many times, the benchmark used to calculate the changes in an adjustable rate mortgage (ARM) vanishes with the passage of time. In this situation, a Connecticut court allowed the substitution of a reasonable interest rate when the bank, whose interest rate was the ARMs benchmark, went out of business. F.D.I.C. v. Napert-Boyer Partnership, 40 Conn.App. 434, 671 A.2d 1303 (Conn.App. 1996). 4. Escrow Accounts The establishment and maintenance of escrow accounts for taxes and insurance is regulated by the Real Estate Settlement Procedures Act (RESPA) 12 U.S.C. 2609(10)(b) (d) and its implementing regulation, Regulation X, 3500.17. A mortgagee has an insurable interest in the secured property. Therefore, if the borrower fails to provide insurance, the mortgagee can insure the property and charge the costs to the mortgagor. Ferguson v. Dickenson, 138 S.W. 221 (Tex.Civ.App.

Foreclosure From The Lenders Perspective

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Fort Worth 1911) and Smart v. Tower Land and Investment, 582 S.W. 2d 543 (Tex.App.Dallas 1979, no writ). The same principle applies to property taxes. Young v. Harbin Citrus Groves, 130 S.W. 2d 896 (Tex.Civ.App.San Antonio 1939, writ refd). D. Chain of Title To conduct a foreclosure, the chain of title of a property should be examined to identify any recorded instrument that affects title. The failure to do a thorough title search can be expensive. For example, a foreclosing mortgagee who acquires a property at a foreclosure sale for its debt may be responsible for a federal tax lien that could have been extinguished if the proper notice had been sent to the IRS prior to the foreclosure sale. The best practice is to review copies of all the documents recorded in the chain of title and not depend on an abstractors run sheet. The cost difference for the actual title documents as opposed to a run sheet may be significant, but most investors, the GSEs, VA, and HUD, will pay the costs for obtaining copies of the chain of title. Therefore, it is not worth the risk to depend on a run sheet to prosecute a foreclosure. When it comes to title issues related to real property, state law always applies unless there is a clear and manifest intent that federal law preempts the state law. Matter of T.F. Stone Co., Inc., 72 F. 3d 466 (5th Cir. 1995) and In re Robertson, 203 F. 3d 855 (5th Cir. 2000). Federal and state tax liens as well as other federal and state statutory liens, receiverships, lawsuits, lis pendens and probate proceedings are just some of the matters that will affect how a foreclosure must be prosecuted. Texas Tax Liens If there is any indication that a tax lien exists in the chain of title, a copy of the lien should be obtained to determine its priority and enforceability. Ad valorem tax liens are superior to all pre-existing liens, regardless of the date any prior lien was recorded. Tex. Tax Code 32.04-32.06. Taxing authorities must mail delinquent tax notices to property owners by first class mail, postage pre-paid. There is a statutory presumption of mailing. Tax Code 1.07. If the mailing presumption is challenged, the taxing authority has the burden of proof. WHM Prop Inc. v. Dallas County, 119 S.W. 3d 325 (Tex.App.Waco 2003, reh. overruled) and New v. Dallas Appraisal Review Bd., 734 S.W. 2d 712, 714 (Tex.App.Dallas 1987, writ refd). Mortgagees who do not require borrowers to escrow for property taxes must be aware of Tex. Tax Code 32.06 and 32.065. With the borrowers consent, an investor called a transferee can loan the borrower money to pay the borrowers delinquent taxes and obtain a certificate of payment from the taxing
9

1.

authorities, when the investor pays the borrowers delinquent tax bill. The investors loan with the borrower is evidenced by a note and deed of trust in an amount that includes the taxes and penalties paid to the taxing authority, as well as transaction and closing costs that may exceed twenty percent of the amount borrowed. By statute, the interest rate for the investors note with the borrower can be as much as eighteen percent and the loan agreement does not have to comply with the provision of the Texas Finance Code. Tex. Tax Code 32.06 and 32.065. Until an investor tax lien case is appealed and an opinion rendered, the prevailing view is that the investors note and security agreement imposed against the tax payers property has the same super priory lien status as the taxing authoritys ad valorem tax lien. Until September 1, 2005, if the taxpayer defaulted on the note with the investor, the investors lien against the borrowers property could be non-judicially foreclosed without notice to any other lien holder. Consequently, an investors tax lien foreclosure putatively extinguished all liens against the borrowers property, including the purchase money lien and any other lien that may have been recorded before the investors tax lien. As a result of House Bill 2491 passed by the 79th Legislature, Tex. Tax Code 32.06 and 32.065 was amended to provide that tax lien investors must send notice of non-judicial foreclosure to all mortgagees who have a security interest against the taxpayers property prior to conducting an investor tax lien foreclosure. After the non-judicial foreclosure of an investor tax lien, a lien holder has one year to redeem the foreclosed property from the foreclosure sale purchaser. The redemption price is the amount paid at the tax sale, plus costs and accrued interest to the date of redemption or 118 percent of the judgment amount, whichever is less. If the first lien holder fails to timely redeem, its security interest in the property is extinguished. A discussion of Tex. Tax Code 32.06 is found in Rosewood Properties, Inc. v. Community Credit Union, 944 S.W. 2d 46 (Tex.App.Eastland [11th Dist.] 1997) and BW Village, Ltd. v. Tricon Enterprises, Inc., 879 S.W. 2d 205 (Tex.App.Houston [14th Dist.] 1994, pet. den). Except for investor tax liens discussed above, all taxing authorities must judicially foreclose and all lien holders must be made a party in the delinquent tax suit; otherwise, the judgment against the non-party lien holder is void. Murphee Property Holdings, Ltd. v. Sunbelt Sav. Assn of Texas, 817 S.W. 2d 850 (Tex.App.Houston [1st Dist.] 1991, no writ). To challenge a tax sale, a mortgagees only recourse is to seek a restricted appeal, which replaced the Bill of Review. See Quaestor Inv. Inc. v. Chiapas

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997 S.W. 2d 226 (Tex.1999) and Texaco Inc. v. Central Power & Light Co. 925 S.W. 2d 586 (Tex.1996). The restricted appeal must be filed within six months of the date the judgment was signed. Tex. Civ. Prac. & Rem. Code 51.013. To date, there appears to be only one case involving the non-judicial foreclosure of an investor tax lien. However, the specific facts of the case allowed the court to focus on a priory of lien issue and the court did not have to opine on the non-judicial foreclosure of the investor tax lien. ABN AMRO Mortg. Group v. TCB Farm and Ranch Investments, 2006 WL 2076546 (Tex.App.Fort Worth, July 27, 2006). A mortgagee may pay the mortgagors taxes to preserve and protect its interest in the property. In this instance, the mortgagee is not a volunteer and is subrogated to the rights of the taxing authority. Smart v. Tower Land and Inv. Co., 582 S.W. 2d 543 (Tex.Civ.App.Dallas 1979), appeal on other grounds, 597 S.W. 2d 333 (Tex.1980) and Vista Development Joint Venture II v. Pacific Mut. Life Ins. Co., 822 S.W. 2d 305 (Tex.App.Houston [1st Dist] 1992, writ den). A right of reverter is a non-taxable interest in real estate; therefore, foreclosure of a tax lien does not extinguish reversionary rights. Cypress-Fairbanks Independent School Dist. v. Glenn W. Loggins, Inc., 115 S.W. 3d 67 (Tex.App.San Antonio 2003, rev. den). Federal Tax Liens Special rules apply to federal tax liens; however, tax liens recorded after a purchase money security interest do not have priority over previously recorded liens. Slodov v. U.S., 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed. 2d 251 (1978). 26 U.S.C.A. 6321 6323 and see U.S. By and Through I.R.S. v. McDermott, 507 U.S. 447, 113 S.Ct. 1526, 123 L.Ed. 2d 128, (1993). An inferior IRS lien can encumber a foreclosed property if the mortgagee fails to provide the IRS with certain specific information at least 25 days before the foreclosure sale. 26 C.F.R. 307.7425-2(b) and 307.7425-3(d) and 26 U.S.C.A. 7425c(1). The sender of the IRS foreclosure notice must ensure that the U.S. Postal Service postmarks the envelope at least 25 days before the foreclosure sale. 26 C.F.R. 301.7502-1. The date of sale is not included in the 25-day calculation. 26 C.F.R. 301.7425-2. Beginning April 2005, IRS notices must be sent to the following IRS office: INTERNAL REVENUE SERVICE Attn.: Kimberly Lester 1645 S. 101st. East Ave. Mail Stop 5022-TUL Tulsa, OK 74128 918-581-7060 EXT 235 WARNING: THIS ADDRESS CAN CHANGE WITHOUT NOTICE.
10

A pre-foreclosure notice does not extinguish the IRS lien, but rather gives the IRS the right to redeem the property for the foreclosure sale price within 120 days of the foreclosure sale date. 26 U.S.C.A. 7425 and Treasury Regulations 26 C.F.R. 301.7425-4. If the IRS does not redeem, the purchaser at the foreclosure sale takes the property free of the IRS lien. If the notice is not given, the property remains subject to the IRS lien. If the lender fails to give proper notice to the IRS when foreclosing a loan that paid off a lien that primed the IRS lien, a creative lawyer might use the subrogation argument made in Dietrich Industries Inc v. U.S., 988 F. 2d 568 (5th Cir. 1993). See also U.S. Clifford 1993, WL 306669 (N.D.Tex. 1993), which approved the Dietrich argument. Recently, the IRS office in Washington D.C. has been sending form letters to persons filing the 25 day IRS foreclosure notice advising that IRS claims any excess proceeds from the foreclosure sale and demands that a disclosure of the excess proceeds retained by the foreclosing entity be sent to the address below: INTERNAL REVENUE SERVICE 1819 Smith Street Houston, Texas 77102 Mail Stop 5021-HOU Attn: Alma Burks Phone: 713-209-4515 WARNING: THIS ADDRESS CAN CHANGE WITHOUT NOTICE. The statute of limitation barring enforcement of an IRS tax lien is ten years from the date of assessment of the taxes not from the date of filing in the real property records. 26 U.S.C.A. 6502. Prior Unreleased Liens If a loan has been paid off, the mortgagee has the obligation to prepare and file a release of lien; otherwise, the mortgagee may be liable for damages. Bayless v. Strahan, 182 S.W. 2d 262 (Tex.Civ.App. Amarillo 1944, writ refd). If the note was paid off at a closing conducted at a title company, the title company can file a release of the lien, if the mortgagee fails to do so, using the procedure found in Tex. Prop. Code 12.017. This provision, however, is very cumbersome. Most title companies ignore the 12.017 procedure because distribution of the closing proceeds releases the title company for payments made to a person. FCLT Loans, L.P. v. United Commerce Center, Inc., 76 S.W. 3d 58 (Tex.App.Eastland 2002, no writ). Because a HUD-1 is signed under penalty of perjury, a settlement statement or HUD-1 can sometimes be used to prove a lien was paid off. In addition, since the title company must keep a copy of the check used to pay off the loan for three years, the cancelled check can serve as proof of payment. 3.

2.

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4.

Labor Liens Two State of Texas liens causing confusion are liens arising under Tex. Lab. Code 61.001, et. seq. related to non-payment of wage claims and Tex. Lab. Code 213.001, et. seq. dealing with overpayment of unemployment compensation. These liens are easily distinguishable because the lien form recorded in the real property records recites which Tex. Labor Code provision gives rise to the lien. The wage claim lien arising under Tex. Lab. Code 61.001 is superior to all other liens encumbering the property except for ad valorem taxes. Tex. Lab. Code 61.0825. Unemployment compensation claims are assessed and collected under the provisions of Tex. Lab. Code 213.031-213.036. Once the notice of levy is filed, the notice is effective against all property rights of the delinquent tax payer, but this lien is not superior to preexisting liens. Tex. Lab. Code 213.059.

and Matter of A & M Operating, 84 F.3d 433 (5th Cir. 1996). Mechanics and Materialmans Liens Perfection of a valid mechanics, contractors, or materialmans (M&M) lien against the homestead requires exacting compliance by those who furnished labor or materials. Tex. Prop. Code 53.021-53.059. Architects, engineers, and landscapers who have written contracts with the original owner also have M&M lien rights. Tex. Prop. Code 53.02a(c) and 53.021(d), respectively. However, an M&M lien arising under a contract only attaches to the interest the party signing the M&M contract has in the property. Therefore, if the borrower has only a leasehold interest, the M&M lien attaches only to the leasehold interest. Diversified Mortgage Investors v. Lloyd D. Blaylock Gen. Contractor, Inc, 579 S.W. 2d 794 (Tex.1978). If a landowner is not a party to the M&M contract, the M&M lien does not encumber the landowners interest. 2811 Assocs., Ltd v. Metroplex Lighting & Elec., 765 S.W. 2d 851 (Tex.App.Dallas 1989, writ den). If a land buyer has knowledge that improvements were being made to the property at or prior to closing, the buyer cannot avoid paying subsequently filed M&M liens associated with the improvements, because the buyer is not a bona fide purchaser. Texas Wood Mill Cabinets, Inc. v. Butter, 117 S.W. 3d 98 (Tex.App. Tyler 2003, no pet). Though substantial compliance is the legal standard for perfecting an M&M lien, the standard is still exacting. For example, when the claimant used an acknowledgement instead of a jurat, the lien was declared invalid. Crockett v. Sampson, 439 S.W. 2d 355 (Tex.Civ.App.Austin 1969, no writ). Clearly any M&M lien affidavit must comply with the requirements of Tex. Prop. Code 53.054 but notice of the lien does not have to be given before the lien is recorded. New AAA Apartment Plumbers, Inc. v. DPMC-Briarcliff, LP, 145 S.W. 3d 728 (Tex.App. Corpus Christi 2004). According to the Texas Supreme Court, a subcontractor must file the M&M lien affidavit within 30 days of the contemplated termination of the subcontractors performance of the contract, instead of 30 days after termination of the entire project contemplated by the contract. Page v. Structural Wood Components, 102 S.W. 3d 720 (Tex.2003). This interpretation should benefit subcontractors because they can enforce an M&M lien within 30 days of finishing their portion of the project. For a residential construction project, the statute of limitation for enforcing a lien is one year after the last day the claimant could file a lien affidavit or the termination, completion, or abandonment of the original contract. Tex. Prop. Code 53.158.
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7.

Abstract Judgments If for some reason a mortgagee needs to extinguish a superior abstract of judgment and thereby elevate the mortgagees inferior lien position to a first lien position, a release of the abstract of judgment can be obtained without the judgment creditors consent. Tex. Civ. Prac. & Rem. Code 31.008. Using 31.008, the amount of the judgment is paid into the registry of the court and a proposed recordable release is submitted to the court. Notice is then sent to the judgment creditor in accordance with Tex. Civ. Prac. & Rem. Code 31.008(b). The judge or clerk of the court then executes a release of the judgment and pays the money deposited into the registry of the court to the judgment creditor. If the judgment creditor cannot be located, the funds are escheated to the State of Texas in accordance with Tex. Prop. Code 72.001, et. seq. Constitutional Mechanics and Materialmans Liens An original contractor may have a silent but superior constitutional mechanics and materialmans lien based on TEX CONST. art. XVI 37. This lien is self-executing, but is only valid if the lien claimant had a direct contractual relationship with the owner. Hayek v. Western Steel Co., 478 S.W. 2d 786 (Tex.1972) and Berry v. McAdams, 93 Tex. 431, 55 S.W. 1112 (Tex.1900). This obscure lien does not have lien priority over a mortgagee or bona fide purchaser who had no actual or constructive knowledge of the constitutional lien. Irving Lumber Co. v. Alltex Mortg. Co., 446 S.W. 2d 64 (Tex.Civ.App.Dallas 1969), affd, 468 S.W. 2d 341 (Tex.1971) and Detering Co. v. Green, 989 S.W. 2d 479 (Tex.App.Houston [1st Dist.] 1999, no writ). An excellent discussion of the constitutional mechanics and materialmans lien is In re A&M Operating Company In., 182 B.R. 997 (E.D.Tex. 1995) 6.

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The statutory procedures for discharging an M&M lien are outlined in Tex. Prop. Code 53.157. In addition, Tex. Prop. Code 53.160 describes a summary motion type of procedure for removing a lien with at least 21 days notice to the lien claimant. A hearing is held to determine whether the claimant must post a bond for attorney fees and costs in order to avoid extinguishment of the lien pending a trial. If a patently bogus or fraudulent mechanics and materialmans lien clouds title to the property, the mortgagee might consider using the lien expungement proceedings found in the Tex. Gov. Code 51.901, et. seq. If the M&M lien security instrument does not have a power of sale, the M&M lien cannot be foreclosed without a judgment ordering the lien be foreclosed. Tex. Prop. Code 53.154. Since many construction and mechanics lien contracts contain arbitration clauses, CVN Group Inc. v. Delgado, 95 S.W. 3d 234 (Tex.2002) reversing 47 S.W. 3d 157, should be reviewed because the Supreme Court upheld an arbiters findings that a lien was valid even though the trial court came to the opposite conclusion. Vendors and purchase money liens have priority over subsequently recorded M&M liens. If, however, the M&M lien is secured by removables, i.e., any improvements that can be removed from the structure without material damage, the contracting lienholder can use self help to repossess the removables from the property. Exchange Sav. & Loan Assn v. Monocrete Pty., 629 S.W. 2d 34 (Tex.1982); and Hoarel Sign Co. v. Dominion Equity Corp., 910 S.W. 2d 140 (Tex.App.Amarillo 1995, writ den). Otherwise, a removable lien has priority over a previously recorded security instrument. First Nat. Bank in Dallas v. Whirlpool Corp., 517 S.W. 2d 262 (Tex.1974). Examples of removables that can be repossessed by self-help by the lien claimant, so long as there is no damage to the structure, are: a) Garbage disposals and dishwashers, First Nat. Bank in Dallas v. Whirlpool Corp., 517 S.W. 2d 262 (Tex.1974), and windows and doors. First Continental Real Estate Inv. Trust v. Continental Steel Co., 569 S.W. 2d 42 (Tex.Civ.App.Fort Worth 1978, no writ). Carpets, appliances, smoke detectors, burglar alarms, light fixtures and door locks. Richard H. Sikes, Inc. v. L & N Consultants, Inc., 586 S.W. 2d 950 (Tex.Civ.App.Waco 1979, writ refd n.r.e.); Pumps, compressors, air conditioning and heating systems, fans, toilets, basins, light fixtures, wall switches, electrical control panels, hardware and cabinets. In re Orah Wall Financial Corp., 84 B.R. 442
12

(Bankr.W.D. Tex.1986) and Houk Air Conditioning, Inc. v. Mortgage & Trust, Inc., 517 S.W. 2d 593 (Tex.Civ.App.Waco 1974, no writ). The test to determine whether an improvement is a removable is found in Exchange Sav. & Loan Assn v. Monocrete Pty. Ltd., 629 S.W. 2d 34 (Tex.1982) and refined in In re Orah Wall Financial Corp., 84 B.R. 442 (Bankr.W.D.Tex. 1986). A mortgagee should consider demanding that a lien claimant repossess removables from the property, instead of paying off the lien claim, prior to foreclosure. If the mortgagee forecloses the property and later sells the REO, the mortgagee must make sure the earnest money contract does not sell the stove, refrigerator, air conditioner or other removables that are still subject to an enforceable lien. Receiverships If a borrower is involved in an acrimonious divorce, the divorce docket sheet should be reviewed for a receivership. Although a mortgagee is entitled to notice, most receivers fail to give notice of the receivership and also fail to file a lis pendens in the real property records. North Side Bank v. Wachendorfer, 585 S.W. 2d 789 (Tex.Civ.App. Houston [1st Dist.] 1979, no writ). Consequently, most mortgagees never know a receivership exists and that the property is in custodia legis, i.e., under the custody and control of the court and receiver. A property subject to a receivership proceeding cannot be foreclosed without a court order. Texas Trunk Ry. Co. v. Lewis, 81 Tex. 1, 16 S.W. 647 (Tex. 1891) and Cline v. Cline 323 S.W. 2d 276 (Tex.Civ.App.Houston 1959, writ refd n.r.e.). A receivership, however, does not extinguish the mortgagees security interest, but only preserves the status quo. First Southern Properties, Inc. v. Vallone, 533 S.W. 2d 339 (Tex.1976). Rules of equity govern all matters relating to the appointment, powers, duties, and liabilities of a receiver as well as the receivership powers of the court. Tex. Civ. Prac. & Rem. Code 64.00 et. seq. and Tex. Rule Civ. Prac. 695 and 695(a). A receiver who performs any act without court approval may be held personally liable. Kansas City, M. & O. Ry. Co. of Texas v. Weaver, 191 S.W. 591 (Tex.Civ.App.El Paso 1917, writ refd). Receiverships arising because of marital property disputes fall under Tex. Fam. Code 6.502 and 6.709. For mineral interest receiverships, see Tex. Civ. Prac. & Rem. Code 64.091 & 64.092 and Jones v. Colle, 727 S.W. 2d 262 (Tex. 1987). In a receivership action, the borrower has the burden of proof that the property is in danger of being materially injured and that a sale of the property is sufficient to discharge the mortgage debt. Tex. Civ. 8.

b)

c)

Foreclosure From The Lenders Perspective

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Prac. & Rem. Code 64.001(b) and (e). Greenland v. Pryor, 360 S.W. 2d 423 (Tex.Civ.App.San Antonio 1962, no writ). Contrary to most receivers assumptions, a superior lien is entitled to a full pay-off before receivership fees are paid, unless the lien holder asked for or consented to the receivership. Chase Manhattan Bank v. Bowles, 52 S.W. 3d 871 (Tex.App.Waco [10th Dist.] 2001, no writ). If the lender expects to object to fees, to perfect an appeal any fee objections must be made at the post trial hearing on fees. Jocson v. Crabb, 133 S.W. 3d 268 (Tex. 2004). Jocson deals with ad litem fees. If there appears to be no equity in the property, the mortgagee should seek to vacate the receivership. Couch Mortg. Co. v. Roberts, 544 S.W. 2d 944 (Tex.Civ.App.Houston [1st Dist.] 1976, dismd), King Land & Cattle Corp. v. Fikes, 414 S.W. 2d 521 (Tex.Civ.App.Fort Worth 1967, writ refd n.r.e.), and Best Inv. Co. v. Whirley, 536 S.W. 2d 578 (Tex.Civ.App.Dallas 1976, no writ). The failure of the mortgagor to pay taxes and keep the property insured are not grounds for a receivership because the mortgagee can pay these expenses and add them to the original loan obligation. Ferguson v. Dickenson, 138 S.W. 221 (Tex.Civ.App.Fort Worth 1911). Temporary Restraining Orders and Injunctions The elements that should be contained in a suit seeking a temporary restraining order (TRO) to stop a foreclosure for at least 14 days are found in PILF Investments v. Arlitt, 940 S.W. 2d 255 (Tex.App.San Antonio 1997, writ refd) and Tex. Civ. Prac. & Rem. Code 65.001 et seq., particularly 65.011 for injunction. Generally, borrowers use the irreparable injury to real property as grounds for a TRO under Tex. R. Civ. P. 680. However, if the purpose of the TRO is merely for delay, damages may be awarded against the applicant. Swoboda v. Wilshire Credit Corp., 975 S.W. 2d 770 (Tex.App.Corpus Christi 1998, pet. den). TROs can be issued on sworn pleadings and affidavits, whereas temporary injunctions require a presentation of evidence. Tex.R.Civ.P. 681. Letson v. Barnes, 979 S.W. 2d 414 (Tex.App.Amarillo 1998, pet. den). The maxim he who seeks equity must do equity applies to TROs and injunctions. Therefore, the borrower should be required to tender the amount that is due under the loan agreement to obtain a TRO or temporary injunction to stop foreclosure. GintherDavis Center, Ltd. v. Houston Nat. Bank, 600 S.W. 2d 856 (Tex.Civ.App.Houston [1st Dist.] 1980, writ refd n.r.e.). Tender is not required if the borrower can prove the ability to pay. Grella v. Berry, 647 S.W. 2d 15 (Tex.App.Houston [1st Dist.] 1982, no writ).
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If the debtor tenders the amount believed owed, the tender is sufficient to support an injunction. Lee v. Howard Broadcasting Corp., 305 S.W. 2d 629 (Tex.Civ.App.Houston 1957, writ dismd). However, a borrowers good faith payment of the amount the borrower believed was due, which failed to cure the default, did not overturn the foreclosure in Church v. Rodriguez, 767 S.W. 2d 898 (Tex.App.Corpus Christi 1989, no writ). 10. Deceased Mortgagor When a mortgagor dies, title to the decedents interest in the secured property is immediately vested in the mortgagors heirs-at-law. Tex. Prob. Code 37, 38 and 45. Heir-at-law is defined in Tex. Prob. Code 3. Once a probate proceeding is opened, title of all real and personal property of the decedent vests in the probate estate subject to the custody and control of the personal representative. As a practical matter, a deceased mortgagor file, more commonly known as a dead debtor file, is not a default problem but rather a title problem. If the mortgagee forecloses, the foreclosure extinguishes the note and security instrument, which are the only tools the mortgagee needs to obtain title and possession of the property from the heirs. Since a dependent administration can be opened at any time within four years of the mortgagors death, title companies are hesitant to issue a REO title policy if the mortgagee foreclosed within four years of the mortgagors death. In addition, if a dependant administration is opened after the property is foreclosed, the personal representative can force the foreclosed property back into the probate estate and sue the mortgagee for conversion. American Sav. & Loan Assn of Houston v. Jones, 482 S.W. 2d 62 (Tex.Civ.App.Houston [14th Dist.] 1972, writ refd n.r.e.). Generally a mortgagee will file a preferred debt and lien against the deceased mortgagors estate, instead of a matured claim. Tex. Prob. Code 306 and 320. A preferred claim limits the lenders recovery to the property securing its claim, but once the property is sold the lender has priority to all the sales proceeds, including claims for an allowance for the surviving spouse and children. Herring v. Bank of America N.A., 176 S.W. 3d 513 (Tex.App.Houston [1st Dist.] 2004, no pet.). If an independent probate administration is opened for the deceased mortgagor, the mortgagee can foreclose under the authority Bozeman v. Folliott, 556 S.W. 2d 608 (Tex.Civ.App.Corpus Christi 1977, writ refd n.r.e.). However, the independent executor has six months to inventory and collect the assets of the estate before foreclosure can be initiated. Tex. Prob. Code 147. Foreclosure notices must be sent to the independent executor of the estate, who is obligated for

9.

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the debt by virtue of receiving Letters Testamentary from the court. It also appears foreclosure notices may be required to be sent to the deceased mortgagors heirs even though the loan was reinstated and modified after the borrowers death. Mills v. Haggard 58 S.W. 3d 164 (Tex.App.Waco 2001, no pet). The statute of limitation for any cause of action against an estate is also suspended for twelve months after the personal representative of the estate is appointed. Tex. Civ. Prac. & Rem. Code 16.062. Rescission of the vendors lien is an alternative to a creditors administration, if the loan is in default and the mortgagor is deceased. Lusk v. Mintz, 625 S.W. 2d 774 (Tex.App.Houston [14th Dist.] 1981, no writ) and Walton v. First Nat. Bank of Trenton, Trenton, Texas, 956 S.W. 2d 647 (Tex.App.Texarkana 1997, reh. den). The reservation clause describing the vendors lien is usually found in the warranty deed and many times in the paragraphs immediately preceding the signature line of the deed of trust. If the loan proceeds were the purchase money used to acquire the property and an express vendors lien was not reserved in any of the loan documents, a vendors lien is still implied in favor of the vendor. McGoodwin v. McGoodwin, 671 S.W. 2d 880 (Tex.1984). The vendors lien for purchase money is assignable and when the vendors lien follows the debt by assignment, it is enforceable by the assignee. Cebell v. Hauser, 112 S.W. 2d 285 (Tex.Civ.App.San Antonio 1937, writ dismd.). Since the mortgagee could rescind the vendors lien and obtain title and possession of the property while the mortgagor was living, neither the decedents estate nor heirs can prevent rescission if the loan remains in default after the mortgagors death. Hudson v. Norwood, 147 S.W. 2d 826 (Tex.Civ.App.Eastland 1941, writ dismd judgmt corr.). Because enforcement of a vendors lien requires a lawsuit, all the heirs must be made a party to the suit. So long as the purchase price for the property remains unpaid, the mortgagee has superior title to the property secured by a vendors lien. As the Texas Supreme Court held in Estes v. Browning, 11 Tex. 237 (1853), no man shall claim title to the land of another without payment of the price agreed upon. Until the debt used to acquire the decedents property is paid, any co-maker of the note and the decedents heirs have only equitable title to the property, that is the use, benefit and enjoyment of the property not legal title which is held by mortgagee. By exercising its right to rescind the vendors lien, the mortgagee is not making a claim for money against decedent or decedents putative estate; therefore, there is no necessity of administration of lenders claim under the Texas Probate Code. Walton vs. First Natl Bank of Trenton, 956 S.W. 2d 647, 652 (Tex.App. Texarkana 1997). Skelton v. Washington Mutual Bank F.A., 61 S.W. 3d 56 (Tex.App.Amarillo 2001). For
14

due process purposes, the suit to rescind the vendors lien should allege that the foreclosure procedures in Tex. Prop. Code 51.002 will be used as the legal means to rescind the vendors lien and convert title from the decedent and decedents heirs into the owner or holder of the vendors lien. 11. Republic of Texas (ROT) and Debt Elimination Scams Over the last several years, a proliferation of specious liens and claims inspired by the Republic of Texas (ROT) and debt elimination scams have been used to thwart foreclosures and evictions. Because of fanatical behavior of borrowers who use common law liens, bogus lien releases, and numerous weird and nonsensical documents filed in the chain of title to stymie foreclosure, many title insurance underwriters refuse to insure a foreclosure REO title policy because of the litigation risk unless the lender judicially forecloses. The website of the Office of the Comptroller of Currency at www.occ.treas.gov should be visited regularly because the OCC publishes alerts on a regular basis that describe the newest versions and variations of mortgage scams. The specious documents used in these scams are hard to describe but are identifiable in the same way Justice Stewart defined pornography, you know it when you see it, even though you cannot describe it. Jacobellis v. State of Ohio, 378 U.S. 184, 84 S.Ct.1676, 12 L.Ed.2d 793 (1964). One of the favorite theories used by the Republic of Texas zealot is that the lender creates money when a loan is made, therefore, the borrower cannot owe the money that was created from nothing. A variation of this theory was described in Alcorn v. Washington Mut. Bank, F.A., 111 S.W. 3d 264 (Tex.App.Texarkana 2003) and also see Fisher v. State, 2001 WL 520799 (Tex.App.Austin) May 17, 2001. Two interesting out-of-state opinions that discuss in great detail the ROT tactic of presenting a Bonded Bill or Bill of Exchange to an unsuspecting lender to pay-off a loan are McElroy v. Chase Manhattan Mortgage Corp., 134 Cal. App 4th 388, 36 Cal Rptr. 3d 176 (2005) and U.S. Bank N.A. v. Phillips, 852 N.E. 2d 380 (Ill.App.1st Dist. 2006). Whenever faced with a ROT issue or debt elimination scam, the provisions in Tex. Govt. Code 51.901-51.905, Tex. Bus. & Com. Code 9.5185 and Tex. Civ. R. P. Code 12.001 12.007 should be considered to expunge any instrument that clouds title or purports to be a U.C.C. filing. However, the nuances and pitfalls connected with using Tex. Govt. Code 51.901 51.095 should be studied in light of In re Purported Judgment Lien Against Barcroft, 58 S.W. 3d 799 (Tex.App.Texarkana [6th Dist.] 2001). In Barcroft, the case was remanded to the trial court

Foreclosure From The Lenders Perspective

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because the Order expunging the bogus lien failed to follow Tex. Govt. Code 51.901-51.903. Interestingly, the person who was the subject of Barcroft was not satisfied with his victory and subsequently sued Fannin County, the City of Paris, Texas, and various peace officers claiming he was one of the sovereign American people and his rights were violated when peace officers executed a search warrant. Barcroft v. County of Fannin, 118 S.W. 3d 922 (Tex.App.Texarkana 2003, reh. overruled). In County of Fannin the court discusses Barcrofts attempts to manipulate the legal system using the sovereign American people argument originating in the infamous Dredd Scott case. Scott v. Sandford, 60 U.S. 393, 15 L.Ed. 691 (1856). Barcroft is definitely a case worth reading. Though the claims made by Republic of Texas militants and debt elimination scammers are specious, lenders can spend years in protracted litigation trying to foreclose and obtain title and possession of the secured property. The best defense against these zealots is immediately filing a judicial foreclosure suit with: (a) Tex. Govt. Code 51.901-51.905 and Tex. Civ. Prac. & Rem. Code 12.001 12.007 allegations to remove bogus liens and U.C.C. filings; (b) a bastardization of Tex. Prop. Code 51.002 and Tex. Prob. Code 346 and 353 that requests non-judicial foreclosure with the lender filing a report of sale and getting an order confirming sale after the non-judicial foreclosure inside the judicial foreclosure suit; (c) a request for a permanent injunction to prevent further document harassment by the zealot; and (d) a request for a writ of possession from the District Court to evict any occupant of the property under Tex. R. Civ. P. 310. In the alternative, call the author and I will send you sample pleadings that have been tested in practice against mortgage scammers. Loss Mitigation One of the main reasons the foreclosure rate is so low is that most lenders have a strong financial incentive to keep the borrower in the home. If a property is foreclosed, the cost to market and sell the foreclosure REO is twelve to twenty-two percent of the propertys fair market value, which is usually substantially less than the unpaid principal balance owed at the time of foreclosure. Therefore, if a debtor is suffering a financial crisis because of loss of employment, sickness, divorce, or death which are the primary reasons for a default on ones home loan lenders are quick to offer loss mitigation alternatives. According to a Mortgage Bankers Association (MBA) report authored by Michael Murray and dated August 30, 2006, 41% of all mortgage delinquencies are caused by job loss. In 1991, HUD and the VA initiated mandatory loss mitigation programs for all FHA and VA loans.
15

E.

The most recent version of the HUD loss mitigation program for FHA loans is found in HUD 2000 Mortgagee Letter ML 00-05, Loss Mitigation Program, dated Jan. 19, 2000, and 24 C.F.R. 203.501. To ensure lenders and mortgage servicers pay more than lip service to loss mitigation, HUD has proposed regulations to impose treble damages on any servicer who fails to offer loss mitigation to a borrower in financial trouble. 69 F.R. 19906-01, 2004 WL 783027 (F.R.) Apr. 14, 2004. According to a Mortgage Bankers Associations ISSUE PAPER dated May 2003, HUD believes loss mitigation programs are very successful. For example, when a loan went into default in the HUD Assignment Program, HUD was able to save 53,706 loans from foreclosure with loss mitigation agreements and had to foreclose only 4,000 loans. The VA has also initiated a Servicer Loss Mitigation Program (SLMP) for VA loan borrowers in financial trouble. One of the principal factors used in structuring a SLMP alternative is the Net Value Factor, which calculates all the costs the VA must pay to acquire, maintain, and market the property if the borrowers home is foreclosed. Generally, the Net Value Factor ranges from 12 percent for a deed-in-lieu to 20 percent for foreclosure of the appraised market value of the property or the anticipated net proceeds from the sale of the property as a foreclosure REO. The Net Value Factor is not important in itself, except to demonstrate that the VA recognizes the tremendous costs associated with foreclosure. The VAs loss mitigation requirements are located in the VA Servicing Guide, 3.01-3.06 and Appendix D. Fannie Maes loss mitigation policies can be found in the Fannie Mae SINGLE FAMILY SERVICING GUIDE, VIII 501-508. Freddie Macs loss mitigation rules can be found in the Freddie Mac SINGLE FAMILY SERVICING GUIDE, Vol. II, Chap. 65, A65, and B65. Home ownership counseling is required on all VA and FHA loans secured by a single-family residence. 12 U.S.C. 1701x(c) (5). In addition, all FHA homeowners must be provided with a list of HUD approved non-profit home ownership counseling organizations or HUDs toll-free number, 800.569.4287. To assist homeowners, HUD also set up an information contact for homeowner counseling. At this time, the HUD liaison is Eric L. Kooestra, Review Examiner, phone number 202.942.3339; however, the liaison and phone number are constantly changing. On the HUD website at www.hud.gov under the Foreclosure menu and the Related Information subsection is an article entitled Relief Options for FHA Homeowners that describes what homeowners can do to obtain a loss mitigation or workout from the mortgagee. Another article posted on the HUD website, entitled Help for Homeowners Facing the Loss of Their Home, is the collaborative effort of the

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Department of Labor, Fannie Mae, Freddie Mac, VA, HUD, and members of the mortgage industry to provide generic loss mitigation information for borrowers. This publication is just one example of the mortgage banking industrys commitment to help homeowners in financial distress. Though the mortgage banking industry is clearly trying to mitigate the incidents of foreclosure by offering loss mitigation, borrowers clearly are not responding. A recent Freddie Mac/Roper Public Affairs and Media survey exposed the myths and misconceptions that borrowers have when their mortgages become delinquent. The study surveyed 2,031 borrowers whose mortgages were delinquent and found that 60% were unaware of the options available through their mortgage company to bring their loan current, even though 75% of these same borrowers recalled having been contacted by their loan servicers to develop a work-out plan. The survey also found 28% of the delinquent borrowers did not respond to the servicers work-out offer because they thought the delinquency would take care of itself or they thought the servicer could not help them; 7% did not talk to the servicer because they didnt have any money; and 12% said they just didnt know what to do, either because of embarrassment or fear. But the most interesting figure from the study, though seemingly contradictory, is that 92% of the delinquent borrowers claimed they would have talked to their servicer if they had known what options were available to them. According to Ingrid Beckles, Freddie Mac VicePresident of Default Asset Management, The results of the Freddie Mac/Roper survey are a wake-up call to delinquent borrowers everywhere. The message is clear: when you get a phone call or letter from your servicer, dont ignore it, act on it. Pick up the phone, call your servicer and talk to them about the possibility of forbearance or some other repayment alternative because it just may be your best chance to avoid foreclosure. F. Servicing Guidelines The GSEs, VA, and HUD have servicing guidelines that provide the rules for servicing and foreclosure of their loans. The Fannie Mae foreclosure requirements are found in the Fannie Mae Servicing Guide, Part VIII, Chap. 1. Freddie Macs foreclosure guidelines are found in the Single Family Seller/Servicing Guide, Volume 2, Chap. 64-69. Since Ginnie Mae loans are usually guaranteed by the VA or are FHA loans insured by HUD, Ginnie Mae requires its loans to be serviced according to the VA and HUD Servicing Guidelines.
16

The VA servicing regulations are found in 38 C.F.R. 36.4300, et. seq. and VA Servicing Guide, Chap. 4. Likewise, the FHA/HUD foreclosure requirements are found in 24 C.F.R. 203.330, et. seq. and the HUD Handbook 4330.1, Rev. 5, Chap. 7-9. Mortgagee Letters that inform lenders of changes in FHA operations, policies and procedures can be found at www.hud.gov/offices/hsg/mltrmenu.cfm. The best source for all the GSE and government entity servicing regulations is AllRegs, a web-based subscription service that can be found at www.AllRegs.com. The GSEs, VA, and HUD enforce their guidelines by imposing financial penalties on any investor, servicer, or foreclosure professional who fails to comply with their regulations and policies. If a lender fails to originate or service a loan properly, the lender will be required to repurchase the loan or pay a penalty for failing to conform to the servicing guidelines. By forcing lenders to repurchase bad loans and pay for servicing mistakes or negligence, investors impose discipline and accountability on loan originators and servicers. G. Servicemembers Civil Relief Act 1. Introduction If the defaulting borrower is in military service, the lender and attorney must always consider whether the Servicemembers Civil Relief Act, 50 App. U.S.C.A. 501-596, or Public Law No. 108-109, effective Dec. 19, 2003, applies. Beginning with the first Soldiers and Sailors Civil Relief Act of 1918, which was enacted in contemplation of the hardship imposed on persons suddenly drafted into military service, Conroy v. Aniskoff, 507 U.S. 511, 113 S.Ct. 1562, 123 L.Ed. 2d 229 (1993), the policy of the United States toward soldiers and sailors who have dropped their affairs to defend the nation has been: Instead of a rigid suspension of all actions against a soldier, a restriction upon suits is placed only where a court is satisfied that the absence of the defendant in military service has materially impaired his ability to meet that particular obligation. Most of the actions sought to be brought against soldiers will be for small amounts and will thus be in a local court where the judge, if he does not already know, will be in a favorable position to learn whether or not the defendant who seeks the benefit of the statute has really been prejudiced by his military service. Boone v. Lightner, 319 U.S. 561, 63 S.Ct 1223, 87 L.Ed. 1587 (1943).

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Because it succinctly analyzes and articulates reasons for most issues that arise under the Act, Boone v. Lightner, 319 U.S. 561, 63 S.Ct 1223, 87 L.Ed. 1587 (1943) is the most quoted opinion in cases dealing with the Act. Before researching any SCRA question, the Boone opinion should be read. The purpose of the SCRA is to prevent the collection of debts from servicemembers whose call to active duty materially affected the default. The Act does not extinguish a borrowers debts, it merely suspends a creditors collection rights while the servicemember is on active duty and for three months after discharge from active duty. Citing the legislative history of the 1918 Act, the Court held that the 1940 version of the SCRA carried forward the idea of avoiding arbitrary and rigid rule making by allowing a trial judge to determine whether military service materially affected the soldiers or sailors ability to defend their civil rights or meet their financial obligations. The Court said, [t]he discretion as to dealing out even handed justice between the creditor and the soldier . . . rests largely, and in some cases entirely, on the breast of the judge who tries the case. The Texas Supreme Court cited with approval the Boone holding and agreed that the trial court should be given wide discretion to determine whether the rights of a party in military service, whether plaintiff or defendant, were materially affected by serving in the armed forces. Womack v. Berry, 156 Tex. 44, 291 S.W. 2d 677 (1956). The SCRA is always construed in favor of those who dropped their affairs to answer their countrys call. LeMaistre v. Leffers, 333 U.S. 1, 68 S.Ct. 371, 92 L.Ed. 429 (1948). 2. Military Status Foreclosures and default judgments require knowing whether the borrower is in military service. Information pertaining to the military status of a defendant can be obtained from the U.S. Department of Defense Manpower Data Center (DMDC) military verification service to prepare the affidavit required by 50 U.S.C. App. 521(b). After receiving more than 30,000 requests for military status each week, the DMDC developed a twenty-four-hour website that allows anyone to print a document containing the Department of Defense seal and the signature of the Director of the DMDC attesting to the status of the defendant. Access to the DMDC website, at www.dmdc.osd.mil/scra/owa/home, no longer requires a password. But the DMDC website requires a Social Security number for the servicemember that, with the focus on financial privacy, may be difficult to obtain without the loan origination file. Commercial firms advertise on the Internet claiming they can provide
17

military status confirmation without the necessity of a Social Security number. The Act at 50 U.S.C. App. 582 also describes a procedure for obtaining a certificate signed by the Secretary concerning certain facts related to the military status of a person, to include whether the person has been in the military and, if so, the place and date the person entered and left military service, rank, and military pay. If the military status of the person is unknown, a request for the certificate must be sent to each branch of service. The charge for the SCRA certificate as of Feb. 21, 2002, was $5.20, and checks had to be made payable to the Treasurer of the United States. The address of the locator service for each of the military services is listed below BUT THESE ADDRESSES CAN CHANGE AT ANY TIME AND WITHOUT NOTICE: Army: Worldwide Locator Service Enlisted Records and Evaluation Center 8899 E. 56th St. Indianapolis, IN 46249-5031 [All requests must be in writing.] Air Force: Air Force Manpower and Personnel Center ATTN: Air Force Locator/MSIMDL 550 C St. W., Ste. 50 Randolph Air Force Base, TX 78150-4704 Locator Service: 210.652.5775 Marine Corps: Commandant of the Marine Corps Headquarter, U.S. Marine Corps (MMSB 10) 2008 Elliot Rd., Ste. 201 Quantico, VA 22134-5030 Locator Service: 703.784.3941 through 3944 Navy: Bureau of Navy Personnel PERS-312E 5720 Integrity Dr. Millington, TN 38055-3120 901.874.3351 WARNING: THESE ADDRESSES CAN CHANGE WITHOUT NOTICE. Courts and Administrative Proceedings The Act applies to all judicial or administrative proceedings commenced in any court or by any agency in the United States, in each of the States, including all their political subdivisions, and in all territories subject to the jurisdiction of the United States. 50 U.S.C. App. 512(a) and (b). A huge expansion of coverage under the SCRA was created when the definition of court in 50 U.S.C. App. 511(5) was changed to include any 3.

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administrative agency of the United States or of any State including any political subdivision of any State, whether or not a court or administrative agency of record. According to many JAG officers and legal commentators, most agencies, whether federal, State, or local political subdivisions, have no idea that the SCRA applies to their proceedings. Person Covered Persons covered by the Act include any member of the uniformed service, as defined in 10 U.S.C. 101(a)(5), which means the Army, Navy, Air Force, Marine Corps, and Coast Guard, as well as the commissioned corps of the National Oceanic and Atmospheric Administration and the Public Health Service. A member of the Reserves who is ordered to report for military service is also entitled to the protection under 50 U.S.C. App. 516(a). Prior to the 2003 SCRA amendments, unless a member of the National Guard was called to active duty for more than thirty consecutive days in a military operation involving hostilities against an enemy of the United States, National Guardsmen were not covered by the Act. National Guardsmen are now entitled to protection under the SCRA if they are called to active service by the President or the Secretary of Defense for a period of more than thirty consecutive days under 32 U.S.C. 502(f), for the purposes of responding to a national emergency declared by the President and supported by Federal funds. 50 U.S.C. App. 511(2)(A)(ii). Upon proper application, dependents can claim in their own right all the protections of Title III dealing with evictions, installment contracts for purchase or lease, mortgages and deeds of trust, and motor vehicle leases. 50 U.S.C. App. 531-538. Dependents are defined as the servicemembers spouse, child (as defined in 38 U.S.C. 101(4)), or an individual for whom the servicemember provides more than one-half of the individuals support for 180 days. A surety, guarantor, endorser, accommodation maker or co-maker, or any other person who is or may be primarily or secondarily liable on an obligation or liability owed by a servicemember may also obtain a stay, postponement, or suspension given of the joint obligation. 50 U.S.C. App. 513(a) and (b). 4.

5.

Significant SCRA Provisions

SIGNIFICANT SCRA PROVISIONS PreSCRA Service Service Provision Obligati Obligation on 6% Interest Yes. No. Cap 527 No. Civil Court (Only applies to Yes. Stay active 522 duty)

Post-Service

No.

Yes. Up to 60 days. Yes. Judgments up to 30 days from discharge. Reopen up to 90 days from discharge.

Reopen Default Judgment 521

No.

Yes.

Statute of Limitations 526

No.

Evictions 531 Termination of Leases 535

No.

Yes. Civil & Administra No. tive Actions. Yes. Rent No. <$2,465/m onth.

Yes. Residenti al and Auto. Yes. Mortgages Obligatio and Deeds of n was preTrust service. 533 Storage Liens 537 Fines Penalties 523 Waiver 517 6. & No. Yes. Yes.

No.

No.

No.

No.

Yes.

Yes. Up to 3 months from discharge. No. No.

Yes. Yes.

Creditors Rights The rule is simple when a creditor seeks to enforce a note or security instrument when the SCRA is in effect. The creditor can never foreclose, repossess,

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or take any other enforcement or collection action against a person covered by the SCRA without a court order from a court of competent jurisdiction. The term court order appears in all the sections of the Act where the civil rights of a person covered by the SCRA may be materially affected by military service. Contrary to popular belief, however, a creditor can file an application in Federal or State court to obtain the necessary court order. The Act provides in 50 U.S.C. App. 512(c): When under this Act any application is required to be made to a court in which no proceeding has already been commenced such application may be made to any court which would otherwise have jurisdiction over the matter. Materially Affected The term materially affected is used seventeen times in the Act. A court or administrative agency must decide whether military service materially affected the servicemembers circumstances in such a way that the servicemembers civil rights were prejudiced before any stay, postponement, suspension, or other relief is granted to a career servicemember, Reservist, or National Guardsman. The materially affected determination has three elements. The first is the servicemembers ability or availability to timely attend a court or administrative proceeding; the second is the financial effect of military service on the servicemembers circumstances; and the third is whether the persons obligations were in default prior to military service. The first element takes into consideration the persons assignment and duty station and the difficulty of travel to the court to prosecute or defend his or her case. In Plesniak vs. Wiegand, 31 Ill. App. 3d 923, 335 N.E. 2d 131 (1975), the Court described several additional factors: a) b) c) d) When will the servicemember be available for trial; What was the time period between filing suit and an application for stay; How long did the servicemember have notice of the trial date; and Did the servicemember attempt to obtain military leave. 7.

may be earned, it cannot be taken automatically because it is subject to the commanders discretion based on a units mission. Therefore, a person on a nuclear submarine may have difficulty in obtaining leave, while a finance clerk stationed in the United States would not. Today, the availability question is less important with advanced technology, such as real-time conference calls and videotaped depositions, lessening the need for a servicemembers physical presence in a court or administrative proceeding to protect his or her interests. The second element of the materially affected inquiry concerns the financial impact of military service and generally affects only Reservists and National Guardsmen called to active duty or a high school or college student recently inducted into the service. This inquiry compares the servicemembers financial condition prior to entering active duty with their financial situation while in the military. Brown Services Ins. Co. v. King, 24 Ala. 311, So. 2d 219 (1945). When the court found that a sailor earned more money in the Navy than as a civilian, the court held the sailor failed to prove that military service impaired his ability to meet his obligations. Harvey v. Homeowners Loan Corp., 189 Misc., 67 N.Y.S. 2d 586 (N.Y.Sup. 1946). The third factor considered in the materially affected analysis is whether there was a pattern of failing to comply with financial obligations before military service. For example, the court allowed a soldiers car to be repossessed because he failed to make car payments long before he was required to report to active duty. Reese v. Bacon, 176 S.W. 2d 971 (Tex.Civ.App.Eastland, 1974 reh. den.). Proof of Facts checklists, model affidavits, and examples of discovery requests used to prove whether a servicemember is entitled to relief under the SCRA can be found at 35 Am.Jur. Proof of Facts 3d. 323. Six Percent Cap 527 The six percent cap on interest that can be charged on a servicemembers contractual obligation while in military service is found in 50 U.S.C. App. 527. The term interest includes both service and carrying charges, but not bona fide insurance charges. 50 U.S.C. App 527(d). Because the Act requires that the obligation must exist before active-duty service, the six percent interest cap generally affects only Reservists, National Guardsmen, and recent recruits, if military service materially affected their ability to pay. For example, an 18-year-old who joins the Air Force and gets a paycheck for the first time in his or her life is not materially affected by military service. The opposite is true of a Reservist or National
19

8.

Whether a servicemember requests leave is important in an availability determination. By law, military personnel are entitled to thirty days of paid leave each year to use however they wish. Even if a military person has used up their thirty days of annual leave, the commanding officer can authorize an advance of days of leave that will accrue in the future. Though leave

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Guardsman who leaves a well-paying civilian job and suffers a substantial pay cut. Upon a showing that military service did not materially affect the servicemembers ability to pay, a creditor may be able to convince the court the servicemember can pay the contract rate, or some lesser amount, that exceeds the six percent interest rate cap. 50 U.S.C. App. 527 (c). When they were advised of its applicability, it appears that most creditors try to abide by the six percent interest cap. However, creditors have been sued for failing to comply with the six percent interest cap. Moll v. Ford Consumer Finance Co., Inc., 1998 WL 142411 (N.D.Ill. 1998). An interesting question arises when a married person is called to active duty and his or her income increases but, because the nonmilitary spouse had to quit his or her job to maintain the joint household, the couples joint income decreases. Has military service materially affected their ability to pay? If the nonmilitary spouse was not obligated for the debt, the creditor should argue that the nonmilitary spouses income is irrelevant because credit was extended solely to the military member. Prior to 2003, a contentious issue was what happens to the interest allowed under the terms of the contract that exceeded the six percent cap. Was the difference to be forgiven or accrued? Because of judicial inconsistency, statutory ambiguity and, probably more importantly, perceived creditor abuse, the 2003 Act provides that any pre-service obligation that exceeds six percent interest is forgiven. 50 U.S.C. App. 527(a)(2). The SCRA further provides that all installment payments must reflect the reduction of the contract interest rate to six percent. 50 U.S.C. App 527(a)(3). Only government-guaranteed student loans are immune from the six percent interest cap. One of the more important additions to the SCRA was clarifying how the six percent interest cap could be obtained. Beginning Dec. 19, 2003, a servicemember must send a written notice and a copy of his or her orders to the creditor no later than 180 days after the servicemember is released or terminated from service. On receipt of the notice, the creditor must change the contract interest rate to six percent effective as of the date the servicemember was called to military service not when the creditor received the notice. 50 U.S.C. App. 527(b)(2). 9. Mortgage Foreclosures 533 From a creditors perspective, any real or personal property that serves as a security for a mortgage cannot be foreclosed or repossessed without a court order from a court of competent jurisdiction. 50 U.S.C. App. 533(c). However, the obligation in question must have originated before the servicemember was called into military service. 50 U.S.C. App. 533(a).
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From a servicemembers perspective, 50 U.S.C. App. 533 allows the soldier, sailor, or airman to obtain a stay or adjustment of the mortgage obligation at any time during military service and ninety days after release or termination from service. 50 U.S.C. App. 533(b). The court can stay the enforcement of a mortgage or adjust the terms of the obligation, but only if military service materially affected the servicemembers ability to perform his or her obligation. 50 U.S.C. App. 533(b). If a creditor knowingly forecloses, repossesses, or seizes a servicemembers property without a court order, criminal penalties consisting of a fine or imprisonment for a year, or both, can be imposed. 50 U.S.C. App. 533(d)(1). In addition, the criminal penalties do not preempt the borrower from seeking damages for wrongful foreclosure or conversion or consequential and punitive damages 50 U.S.C. App. 533(d)(2). 10. Waiver of SCRA Rights 517 A servicemember can waive any of the rights and protections provided by the Act. However, the waiver must be in writing and must be in a document that is separate from the document that contains the terms and conditions of the obligation or liability to which the waiver applies if the waiver modifies, terminates, or cancels a contract, or lease, or any obligation secured by a mortgage, trust, deed, lien, or other security in the nature of a mortgage. 50 U.S.C. App. 517(b). The waiver is effective only if it was executed during or after the servicemembers period of military service. The written waiver must specify the legal instrument to which the waiver applies and, if the servicemember is not a party to the instrument, the name of the servicemember. 50 U.S.C. App. 517(a). Public Law No. 108-454 added two new requirements to the waiver rule. Effective Dec. 10, 2004, a waiver must be in twelve-point type and the waiver instrument must be separate from the obligation or liability to which the waiver applies. 50 U.S.C. App. 517(b)(2)(B) and 517(a), respectively. 11. The Heart of the Act 522 If a servicemember makes an appearance or files an answer in a court or administrative proceeding that might affect his or her civil rights, the servicemember can obtain a stay or modification of any obligation if military service materially affected the servicemembers circumstances adversely. 50 U.S.C. App. 522. The stay is authorized whether the servicemember is the plaintiff or defendant and applies to all military personnel, whether career military, Reservists, or National Guardsmen. The stay may be obtained at any time while the servicemember is on

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active duty or within sixty days after release or termination from military service. However, a civil action or proceeding is only stayed if, in the opinion of the court, the ability of the servicemember to prosecute an action or conduct his or her defense is not materially affected by reason of military service. Strong v. Pontiac Leasing, 722 S.W. 2d 479 (Tex.App.Dallas 1986, no writ). Though a court may stay its proceedings on its own motion, litigants are not advised to rely on a trial court to initiate the stay. Courts are generally unsympathetic to SCRA arguments raised for the first time in a collateral attack or in any post-trial proceeding where the military litigant had the opportunity to request a stay prior to trial but did not. The Supreme Court in Boone v. Lightener, 319 U.S. 561, 63 S.Ct. 1223, 87 L.Ed 1587 (1943), concluded that placing discretion in the hands of the trier of fact to determine whether a stay should or should not be granted was the very heart of the policy. The court in Boone also held that the Act cannot be construed to require a continuance on a mere showing that the defendant was in military service. See also Power v. Power, 720 S.W. 2d 683 (Tex.App. Houston [1st Dist.] 1986, writ dismd). Over the years, several general rules seem to have evolved when it comes to the burden of proof for the materially affected test: (1) the burden of proof lies with the party resisting the stay; (2) the military litigant must show something more than merely being in the military; (3) the military litigant has to show actual unavailability at time of trial; and (4) the subject matter of the controversy can determine who has the burden to prove whether the servicemembers rights are materially affected. The Supreme Court found that there was no guidance in the SSCRA as to who had the burden of proof in Boone v. Lightener, 319 U.S. 561, 63 S.Ct. 1223, 87 L.Ed 1587 (1943). Therefore, the Court concluded We, too, refrain from declaring any rigid doctrine of burden of proof in this matter, believing that courts called upon to use discretion will usually have enough sound sense to know from what direction their information should be expected to come. In World War IIera cases, Texas courts suggested that once a party demonstrated he or she was in the military they were entitled to a stay. Then the burden shifted to the opposing side to show whether the servicemembers ability to prosecute or defend was materially affected by military service. In Womack v. Berry, 156 Tex. 44, 291 S.W. 2d 677 (1956), the Texas Supreme Court endorsed the Boone reasoning that places the discretion to determine who should have the burden of proof on the trial court. Denied stay requests usually deal with situations where there is liability insurance or the military defendant has little or no financial risk of loss.
21

Hackman v. Postel, 675 F.Supp. 1132 (N.D.Ill. 1988). Accordingly, when the opposing party agrees to look only to an insurance policy for payment of a claim, a stay under the SCRA will usually be denied. Underhill v. Barnes, 161 Ga.App. 776, 288 S.E. 2d 905 (Ga.Ct.App. 1982 cert den.). It appears that in Texas the success of obtaining a stay is directly related to the reasonableness of the request. The more reasonable the request, the more likely it is to be granted. Bond v. Bond, 547 S.W. 2d 43 (Tex.Civ.App.Eastland 1977, writ refd n.r.e.). Unreasonable requests, or repeated requests for a stay, may indicate the litigant is attempting to utilize the Act as part of a litigation strategy to shield wrongdoing or lack of diligence. Runge v. Fleming, 181 F.Supp. 224 (N.D. Iowa 1960) and In re Burrell, 230 B.R. 309 (Bankr. E.D. Tex. 1999). In the past, contentious issues arose around whether a letter to the court requesting a stay would be deemed an appearance and subject the servicemember to the jurisdiction of the court. This issue was addressed in the SCRA, and 50 U.S.C. App. 522(c) provides that a request for a stay does not constitute an appearance for jurisdictional purposes and does not constitute a waiver of any substantive or procedural defenses. An application for stay can be contained in a letter or other communication to the court setting forth facts why current military duty requirements materially affect the servicemembers ability to appear. However, the application must state a date when the servicemember will be available to appear. 50 U.S.C. App. 522 (b)(2)(A). The servicemembers commanding officer can also communicate in a letter or other means of communication that the servicemembers current military status prevents an appearance and that military leave is not currently authorized for the servicemember. 50 U.S.C. App. 522 (b)(2)(B). 12. Default Judgments 521 Any attorney who has prepared a default judgment is familiar with the affidavit that must be filed with the court that alleges whether the defendant is or is not in military service or whether the plaintiff was unable to determine whether the defendant was in the armed forces. 50 U.S.C. App. 521(b)(1). The purpose behind the affidavit is to prevent prejudicial default judgments that would require significant court resources and time when the defendant seeks to set aside or vacate a default judgment. For this reason, if any defendant fails to answer, the plaintiff must file an affidavit attesting to the military status of the defendant, whether known or unknown. The Act is clear that the default judgment procedures apply to all court and administrative

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proceedings. 50 U.S.C. App. 521(a). If there is a default, the plaintiff must file an affidavit under penalty of perjury stating whether or not the defendant is in the military service or state facts to support the conclusion why the plaintiff was unable to determine whether the defendant was in the armed forces. 50 U.S.C. App. 521(b)(1)(B). The affidavit must contain more than a mere statement that the defendant is not in military service. U.S. v. Simmons, 508 F.Supp. 552 (D.C.Tenn. 1980). Failure to file an affidavit means the court shall not grant a default judgment until the affidavit is filed. 50 U.S.C. App. 521(b)(1). If an affidavit is not filed, the default judgment is voidable and can be reopened by the defendant. Murdock v. Murdock, 338 S.C. 322, 526 S.E. 2d 241 (Ct. App. 1999). If the court is unable to determine whether the defendant is in military service, the court can require the plaintiff to post a bond to indemnify the defendant against any loss if the judgment is set aside. The bond remains in effect until the time for an appeal to set aside the judgment is final. 50 U.S.C. App. 521(b)(3). The court can also issue any other order it deems necessary to protect a non-appearing defendant. 50 U.S.C. App. 521(b)(3). Failure to appoint an attorney, if the court cannot determine whether the defendant is in military service, renders the judgment voidable. Smith v. Davis, 88 N.C.App. 557, 364 S.E. 2d 156 (1988). If the court determines the non-answering defendant is in military service, the court must grant a stay for at least ninety days to determine whether the defendant has a meritorious defense. 50 U.S.C. App. 521(d). Proof of a meritorious defense is also required to reopen a default judgment, if the servicemember was in military service when the default judgment was entered. 50 U.S.C. App. 521(g). If it appears the defaulting defendant is in military service, the attorney appointed by the court is responsible for trying to locate the servicemember and cannot waive any of the defendants rights or bind the defendant in any way. 50 U.S.C. App. 521(b)(2). At a minimum, appointed counsel should: (1) attempt to locate or contact the servicemember to determine whether he or she has a defense or wants to explore settlements; (2) ensure that the service of process was proper on the defendant servicemember; (3) ensure that the court has personal and subject matter jurisdiction; and (4) make sure that the plaintiffs petition is not defective on its face. Even so, it appears that 50 U.S.C. App. 521 does not appear to obligate the appointed attorney to do anything more than ensure entry of a default judgment was proper. Compensation for an attorney appointed by the court is not discussed in the Act. Many courts take the position that it is the appointed counsels patriotic duty to represent the servicemember without compensation,
22

especially if the servicemember is serving on the battlefield. Davison v. Lynch, 103 Misc. 311, 171 N.Y.S. 46 (1918). However, in probate matters, appointed counsel can generally obtain compensation where such allowances are commonly awarded to attorneys ad litem. In re Ehkles Estate, 250 Wis. 583, 28 N.W. 2d 884 (1947). Bad press and publicity deter most lenders from considering foreclosure if the borrower is covered by the Act. Fannie Mae and Freddie Mac, as well as the Department of Veterans Affairs, have detailed procedures in their guidelines on servicing loans owed by servicemembers covered by SCRA. H. Debt Collection Acts Any person involved in the foreclosure of a consumer debt must be familiar with the Fair Debt Collection Practices Act (FDCPA or Act), 15 U.S.C. 1692 1692o and the Texas Debt Collection Practices Act (TDCPA), Tex. Fin. Code 392.001, et. seq. Commercial debts are not covered by these debtcollection acts. Federal Fair Debt Collection Practices Act The preamble to the Fair Debt Collection Practices Act states its purpose is: to eliminate abusive debt-collection practices by debt collectors, to ensure that those debt collectors who refrain from using abusive debt-collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt-collection abuses. Though the penalty for violating the FDCPA is small in an individual case, i.e., actual damages plus a statutory $1,000 and attorney fees, the success of the plaintiff class action bar resulting in large attorney fee awards in the Second and Seventh Circuit Courts of Appeal for seemingly de minimis FDCPA violations should make ethical, non-abusive mortgage servicers and attorneys wary of the Act. Because the FDCPA is a strict liability statute that awards attorney fees for any violation, however small, Judge Suhrheinrich expressed the sentiment of most lenders when he said, The suspicion raised in my mind is whether the UAW Legal Services Planis more interested in the mandatory statutory award of attorneys fees than they are in protecting the rights of debtors against dishonest debt collectors. Frey v. Gangwish, 970 F. 2d 1516 (6th Cir. [Ky.] 1992). In another Seventh Circuit case, the court held the [FDCPA] law would be best served by challenging clear violations rather than scanning for technical missteps that bring minimal relief to the individual debtor but a possible windfall for the 1.

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attorney. Bailey v. Security Nat. Servicing Corp., 154 F. 3d 384 (7th Cir. [Ill.] 1998). The Bailey comment cited above is interesting because the Seventh Circuit has been at the forefront in finding technical violations of the Act that result in a windfall for the attorney. Attorneys were not considered debt collectors when the FDCPA was originally enacted. However, because of blatant and abusive debt-collection practices by a small number of attorneys, Congress abolished the attorney exemption several years later. In 1995, the U.S. Supreme Court held attorneys who regularly collect debts are debt collectors. Heintz v. Jenkins, 514 U.S. 291, 115 S.Ct. 1489, 131 L.Ed. 2d 395 (1995). See also Addison v. Braud, 105 F. 3d 223 (5th Cir.1997). Beginning in 2002, some courts began to hold that debt collectors conducting a foreclosure in accordance with statutory law were not debt collectors because foreclosure is a legal proceeding. In reviewing the conduct of a Florida lender in Hulse v. Ocwen Federal Bank, FSB, 195 F. Supp. 2d 1188 (D.Or. 2002), the court opined: Foreclosing on a deed of trust is distinct from the collection of the obligation to pay money. The FDCPA is intended to curtail objectionable acts occurring in the process of collecting funds from a debtorPayment of funds is not the object of the foreclosure action. Rather, the lender is foreclosing its interest in the property. Relying on Hulse, a federal judge in Texas held that even though a law firm furnished reinstatement quotes to a consumer during foreclosure, the firms lawyers were not debt collectors. Bergs v. Hoover, Bax & Slovacek, L.L.P., 2003 WL 22255679 (N.D.Tex. Sep. 24, 2003). Another case that seems to hold that the communications necessary to comply with statutory foreclosure requirements are not acts of debt collection is Heinemann v. Jim Walter Homes, 47 F.Supp. 2d 716 (N.D.W.Va. 1998) aff. 173 F. 3d 850 (4th Cir. 1999). Because the FDCPA is a technical and complicated piece of legislation, a person can easily violate the Act without regard to intent, knowledge, or willfulness. Booth v. Collection Experts, Inc., 969 F.Supp. 1161 (E.D.Wis.1997). The degree of the debt collectors violation of the FDCPA is only considered in computing damages. Bentley v. Great Lakes Collection Bureau, 6 F. 3d 60 (2nd Cir. 1993). For guidance on drafting demand letters to borrowers, a prudent lender or debt collector should review Bartlett v. Heibl, 128 F. 3d 497 (7th Cir. 1997) which contains a safe harbor demand letter that, according to the Chief Judge of the Seventh Circuit Court of Appeals, will comply with all the requirements of the Act without overshadowing or
23

confusing an unsophisticated consumer. Also see Riddle & Associates, P.C. v. Kelly, 414 F. 3d 832 (7th Cir. 2005). A Fifth Circuit case that considers how certain language used in a debt collectors demand letter violates the FDCPA is Peter v. GC Services L.P., 310 F. 3d 344 (5th Cir. 2002). Texas Debt Collection Practices Act The Texas Debt Collection Practices Act (TDCPA or Act), formerly found at Vernons Ann. Civ. St. art. 5069-11.01, is now codified as Tex. Fin. Code 392.001. The operative definitions used in the TDCPA at Tex. Fin. Code 392.001 such as consumer, creditor, and debt collector mirror the same definitions in the Fair Debt Collection Practices Act. 15 U.S.C. 1692a. The TDCPA separately defines debt collector and third party debt collector. Tex. Fin. Code 392.001(5) and 392.001(6), respectively. The third party debt collector definition adopts by reference the FDCPA definition in 15 U.S.C. 1692a(6). However, debt collector, as defined in the TDCPA, is broad enough to make a creditor which collects its own debts a debt collector. Though the definition of third party debt collector in Tex. Fin. Code 392.001(6) seems to exempt attorneys from coverage under the Act if certain conditions apply, the conditions are so limited that any attorney who writes even a few demand letters might be deemed a debt collector. Catherman v. First State Bank of Smithville, 796 S.W. 2d 299 (Tex.App.Austin 1990 no writ) Contrary to the FDCPA, a creditor who collects its own debts may be a debt collector under the TDCPA. Smith v. Heard 980 S.W. 2d 693 (Tex.App. San Antonio 1989 reh. den) citing Monroe v. Frank 936 S.W. 2d 654 (Tex.App.Dallas 1996 writ dismd w.o.j.). The debt collection practices that are prohibited in Tex. Fin. Code 392.202 and 392.301-392.304 are also similar to the prohibited practice found in the FDCPA at 15 U.S.C. 1692d and 1692f. Likewise, the bona fide error defense set out in Tex. Fin. Code 392.401 is basically the same as the FDCPA, except the bona fide error defense must be specifically pled as an affirmative defense in Texas. A well reasoned 10th Circuit case arising in Utah opines that the bona fide error defense applies to both mistakes of law as well as the universally accepted clerical error. Johnson v. Riddle, 305 F.3d 1107, 1121 (10th Cir. 2002). When collecting a debt secured by a real property first lien mortgage, a mortgage servicer does not have to disclose the name of the person to whom the debt has been assigned or is owed when making a demand for money. Tex. Fin. Code 392.304(b) referring to Tex. Fin. Code 392.304(a)(4). The negligent handling 2.

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of a mortgagors account by a mortgage servicer is not a violation of the TDCPA. Blanche v. First Nationwide Mortgage Corp. 74 S.W. 3d 444 (Tex.App.Dallas 2002). The TDCPA requires that all third party debt collectors post a $10,000 surety bond as a source of funds to pay judgment debtors who are unable to collect TDCPA awards from debt collectors. Tex. Fin. Code 392.101 and 392.102. The surety bond requirement was amended in 1998 so that lawyers are not required to obtain the surety bond if the attorney is collecting the debt on behalf of a client in the role of an attorney. However, if the attorney uses employees who regularly contact borrowers to collect a debt, then the bond is required because the attorney is a third party debt collector. Tex. Fin. Code 392.001(7)(A) and (B). Since the annual premium for the debt collection surety bond is approximately $100, the best practice is to obtain the surety bond if assistants or secretaries are used to send collection letters. CNA Surety Corporation writes a surety bond called Third Party Debt Collector Bond, Policy No. TX0913954. The TDCPA places a duty on third party debt collectors to correct erroneous consumer information contained in their files. If the borrower disputes the accuracy of any item contained in the third party debt collectors file, the collector must provide the borrower with a form so that the debtor can dispute the accuracy of the information. When requested, the third party debt collector must also assist the consumer in preparing the form. Tex. Fin. Code 392.202(a). Within thirty days after the borrower advises incorrect information is contained in the debtors file, the debt collector must send a written statement to the consumer: (1) denying the inaccuracy of the information; (2) admitting the inaccuracy; or (3) stating that the debt collector does not have sufficient time to complete an investigation. Tex. Fin. Code 392.202(b). If the third party debt collector admits that an item is inaccurate, the error must be corrected within five days and a corrected report sent immediately to all persons who previously received the inaccurate report. If there is insufficient time to complete an investigation within the thirty days, the debt collector must: (1) change the information as requested by the consumer; (2) send a notice to each person who previously received the notice that states the borrowers version of the disputed information is correct. If the consumer disputes any credit information pertaining to the borrower in the third party debt collectors files, the collector must cease all collection activities until the collector determines the information is correct or modifies incorrect information. Once a debt collector determines that the debtors credit
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information is accurate, collection efforts may be resumed. Tex. Fin. Code 392.202(c). Violation of the Texas Debt Collection Practices Act is a criminal misdemeanor punishable by a fine of not less than $100 or more than $500 for each violation of the Act. There is a one year statute of limitation for filing criminal misdemeanor charges, which commences on the date of the alleged violation. Tex. Fin. Code 392.402. The civil remedies section of the TDCPA provides for injunctive relief to prevent any future violations, as well as actual and statutory damages of not less than $100 for each violation. Any person who successfully maintains an action under the TDCPA is also entitled to attorney fees, reasonably related to the amount of work performed, plus costs. Tex. Fin. Code 392.403. Any violation of the TDCPA is a per se deceptive trade practice under Subchapter E, Chapter 17, Business and Commerce Code, and is actionable under the Deceptive Trade Practices Act. Tex. Fin. Code 392.404. If the court makes an affirmative finding that a TDCPA suit was filed in bad faith or for purposes of harassment, the court must award attorneys fees reasonably related to the work performed, plus costs. Tex. Fin. Code 392.403(c). A thorough discussion of the various kinds of damages that can be awarded in a debt collection case, including punitive and mental anguish, can be found in Green Tree Financial Corp v. Garcia, 988 S.W. 2d 776 (Tex.App.San Antonio 1999, writ reh. den). In Green Tree, the jury awarded the Garcias $2,250,000. An $11,700,000 jury verdict was also rendered against Household Credit for debt collection violations in Household Credit Services, Inc. v. Driscol, 989 S.W. 2d 72 (Tex.App.El Paso 1999). Examples and analyses of jury questions submitted to a jury in debt collection cases are found in Green Tree Financial Corp v. Garcia, 988 S.W. 2d 776 (Tex.App.San Antonio 1999, writ reh. den) and Waterfield Mortg. Co., Inc. v. Rodriguez, 929 S.W. 2d 641 (Tex.App.San Antonio 1997). I. Qualified Written Request The qualified written request found in 12 U.S.C. 2605(e) is extensively used by debtors and debtors counsel to make the lender respond to a borrowers complaints or inquiries. Failure to respond in a timely manner subjects the mortgagee to penalties similar to those imposed by the Fair Debt Collection Practices Act. The mortgagee must send an acknowledgement of a qualified written request within 20 days after receipt and must either correct the dispute or provide a response to the borrower or borrowers counsel within 60 business days not calendar days.

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The penalty for a mortgagees failure to respond to a qualified written request provision is actual damages plus additional damages the court approves not to exceed $1,000. In class actions, the measure of damages is the actual damages of each borrower in the class plus, in the courts discretion, $1,000 for each member of the class but not to exceed the lesser of $500,000 or 1 percent of the servicers net worth. A successful borrower is also entitled to attorney fees. 12 U.S.C. 2605(f). A discussion of the qualified written request issue can be found in Ploog v. Homeside Lending, Inc., 209 F.Supp.2d 863 (N.D. Ill. 2002) and Schlosser v. Fairbanks Capital Corp., 323 F. 3d 534 (7th Cir. (Ill.) 2003). IV. THE FORECLOSURE PROCESS A. Default Contrary to borrowers popular belief, Texas has no federal, state, or common law that requires a delinquent loan be foreclosed or that the foreclosure be conducted expeditiously. Federal Deposit Ins. Corp. v. Coleman, 795 S.W. 2d 706 (Tex.1990). However, to foreclose, there must be a default or breach of the underlying loan agreement. State Nat. Bank of El Paso v. Farah Mfg. Co., 678 S.W. 2d 661 (Tex.App.El Paso 1984, reh. overruled). If there is no debt, there is no lien to foreclose. Easy Living, Inc. v. Cash, 617 S.W. 2d 781 (Tex.Civ.App.Fort Worth 1981, no writ). The note and the security instrument are deemed separate loan agreement obligations. Aguero v. Ramirez, 70 S.W. 3d 372 (Tex.App.Corpus Christi 2002, no writ). See Tex. Bus. & Com. Code 26.002 for definition of loan agreement. Only the person who signs the note is personally liable for the debt. Tex. Bus. & Com. Code 3.401(a). However, a common exception to this rule is the sale of the property by assumption, where the new buyer assumes the sellers mortgage obligation as part of the purchase price. In this situation, the new buyer does not sign a note and the agreement to pay the sellers mortgage is reflected in the deed from the seller to the buyer. If the mortgagee does not agree to the assumption of the debt by the new buyer, the due-onsale clause in the security interest is breached and the property can be foreclosed. Lyons v. Montgomery, 701 S.W. 2d 641 (Tex.1985). Although most defaults occur because of failure to pay the mortgage installments, other common defaults include the failure to pay taxes and insurance. Careful attention must be given to what triggers the default so that foreclosure notices accurately describe the cause of default. Most servicers impose a late charge when a loan goes into default. Late charges on consumer debts are
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subject to a Federal Trade Commission provision found in 16 C.F.R. 444.4 which provides: (a) In connection with collecting a debt arising out of an extension of credit to a consumer in or affecting commerce, as commerce is defined in the Federal Trade Commission Act, it is an unfair act or practice within the meaning of Section 5 of that Act for a creditor, directly or indirectly, to levy or collect any delinquency charge on a payment, which payment is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period, when the only delinquency is attributable to late fee(s) or delinquency charge(s) assessed on earlier installment(s). (b) For purposes of this section, collecting a debt means any activity other than the use of judicial process that is intended to bring about or does bring about repayment of all or part of a consumer debt. On FHA loans, HUD regulations provide that a late charge is limited to 4 percent of the amount of each payment more than 15 days in arrears to cover servicing and other costs. 24 C.F.R. 203.25. Other charges allowed to the mortgagee, if permitted by the loan agreement, are found at 24 C.F.R. 203.552. If the mortgagee accepts partial payment of past due installments and still forecloses because the payments failed to cure the default, acceptance of the partial payments is not considered fraud. Nicolas v. McIntyre, 459 S.W. 2d 949 (Tex.Civ.App.El Paso 1970, reh. den). B. Cure of Default To cure a default, the borrower must tender or make an unconditional offer to tender the amount due under the note in the form of cash or its equivalent. For a general discussion of tender and unconditional offer to pay, see Arguelles v. Kaplan, 736 S.W. 2d 782 (Tex.App.Corpus Christi 1987, writ refd n.r.e.). A promise to make an unconditional offer to pay the amount due in the future does not cure the default. Forestier v. San Antonio Savings Assn, 564 S.W. 2d 160 (Tex.Civ.App.San Antonio 1978, writ refd n.r.e.). Numerous examples of tender and the resulting consequences if the mortgagee fails to accept the tender are described in Jenkins v. Redland Springs Homeowners Assn, 1999 WL 215453 (Tex.App.San Antonio [4th Dist.] 1999). It should be noted that Jenkins is an unpublished opinion under Tex. R. App. P. 47.7.

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Once the borrower makes a proper tender of the amount due, the borrower is not liable for additional attorney fees or accrued interest if the lender refuses or neglects to accept the tender. Thomas v. Thomas, 917 S.W. 2d 425 (Tex.App.Waco 1996, no writ) and Staff Industries, Inc. v. Hallmark Contracting, Inc., 846 S.W. 2d 542 (Tex.App.Corpus Christi 1993, no writ). If a mortgagor tenders a check for less than the amount due with words that are similar to full or final satisfaction of the debt and the mortgagee negotiates the check without protest, the debt may be considered paid in full based on the rule of accord and satisfaction. Hixson v. Cox, 633 S.W. 2d 330 (Tex.App.Dallas 1982, writ refd n.r.e.) and Borland v. Mundaca Inv. Corp, 978 S.W. 2d 146 (Tex.App.Austin 1998, no writ). C. Foreclosure Notices Only persons obligated for the debt are required to receive the statutory foreclosure notices. Tex. Prop. Code 51.002(b)(3). A foreclosure notice is not required to be sent to a property owner whose land secures the debt of another person, if the property owner is not obligated for the debt. Lawson v. Gibbs, 591 S.W. 2d 292 (Tex.Civ.App.Houston [14th Dist.] 1979, writ refd n.r.e.). Actual receipt of a foreclosure notices is not required for a valid sale. Valley v. Patterson, 614 S.W. 2d 867 (Tex.Civ.App.Corpus Christi 1981, no writ) and Onwuteaka v. Cohen, 846 S.W. 2d 889 (Tex.App. Houston [1st Dist.] 1993, writ den). The law only requires the lender to place a postage pre-paid certified mail notice in a U.S. Postal Service depository. Tex. Prop. Code 51.002(b)(3). The certified mail requirement is discussed in Lambert v. First Nat. Bank of Bowie, 993 S.W. 2d 833 (Tex.App.Fort Worth 1999, pet. den). Even though Tex. Prop. Code 51.002 mandates the notices be sent by certified mail, hand delivery of foreclosure notices may be sufficient. Savers Federal Sav. & Loan Assn v. Reetz, 888 F. 2d 1497 (5th Cir. 1989). As an aside, Savers contains a Mortgagees Bill of Rights that every lender should use to educate judges and juries when the borrower attempts to manipulate the legal process to keep from paying a just debt. Proof of the lenders customary business practices for sending foreclosure notices can serve as credible evidence that notices were in fact sent. Mahon v. Credit Bureau of Placer County Inc., 171 F. 3d 1197 (9th Cir. 1999) and Van Westrienen v. Americontinental Collection Corp., 94 F.Supp. 2d 1087 (D.Or. 2000). A courtesy foreclosure notice can be sent to anyone who may have even a putative interest in the property. However, a courtesy notice can create the risk of a Fair Debt Collection Practice Act violation, if
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the recipient of the notice is not obligated for the debt. 15 U.S.C. 1692e and (f). Even though the lender believes a family member is the executor of a deceased mortgagors estate, sending a foreclosure notice to that family member will not suffice. Fenimore v. Gonzales County Sav. & Loan Assn, 650 S.W. 2d 213 (Tex.App.San Antonio 1983, writ refd n.r.e.). A demand letter written by a Texas bankruptcy judge is found in a case where the judge chastises both the banks and the borrowers attorneys for making two lost payments into a major piece of litigation. The judge also calls for courts and creditors to develop a national procedure for promptly and gently notifying Chapter 13 debtors of missed mortgage payments post confirmation. In re Martinez, 281 B.R. 883 (Bankr.W.D.Tex. 2002). Mortgagors Address For loans secured by the debtors residence, the address to which foreclosure notice must be sent is the property address, unless the borrower has provided the mortgage servicer with a different change of address in a reasonable manner. Tex. Prop. Code 51.0001(2)(a). In addition, the borrower has a duty to provide the change of address, if the borrower expects to receive foreclosure notices. Tex. Prop. Code 51.0021. If the loan is secured by property other than the borrowers residence, the address for foreclosure notices is the borrowers last known address contained in the mortgage servicers records. Tex. Prop. Code 51.0001(2)(b). Under case law, the debtor also has the burden of notifying the lender of any change of address. Burnett v. Anderson, 543 S.W. 2d 15 (Tex.Civ.App.Dallas 1976, no writ). However, he mortgagee must keep its records up to date if the borrower provides a change of address. Lido Intern, Inc. v. Lambeth, 611 S.W. 2d 622, 624 (Tex.1981). If the borrowers address is not reflected in the mortgagees records or if the mortgagors last known address is obviously invalid, no duty is imposed on the mortgagee to search for the debtors current address. Krueger v. Swann, 604 S.W. 2d 454 (Tex.Civ.App. Tyler 1980, writ refd n.r.e.). If the mortgagees records indicate that comortgagors have the same address, e.g., husband and wife, a single notice letter addressed to both mortgagors is sufficient. Martinez v. Beasley, 616 S.W. 2d 689 (Tex.App.Corpus Christi 1981, no writ) and Forestier v. San Antonio Sav. Assn, 564 S.W. 2d 160 (Tex.Civ.App.El Paso 1978, writ refd n.r.e.). Since most mortgage servicers organize their default servicing activities into functional areas, e.g., collection, pre-foreclosure, dispute resolution, and bankruptcy, it is not unusual for one department to fail to inform another department of the borrowers new 1.

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change of address when the borrowers file is transferred. For example, the servicers bankruptcy department obtains the borrowers current address from the borrowers bankruptcy pleadings and schedules. After a lift of stay is granted, the bankruptcy department sends the file to the foreclosure department to proceed with foreclosure. If the foreclosure department fails to send the foreclosure notices to the borrowers current address listed in the bankruptcy pleadings, a wrongful foreclosure will result. Tex. Prop. Code 51.002(e) and Lambert v. First Nat. Bank of Bowie, 993 S.W. 2d 833 (Tex.App.Fort Worth 1999, pet. den). The mortgagee does not have a duty to take any affirmative action other than that required by statute or the deed of trust. First State Bank v. Keilman, 851 S.W. 2d 914 (Tex.App.Austin 1993). For example, a former wife had a vendors lien and a junior lien from the husband that encumbered a property. When the husband defaulted and the mortgagee foreclosed on its first lien, the court held that the former wife was not required to receive notice. Villarreal v. Laredo Nat. Bank, 677 S.W. 2d 600 (Tex.App.San Antonio [4th Dist.] 1984, writ refd n.r.e.). Demand A mandatory condition precedent for foreclosure is that a demand to cure the default must be sent by certified mail to all persons obligated for the debt. The demand to cure is generally referred to as the breach letter. Under Texas law, the dollar amount due the lender does not have to be disclosed in the breach letter to the mortgagor. In re Davis Chevrolet, Inc., 135 B.R. 29 (Bankr. N.D. Tex.1992), Sanders v. Shelton, 970 S.W. 2d 721 (Tex.App.Austin, 1998 writ den.) and Wright v. Cambridge Condominium Owners Assn, 2000 WL 254298 (Tex.App.Dallas 2000). However, the Fair Debt Collection Practices Act requires that the borrower be advised of the amount that is due in the first communication with the borrower. 15 U.S.C. 1692g. Therefore, if the demand letter is the first communication with the borrower to attempt to collect the debt, the notice must contain the amount due under federal law, not Texas law. Bartlett v. Heibl, 128 F. 3d 497 (7th Cir. 1997). If the debt is an installment loan, a formal notice of the mortgagees intent to accelerate the maturity of the debt must be given to the borrower as a condition precedent to accelerating the maturity of the debt. Otherwise, only the past due installments can be collected, as opposed to the unpaid principal and earned interest due under the note. Ogden v. Gibraltar Sav. Assn., 640 S.W. 2d 232 (Tex.1982). Typically, both the demand to cure and the notice of the lenders intent to accelerate are combined in one
27

2.

letter that is sent certified mail. If the property securing the debt is the debtors residence, the borrower must be given at least 20 days to cure the default. Tex. Prop. Code 51.002(d). The 20-day requirement cannot be waived even by express waiver language contained in the note or security instrument. In commercial loans, however, well-drafted and precise waiver of notice clauses may be enforced against the mortgagor. If the borrower fails to remedy an installment loan default, the mortgagee must give notice that the debt has been accelerated as well as notice of the date, time and place of the foreclosure sale, which is commonly known as the posting notice. The acceleration and posting notices are usually contained in one letter sent certified mail. Allen Sales & Servicenter, Inc. v. Ryan, 525 S.W. 2d 863 (Tex.1975). Home equity loans are an exception to the usual practice of sending the acceleration and posting notice in one letter. The posting notice for a home equity loan foreclosure cannot be sent until an order has been obtained from a district court in accordance with Tex. R. Civ. P. 735 and 736. If a loan is cross-collateralized, the mortgagee must properly identify each note that the mortgagee intends to foreclose. Milliorn v. Finance Plus, Inc., 973 S.W. 2d 690 (Tex.App.Eastland 1998, no writ). Beginning Sept. 1, 2005, the notice of foreclosure sale must disclose the name and address of the mortgagee if a mortgage servicer will administer the foreclosure process pursuant to a written servicing agreement between the mortgagee and the mortgage servicer. Tex. Prop. Code 51.0025(2). Another statutory change effective Sept. 1, 2005 makes clear that anyone can serve written foreclosure notices. Tex. Prop. Code 51.002(b)(3). Acceleration An installment loan cannot be accelerated until the mortgagor has been advised of the mortgagees intent to accelerate maturity of the debt beforehand. Williamson v. Dunlap, 693 S.W. 2d 373 (Tex.1985); Ogden v. Gibraltar Sav. Assn., 640 S.W. 2d 232 (Tex.1982); and Shumway v. Horizon Credit Corp., 801 S.W. 2d 890 (Tex.1991). Using acceleration to coerce the borrower into paying the entire debt is impermissible. Ince v. Herskowitz, 630 S.W. 2d 762 (Tex.App.Houston [1st Dist.] 1982, writ refd n.r.e.). If the borrower tenders the amount due before a notice of acceleration is mailed, the lender is estopped from accelerating the maturity of the debt. Fraser v. Kay, 251 S.W. 2d 754 (Tex.Civ.App.San Antonio 1952, no writ). If the acceleration notices are sent to the borrowers last known address but the letter is returned unclaimed, no further duty is placed on the mortgagee to give any further foreclosure notice. Dillard v. Broyles, 633 S.W. 2d 636 (Tex.App.Corpus Christi 1982, writ refd n.r.e.). Moreover, a foreclosure 3.

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sale may be valid even if the borrower never received any of the foreclosure notices required by law. Martinez v. Beasley, 616 S.W. 2d 689 (Tex.Civ.App. Corpus Christi 1981, no writ). Once accelerated, the entire balance owed under the terms of the note and deed of trust is due. Hiller v. Prosper Tex. Inc., 437 S.W. 2d 412 (Tex.App. Houston [1st Dist.] 1969, no writ). This includes all collection costs and expenses as well as attorney fees and any corporate advances made by the mortgagee to preserve and protect the property, e.g., taxes and insurance. Ogden v. Gibraltar Sav. Assn., 640 S.W. 2d 232 (Tex.1982) and French v. May, 484 S.W. 2d 420 (Tex.Civ.App.Corpus Christi 1972, writ refd n.r.e.). However, it should be noted that VA and HUD regulations allow the borrower to cure a default anytime before foreclosure by paying the principal, interest, and other contract amounts, due plus all expenses associated with the foreclosure proceeding. 38 C.F.R. 36.4300 4393 and 12 C.F.R. 203.333. Two cases imply that, if the borrower is given proper notice of the foreclosure sale date, time, and location, a formal notice of acceleration is not required. McLemore v. Pacific Southwest Bank, FSB, 872 S.W. 2d 286 (Tex.App.Texarkana 1994, writ dismd) and Meadowbrook Gardens, Ltd. v. WMFMT Real Estate Ltd. Partnership, 980 S.W. 2d 916 (Tex.App.Fort Worth 1998). Though filing suit does not constitute a demand to cure, Mackey v. Mackey, 721 S.W. 2d 575 (Tex.App. Corpus Christi 1986, no writ), filing a suit may be sufficient to accelerate the maturity of the debt. Smith v. Davis, 453 S.W. 2d 340 (Tex.Civ.App.Fort Worth 1970, writ refd n.r.e.). Courts closely scrutinize the acceleration process, because acceleration is such a harsh remedy. Vaughan v. Crown Plumbing & Sewer Service, Inc., 523 S.W. 2d 72 (Tex.Civ.App.Houston [1st Dist.] 1975, writ refd n.r.e.). For example, when the mortgagees demand letter advised the debt was accelerated because the mortgage payments were due, when in fact it was taxes that were due, the court held there no acceleration because the wrong reason for acceleration was given. Purnell v. Follett, 555 S.W. 2d 761 (Tex.Civ.App. Houston [14th Dist.] 1977, no writ). If the notice of acceleration is defective, there is no acceleration, and the borrower is not excused from making his or her normal mortgage payments. Rey v. Acosta, 860 S.W. 2d 654 (Tex.App.El Paso 1993, no writ). Once an installment note is accelerated, the fouryear statute of limitation for enforcing the lien against the property by foreclosure begins to run. Tex. Civ. Prac. & Rem. Code 16.035. Shepler v. Kubena, 563 S.W. 2d 382 (Tex.Civ.App.Austin 1978, writ den). Holy Cross Church of God in Christ v. Wolf, 44 S.W. 3d 562 (Tex.2001). Holy Cross specifically overturned a Corpus Christi case that said merely sending a notice
28

of acceleration was not enough to mature the debt. Swaboda v. Wilshire Credit Corp., 975 S.W. 2d 770 (Tex.App.Corpus Christi 1998). However, in Holy Cross, the lenders judicial admission that the limitations had expired before the foreclosure began had to affect the opinion. To determine when limitations accrue, after acceleration, see Hammann v. H.J. McMullen & Co., 122 Tex. 476, 62 S.W. 2d 59 (1933) and Estate of Montague v. National Loan Investors, L.P., 70 S.W. 3d 242 (Tex.App.San Antonio 2001 reh. overruled). If a borrower has not relied on acceleration to his or her detriment, an argument might be made that the statute of limitations never accrued. In re Davis Chevrolet, Inc., 135 B.R. 29 (Bankr. N.D. Tex.1992). Acceleration may be suspended by filing a statutory notice in the real property records in accordance with Tex. Civ. Prac. & Rem. Code 16.036. Though it is unclear in 16.036 whether the borrowers signature is required on a rescission document, which is difficult if not impossible to obtain, the lender should sign and record a unilateral 16.036 notice stating acceleration has been abandoned. Because acceleration triggers the statute of limitations, all reinstatement and loss mitigation agreements executed after acceleration should contain a representation that acceleration has been abandoned. If the mortgagee gives all the required foreclosure notices to the borrower before the borrower files bankruptcy, the lender may not be required to resend an acceleration notice. Fitzgerald v. Harry, 2003 WL 22147557 (Tex.App.Fort Worth Sept. 18, 2003). See In Matter of LHD Realty Corp., 726 F. 2d 327 (7th Cir. 1983), where acceleration while the borrower was in bankruptcy is the subject of an analysis of legislative intent and the interplay between Bankruptcy Code 362 and 1124. If the mortgagee accepts payments after the debt has been accelerated, acceleration is deemed abandoned and the mortgagee must re-accelerate. McGowan v. Pasol, 605 S.W. 2d 728 (Tex.Civ.App. Corpus Christi 1980, no writ) and Matter of Marriage of Rutherford, 573 S.W. 2d 299 (Tex.Civ.App. Amarillo 1978, no writ). Although, to date, there appears to be no Texas case on point, in other jurisdictions late charges cannot be imposed once the debt has been accelerated. F.D.I.C. v. M.F.P. Realty Associates, 870 F.Supp. 451 (D. Conn. 1994) and Security Mut. Life Ins. Co. of New York v. Contemporary Real Estate Associates, 979 F. 2d 329 (3rd Cir. 1992), and see 63 A.L.R. 3d 50, 8. Reinstatement after Acceleration With foreclosure imminent, approximately 20 percent of all delinquent mortgages reinstate. The standard Fannie Mae, Freddie Mac, and MERS deed of trust forms allow the borrower to reinstate the loan by 4.

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paying the past due balance not the accelerated amount five days before the foreclosure sale. Most mortgagees will allow a borrower to reinstate the debt by paying the past due amount plus collection costs up to the moment the trustee starts to auction the property on the courthouse steps. There appear to be no reported cases considering whether the mortgagee can force the borrower to pay the accelerated loan amount to stop a foreclosure sale, if the loan was properly accelerated. If a loan has been accelerated but reinstated prior to foreclosure, the mortgagee must document that the debt has been de-accelerated in the reinstatement or loss mitigation agreement or must record a rescission notice in the deed records in accordance with Tex. Civ. Prac. & Rem. Code 16.036. De-acceleration is critical in this day and time, when mortgages are bought and sold like commodities and little things like abandoning acceleration are lost in the servicing transfers. Another alternative for suspending acceleration is to send written notice to the borrower that the current mortgagee is abandoning its right to collect the accelerated amount. This abandonment letter should be made part of the borrowers permanent servicing file. Otherwise, four years after acceleration, the borrower may claim the statute of limitations bars enforcement of the lien against the property. Though no Texas case appears on point, a California court held that it is the borrowers responsibility to ensure the mortgagee receives the reinstatement amount prior to the foreclosure sale. Mailing reinstatement money that is not received by the mortgagee until after the foreclosure sale does not reinstate the loan. Nguyen v. Calhoun, 129 Cal.Rptr.2d 436, 105 Cal.App. 4th 428 (2003). Waiver The mortgagee waives the right to accelerate if the mortgagee consistently accepts late payments without objection. McGowan v. Pasol, 605 S.W. 2d 728 (Tex.App.Corpus Christi 1980, no writ). One year later, the same Corpus Christi court reversed itself and held that the mortgagee did not waive acceleration even though it accepted late payments. Valley v. Patterson, 614 S.W. 2d 867 (Tex.Civ.App.Corpus Christi 1981, no writ). When a mortgagee accepted 132 payments and 120 were late, the court held the lender could not foreclose until the borrower was advised, in writing, that late payments would no longer be accepted. Highpoint of Montgomery Corp. v. Vail, 638 S.W. 2d 624 (Tex.App.Houston [1st Dist.] 1982, writ refd n.r.e.). See also Vaughan v. Crown Plumbing & Sewer Service, Inc., 523 S.W. 2d 72 (Tex.App. Houston [1st Dist.] 1975, writ refd n.r.e.); Slusky v. Coley, 668 S.W. 2d 930 (Tex.App.Houston [14th Dist.] 1984, no writ); and Bluebonnet Sav. Bank, F.S.B.
29

5.

v. Grayridge Apartment Homes, Inc., 907 S.W. 2d 904 (Tex.App.Houston [1st Dist.] 1995, reh. den). Deplorable conduct on the part of the mortgagee can waive acceleration. Because of the lenders egregious behavior in using acceleration to force the borrower to settle a lawsuit with the lender in another matter, the court denied acceleration in Winton v. Daves, 614 S.W. 2d 464 (Tex.Civ.App.Waco 1981, no writ). When considering cases related to waiver, attention should be paid to whether the property to be foreclosed is commercial or homestead. In commercial foreclosures, the courts seem willing to enforce a waiver clause against the borrower. If the debt is secured by the debtors residence, there is no waiver of the 20-day right to cure period or the 21-day advance notice of the foreclosure sale date, regardless of waiver language in the loan agreement. Tex. Prop. Code 51.002(b) and (d). For a waiver provision to be enforceable there must be a specific statement of the rights waived. An acceleration waiver clause will not waive the independent right to receive notice of intent to accelerate. The Texas Supreme Court rejected a line of cases holding that a general waiver provision could serve as a waiver of both the notice of intent to accelerate and acceleration in Shumway v. Horizon Credit Corp., 801 S.W. 2d 890 (Tex.1991). One creative debtor argued that, to be enforceable, a waiver clause must be reserved in each loan agreement document. The court held that waiver language in one document applies to the whole transaction. Parker v. Frost Nat. Bank of San Antonio, 852 S.W. 2d 741 (Tex.App.Austin 1993, no writ). The standard Fannie Mae and Freddie Mac deed of trust forms contain a clause stating that the borrower must be given notice of the right to reinstate the loan. The Texas Supreme Court has held that the mortgagees failure to give the borrower this reinstatement notice is not fatal because the right to reinstate is a contract right and not a statutory requirement. Jasper Federal Sav. & Loan Assn v. Reddell, 730 S.W. 2d 672 (Tex.1987). In Jasper, the court also found that it is the borrowers attorneys responsibility to advise the borrowers of the right to reinstate. Posting Notice, i.e., Notice of Date, Time, and Place of Foreclosure Sale The foreclosure notice giving the date, time, and location of the foreclosure sale is commonly known as the posting notice. This notice must be posted at the courthouse and filed in the county clerks office in the county where the property is located. The notice posted at the courthouse does not have to be visible to the public. Chambers v. Lee, 566 S.W. 2d 69 (Tex.Civ.App.Texarkana 1978, no writ). Posting is 6.

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constructive notice that the loan has been accelerated. TMS Mortg., Inc. v. Golias, 102 S.W. 3d 768 (Tex.App.Beaumont 2003) and Tex. Prop. Code 51.002(f). Borrowers counsels sometimes assume that grounds for a wrongful foreclosure arise when a posting notice is not found in the real property records. However, Tex. Prop. Code 51.002(f) only requires the posting notice to be filed with the clerk and made available for examination during normal business hours until the foreclosure sale date has passed. Because the county clerks usually discard stale posting notices 30 to 60 days after the sale date, a mortgagee should obtain a filed stamped copy of the posting notice and keep it in a permanent file should the borrower later claim the posting notice was not filed with the clerk. A non-judicial foreclosure sale must be held in the form of a public auction on the first Tuesday of the month and within a three-hour time period between the hours of 10 a.m. and 4 p.m. Tex. Prop. Code 51.002(c). The failure to state when the three-hour period begins is not fatal. Sanders v. Shelton, 970 S.W. 2d 721 (Tex.App.Austin 1998, no writ). However, a strong dissent in Sanders complained the foreclosure notice should have contained the specific three-hour period. Because of the Sanders dissent, the best practice is to disclose in the posting notice when the three-hour period begins and ends. A foreclosure sale is valid even if the first Tuesday falls on a holiday such as July 4th, New Years Day, or any other Texas legal holiday. Koehler v. Pioneer Am. Ins. Co., 425 S.W. 2d 889 (Tex.Civ.App. Fort Worth 1968, no writ). The list of Texas legal holidays is found in Tex. Govt Code 662.003 and discussed in Miller Brewing Co. v. Villarreal, 829 S.W. 2d 770 (Tex.1992). All foreclosure sales must be held at the location designated by the Commissioners Court and in the county where at least part of the property is located. Attorney General Opinion Op. Tex. Atty Gen. No. JAM-1044/19 (1989). As a result of large crowds at the Harris County courthouse on foreclosure day, effective Sept. 1, 2005, the Commissioners Court may designate a location other than the courthouse for foreclosure sales. Tex. Prop. Code 51.002(a) and (h). If the real property is located in more than one county, a notice must be posted and filed in all counties where the property is located and must recite the location where the sale will actually be held. If septic tanks, water lines, or other essential utilities are located outside the deed of trust property description, the owner of the foreclosed property has a right of access to utilize these items. Holmstrom v. Lee, 26 S.W. 3d 526 (Tex.App.Austin 2000, no writ) and Zimmerman v. Chicago Title Ins. Co., 28 S.W. 3d 584 (Tex.App.Austin 1999).
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Invariably, questions arise whether a foreclosure sale affects easements and access rights. The elements for easements by necessity, prescription, estoppel, and dedication are set out in Machala v. Weems, 56 S.W. 3d 748 (Tex.App.Texarkana 2001, no writ). A non-judicial foreclosure sale does not give the purchaser physical possession of the property. Possession must be obtained by an eviction proceeding if the borrower, tenant, or occupant refuses to vacate the premises after foreclosure. Lighthouse Church of Cloverleaf v. Texas Bank, 889 S.W. 2d 595 (Tex.App. Houston [14th Dist.] 1994, writ den), Tex. Prop. Code 24.001, et. seq. and Tex. R. Civ. P. 738-755. Notice Defects A foreclosure notice must provide at least the minimum level of due process required by law. Hausmann v. Texas Sav. & Loan Assn, 585 S.W. 2d 796 (Tex.Civ.App.El Paso 1979, writ refd n.r.e.) and Armenta v. Nussbaum, 519 S.W. 2d 673 (Tex.Civ.App.Corpus Christi 1975, writ refd n.r.e.). Notice to the borrower is complete when a postage prepaid, certified mail notice is placed with the U.S. Postal Service for delivery to the borrower at the borrowers last known address. Tex. Prop. Code 51.002(e) and Chapa v. Herbster, 653 S.W. 2d 594 (Tex.App.Tyler 1983). The wrong zip code on a foreclosure notice does not mean the subsequent foreclosure sale is defective. Judkins v. Davenport, 59 S.W. 3d 689 (Tex.App. Amarillo [7th Dist] 2000). A foreclosure notice returned by the U.S. Postal Service with the notation Forwarding Order Expired does not violate the borrowers right to receive notice. Withrow v. Schou, 13 S.W. 3d 37 (Tex.App.Houston [14th Dist.] 1999, pet. den). In Withrow, the court discusses the constitutional due process aspects of a properly addressed letter sent to the last known address of a lawyer that was returned Forwarding Order Expired, resulting in a lawyer failing to appear for trial. A borrowers complaint that a foreclosure notice was sent to the wrong address fails, if the borrower did not inform the mortgagee of the borrowers new address. Balogh v. Ramos, 978 S.W. 2d 696 (Tex.App.Corpus Christi 1998, pet. den). Beginning Jan. 1, 2004, the borrower has a statutory duty to give the mortgage servicer notice of any change of address in a reasonable manner. Tex. Prop. Code 51.0021. A definition of the borrowers last known address has also been codified in New Tex. Prop. Code 51.001(2)(A(B). D. Trustee 1. Appointment With the words notwithstanding any agreement to the contrary, the need to refer to the security instrument to determine how a substitute trustee must 7.

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be appointed was eliminated by changes to Tex. Prop. Code 51.075(c) and (d). [HOUSE BILL 1234, 79TH REGULAR LEGISLATIVE SESSION]. Effective Sept. 1, 2005, all the case law related to appointment of a substitute trustee are ancient history. The new amendments to Tex. Prop. Code 51.075(e) also require that the name and a street address for a trustee or substitute trustees be disclosed on the foreclosure notice that gives the date, time, and place of foreclosure sale. The use of the word a addressed in Tex. Prop. Code 51.075(e) means that the street address for the trustee or substitute trustees can be the street address of the law firm conducting the foreclosure. The amendments to Tex. Prop. Code 51.075(c) and (d) also make it clear that more than one substitute trustee may be appointed. In the past, courts emphasis on strictly construing the appointment of substitute trustee process was probably based on good reason. Since the local bank or savings and loan originated, owned, and serviced the borrowers loan, the lender would appoint a local person to be the substitute trustee whom the borrower would know or recognize and who could serve as a go between for the borrower and lender if necessary. However, with the advent of the secondary market, no longer is there any type of personal relationship between the borrower and mortgagee and the mortgagee and trustee; therefore the trustee has become a faceless functionary performing a ministerial duty. See Brown v. National Loan & Investment Co., 139 S.W. 2d 364 (Tex.App.El Paso 1940, writ dismd judgmt. corr), where the court opined that the process for appointing a substitute trustee should not be construed so strictly as to defeat the enforcement of an honest obligation. Contrary to popular belief, the appointment of a substitute trustee does not have to be acknowledged and the appointment is valid as to all persons who have knowledge of the appointment. In re Davis Chevrolet, Inc., 135 B.R. 29 (Bkrtcy.N.D.Tex 1992). Trustees Duties The trustee is the special representative of both the mortgagor and mortgagee and must act with absolute impartiality and fairness to both. Peterson v. Black, 980 S.W. 2d 818 (Tex.App.San Antonio 1998, no writ) and an unreported case under Tx.R.RAP 47.7, Elder v. Calvery Credit Corporation, 1997 WL 528990 (Tex.App.Houston [14th Dist.] 1997). The trustee is not required to investigate whether the mortgagor is in default and can rely on a mortgagees or mortgage servicers representations. Spires v. Edgar, 513 S.W. 2d 372 (Mo.1974). Further, the trustee is not required to investigate whether a borrowers claims or defenses against the lenders foreclosure are true. Villers v. Wilson, 304 S.E. 2d 16 (W.Va. 1983).
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2.

The trustees duty is to obtain the highest possible price for the foreclosure property in a business-like manner. First Federal Sav. & Loan Assn v. Sharp, 359 S.W. 2d 902 (Tex.1962). Hammonds v. Holmes, 559 S.W. 2d 345 (Tex.1977) and Stephenson v. LeBoeuf, 16 S.W. 3d 829 (Tex.App.Houston [14th Dist.] 2000, writ den). The trustee does not owe a fiduciary duty to the mortgagor. FDIC v. Myers, 955 F.2d 348, 350 (5th Cir. [Tex.] 1992). The trustee is not required to take any affirmative action beyond what is required by statute and the security instrument, First State Bank v. Keilman, 851 S.W. 2d 914 (Tex.App.Austin 1993, writ den). Therefore a trustee is not responsible for providing the borrower with pay-off or reinstatement information. Sanders v. Shelton, 970 S.W. 2d 721 (Tex.App.Austin 1998, no writ). A trustee cannot bid on a foreclosure for the trustees own account, unless the trustee is also the mortgagee. Skeen v. Glenn Justice Mortgage Co., 526 S.W. 2d 252 (Tex.Civ.App.Dallas 1975, no writ). However, a trustee may purchase the property for a disinterested party, e.g., a second lien holder. Fuqua v. Burrell, 474 S.W. 2d 333 (Tex.Civ.App.Waco 1971, writ refd n.r.e.). A trustee may delegate ministerial duties connected with a foreclosure sale. Natali v. Witthaus, 135 S.W. 2d 969 (Tex.Com.App. 1940); Titterington v. Deutsh, 179 S.W. 279 (Tex.Civ.App.Dallas 1915) and Roe v. Davis, 142 S.W. 950 (Tex.Civ.App. Texarkana 1911). A trustee does not have to sign legal notices of sale. Wilson v. Armstrong, 236 S.W. 755 (Tex.Civ.App.Beaumont 1922, no writ). The amount of trustees fees payable in a foreclosure proceeding is discussed in a case where the bank president as trustee collected $18,061.31 in trustees fees on a $120,000 loan. The case was so acrimonious it went to the Texas Supreme Court twice. The opinion in this appellate nightmare that discusses the trustees fee in the most detail is Edwards v. Holleman, 893 S.W. 2d 115 (Tex.App.Houston [1st Dist.] 1995). All issues related to trustees duties in conducting a foreclosure are considered questions of law, not fact. Centeq Realty, Inc. v. Siegler, 899 S.W. 2d 195 (Tex.1995). There is a four-year statute of limitation for claims questioning the authority of the trustee or the veracity of information set out in the trustees deed. Tex. Civ. Prac. & Rem. Code 16.033(7). Trustees Deed A trustees deed only transfers the interest the borrower has in the property at the time the deed of trust was executed. Diversified, Inc. v. Walker, 702 S.W. 2d 717 (Tex.App.Houston [1st Dist.] 1985, writ refd n.r.e.). Upon acceptance of the bid price, title passes immediately to the buyer at the foreclosure sale. 3.

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Peterson v. Black, 980 S.W. 2d 818 (Tex.App.San Antonio 1998, no writ). Even though a trustees deed is not prepared or recorded, equitable title passes to the foreclosure purchaser. Pioneer Building & Loan Assn v. Cowan, 123 S.W. 2d 726 (Tex.Civ.App.Waco 1938, writ dismd, judgmt n.o.v.). A substitute trustees deed is presumed valid unless rebutted by competent evidence. Criswell v. Southwestern Fidelity Life Ins. Co., 373 S.W. 2d 893 (Tex.Civ.App.Houston [1st Dist.] 1963, no writ). Trustee Escape Clause In a foreclosure related lawsuit, a trustee may seek dismissal in an expedited proceeding found in Tex. Prop. Code 51.007, if the trustee was named as a party solely in his or her capacity as trustee. The dismissal is without prejudice. If the court later determines the trustees acts or omissions were a proximate or producing cause of any damages suffered by the complainant, the trustee is made a party to the suit. Tex. Prop. Code 51.007(f) also protects a trustee who relies in good faith on information provided by the borrower, the mortgagee, or their respective agents or representatives. Excess Proceeds After a foreclosure sale, the trustee must distribute the sale proceeds in accordance with the terms of the loan agreement. After paying the trustees fees, attorney fees, and the amount due to the mortgagee, any excess proceeds remaining must be paid to inferior lien holders in the order of lien priority. Excess proceeds always flow down to inferior liens in the chain of title, never up to superior liens. Conversion Props. L.L.C. v. Kersler 994 S.W. 2d 810 (Tex.App. Dallas 1999, pet. den). If no inferior liens encumber the foreclosed property, the surplus proceeds belong to the mortgagor. Grant v. Dept. of Veteran Affairs, 827 F.Supp. 418 (S.D.Tex. 1993). A helpful roadmap on how a Texas trustee should distribute excess proceeds is Hanley v. Pearson, 61 P. 3d 29 (Ariz. App. Div.1 2003) even though it is an Arizona case that discusses A.R.S. 44-811(c) & 33812(A) (3). Bankruptcy may affect how the excess proceeds are distributed. Keener v. First State Bank of Stratford, 268 B.R.912 (Bankr.N.D.Tex. 2001). In Keener, the bankruptcy trustee filed suit against the foreclosing bank because the bank applied the excess proceeds of $200,590 to other debts that the borrower owed to the lender but were not secured by the foreclosed property. The court found the bank breached the terms of the deed of trust by applying the excess proceeds to debts that were not secured by the foreclosed property. When distributing excess proceeds, the trustee should determine whether the alleged recipient is a
32

person on the list of Specially Designated Nationals and Blocked Persons who are prohibited from receiving such funds. The list can be obtained from the Office of Foreign Assets Control at their website www.treas.gov/offices/eotffc/ofac. E. Conducting the Sale If the trustee encounters problems while conducting the foreclosure auction, the sale may be recessed so that the trustee can obtain advice and new instructions. However, the trustee may prevent many of the potential issues that often arise during the auction process by using a carefully worded script that sets out the conditions that will apply to the sale. These conditions, however, must be reasonable and must be announced before the trustee starts the bidding on the first property the trustee will sell. For example, if the trustee announces that only cash will be accepted and the bidder fails to tender cash or cash equivalent for the bid, the trustee does not have to give the bidder a reasonable time to obtain the funds as was required in First Texas Service Corp. v. McDonald, 762 S.W. 2d 935 (Tex.App.Fort Worth 1988 reh. den). The script provision is Tex. Prop. Code 51.0075(a) which provides: (a) A trustee or substitute trustee may set reasonable conditions for conducting the public sale if the conditions are announced before bidding is opened for the first sale of the day held by the trustee or substitute trustee. If the bidder does not have cash in hand, the property may be resold on the same day. However, a condition precedent for reconvening the sale is that all the original bidders be advised of the time the sale will be re-held. Mitchell v. Texas Commerce Bank-Irving, 680 S.W. 2d 681 (Tex.App.Fort Worth [2nd Dist.] 1984, writ refd n.r.e.). Sometimes a trustee faces the dilemma of whether to accept official checks at the foreclosure sale. The trustee does not have to accept official checks because their payment can be cancelled by a stop-pay order. A stop-pay order does not affect a cashiers check because a cashiers check is equivalent to cash. Wertz v. Richardson Heights Bank and Trust, 495 S.W. 2d 572 (Tex.1973), Humble Nat. Bank v. DCV, Inc., 933 S.W. 2d 224 (Tex.App.Houston [14th Dist.] 1966, writ den) and Guaranty Federal Sav. Bank v. Horseshoe Operating Co., 793 S.W. 2d 652 (Tex.1990). The mortgagee may make a credit bid at the foreclosure sale for an amount equal to or less than the balance amount due under the loan agreement, including fees and costs, corporate advances, and expenses of collection to include attorney fees.

4.

5.

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Habitat, Inc. v. McKanna, 523 S.W. 2d 787 (Tex.Civ.App.Eastland 1974). 1. Foreclosure Bid The mortgagee may make a credit bid at the foreclosure sale for an amount equal to or less than the amount owed on the debt. Cash is not required because it would be an idle ceremony for the trustee to receive the bid price from and then return it to the mortgagee. Thomason v. Pacific Mut. Life Ins. Co. of California, 74 S.W. 2d 162 (Tex.Civ.App.El Paso 1934, writ refd) and also see Valley International Properties v. Ray, 586 S.W. 2d 898 (Tex.Civ.App. Corpus Christi 1979, no writ). If acceptable arrangements have been made with a foreclosure trustee before the sale, it may not be necessary to attend the sale and the sale may be on credit even if the security instrument requires cash. Merrimac Properties Inc. v. Combined Financial Corp., 2004 WL 1126307 (Tex.App.Waco 2004, reh. den). One foreclosure bid can be made for two separate tracts of land, so long as the mortgagee apportions the bid price fairly between each individual tract in a deficiency lawsuit. Provident Nat. Assur. Co. v. Stephens, 910 S.W. 2d 926 (Tex.1995). If the mortgagee advances its own funds to pay delinquent taxes, the mortgagee must include the tax payments in its foreclosure bid as a charge back to the mortgagor. Stone v. Tilley, 100 Tex. 487, 101 S.W. 201 (1907). A trustee must report a cash payment of $10,000 or more in U.S. currency or cash on IRS Form 8300. Because the instructions on how to complete IRS Form 8300 found in IRS Publication 1544 (Rev. Feb. 2002) are unclear, the trustee should consider refusing to accept more than $10,000 in cash and require the foreclosure purchaser to return with a cashiers check. 2.

A purchaser at a foreclosure sale acquires the foreclosed property as is without any expressed or implied warranties, except as to warranties of title, at the purchasers own risk. Tex. Prop. Code 51.009. For a definition of as is, see Bynum v. Prudential Residential, 129 S.W. 3d 781 (Tex.App.Houston [1st Dist.] 2004, reh. den). Sale of foreclosure property is void if the sale was conducted in violation of the bankruptcy automatic stay. Oles v. Curl, 65 S.W. 3d 129 (Tex.App.Amarillo 2001, no pet). The foreclosure buyer has no standing to complain of a breach of contract if either the borrower or lender fails or refuses to enforce a contract term in their loan agreement. Bruner v. Exxon Co., 752 S.W. 2d 679, (Tex.App.Dallas, writ den.). In addition, the foreclosure purchaser has a duty to ascertain whether the trustee has the authority to conduct a foreclosure and sell the property. Diversified Inc. v. Walker Mortgage, 702 S.W. 2d 717 (Tex.App.Houston [1st Dist.] 1985, writ refd n.r.e.) Abstracts of judgments that encumber foreclosed property prove troubling as to what interest the foreclosure buyer actually buys at a foreclosure sale. However, the law is clear that the foreclosure purchaser acquires only the interest the borrower had in the property at the time of sale. Allied First National Bank of Mesquite v. Jones, 766 S.W. 2d 800 (Tex.App.Dallas 1988, no writ). Inadequate Consideration One of the typical allegations made in a wrongful foreclosure lawsuit is that the property was sold for inadequate consideration. Inadequate consideration, standing alone, cannot set aside a foreclosure sale that was legally and fairly made. American Sav. and Loan Assn of Houston v. Musick, 531 S.W. 2d 581 (Tex.1975). Unless the irregularities resulted in injury to the mortgagor, the inadequate selling price complaint will not invalidate a foreclosure sale. Charter Nat. Bank-Houston v. Stevens, 781 S.W. 2d 368 (Tex.App.Houston [14th Dist.] 1989, writ refd n.r.e.). A summary of the evolution of the inadequate sales price issue is contained in Charter Nat. BankHouston v. Stevens, 781 S.W. 2d 368 (Tex.App. Houston [14th Dist.] 1989, writ refd n.r.e.). To set aside a foreclosure sale for inadequate consideration, the mortgagor must plead and prove that a foreclosure irregularity proximately caused the property to be sold for a grossly inadequate sales price. The irregularity may be slight, but it must exist. Delley v. Unknown Stockholders of Brotherly and Sisterly Club of Christ, Inc., 509 S.W. 2d 709 (Tex.App.Tyler 1974, writ refd n.r.e.) and Intertex, Inc. v. Walton, 698 S.W. 2d 707 (Tex.App.Houston [14th Dist.] 1985, writ refd n.r.e.). For purposes of calculating the deficiency, i.e., the difference between what was owed at the time of sale
33

3.

Bidders Peril Purchasers of foreclosure property buy at their peril. Henke v. First Southern Properties, Inc., 586 S.W. 2d 617 (Tex.Civ.App.Waco 1979, writ refd n.r.e.). The good faith purchaser for value without notice rule does not apply to a foreclosure buyer at a void sale. Diversified Inc. v. Walker Mortgage, 702 S.W. 2d 717 (Tex.App.Houston [1st Dist.] 1985, writ refd n.r.e.) citing First Southern Properties, Inc. v. Vallone 533 S.W. 2d 339, 343 (Tex.1976). In addition, the foreclosure buyer is not a consumer. Tex. Prop. Code 51.009. All warranties of title in a trustees deed come from the borrower, not the mortgagee or trustee. In re Niland, 825 F. 2d 801 (5th Cir. 1987) and Sandel v. Burney, 714 S.W. 2d 40 (Tex.App.San Antonio 1986, no writ).

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and the foreclosure sale price, the borrower or mortgagee should look to Tex. Prop. Code 51.003 and 51.004. A discussion of how the deficiency is calculated in actual practice can be found in Resolution Trust Corp. v. Westridge Court Joint Venture, 815 S.W. 2d 327 (Tex.App.Houston [1st Dist.] 1991, writ den). Chilled Foreclosure Sale Chilling the bid refers to acts, omissions, representations, or misrepresentations of the mortgagee or trustee that cause foreclosure bids to be less than the market price at a fair sale. Biddle v. National Old Line Ins. Co., 513 S.W. 2d 135 (Tex.Civ.App.Dallas 1974, writ refd n.r.e.). An example of chilling the bid is found in Charter Nat. BankHouston v. Stevens, 781 S.W. 2d 368 (Tex.App.Houston [14th Dist.] 1989, reh. den). In Charter National the court held there was ample evidence that the banks loan officers conduct chilled the bidding when he agreed to advise a tenant of the foreclosure sale date after the tenant had obtained financing and hired an attorney to attend the sale. The banks officer failed to tell the tenant of the sale date and the bank acquired the foreclosure property for less than the tenants financing. But in another case, the court held the failure of the lenders attorney to properly calculate the lenders credit bid, which resulted in the foreclosure sale of a $200,000 property for $72,500, was not a case of chilling the bid. Powell v. Stacy, 117 S.W. 3d 70 (Tex.App.Fort Worth 2003, reh. overruled). Whether a bad property description in the deed of trust and, consequently, the foreclosure notice caused the bidding to be chilled, was considered, but not decided, in Southwest Federal Sav. Assn v. RoyalBeltline Joint Venture, 1991 WL 352489 (N.D.Tex.1991) because the borrower sought damages instead of rescission and title passed to the foreclosure sale purchaser regardless of the foreclosure defect. Standing to Contest Foreclosure A person must have an equitable or legal interest in the mortgage or the secured property to contest a foreclosure sale. Goswami v. Metropolitan Sav. & Loan Assn, 751 S.W. 2d 487 (Tex.1988). Since foreclosure extinguishes all inferior liens, junior lien holders can challenge a foreclosure sale. Houston Inv. Bankers Corp. v. First City Bank of Highland Village, 640 S.W. 2d 660 (Tex.App.Houston [14th Dist.] 1982, no writ), American Sav. & Loan Assn of Houston v. Musick, 531 S.W. 2d 581 (Tex.1975) and Ursic v. NBC Bank South Texas, N.A., 827 S.W. 2d 334 (Tex. App. Corpus Christi 1991, no writ). If the debtor conveyed the secured property prior to foreclosure, a trustees deed extinguishes title and interest held by the person receiving the deed from the
34

debtor. Ursic v. NBC Bank South Texas, N.A., 827 S.W. 2d 334 (Tex.App.Corpus Christi 1991, no writ) and Abraham v. Ryland Mortg. Co., 995 S.W. 2d 890 (Tex.App.El Paso 1999, no writ). 6. Injunction If a mortgagor seeks to enjoin a foreclosure sale, the debtor must tender the amount necessary to cure the default under the fundamental principle of equity. Ginther-Davis Center, Ltd. v. Houston Nat. Bank, 600 S.W. 2d 856, 864 (Tex.Civ.App.Houston [1st Dist.] 1980, writ refd n.r.e.). To save a borrowers equity in the property or to give the mortgagor time to sell the property are not grounds that will support an injunction. Lincoln Nat. Life Ins. Co. v. Freudenstein, 87 S.W. 2d 810 (Tex.Civ.App.San Antonio 1935, no writ). Bad Foreclosure Sales The measure of damages in a wrongful foreclosure case is the difference between the fair market value of the property and the total debt owed by the mortgagor on the day of the foreclosure sale. Farrell v. Hunt, 714 S.W. 2d 298 (Tex.1986). A borrower can plead in the alternative to have a foreclosure sale rescinded or seek damages. However, prior to judgment, the borrower must elect one remedy: either rescission or damages, not both. Therefore, a mortgagee should consider forcing a borrower to elect either rescission or damages early in a wrongful foreclosure lawsuit by filing a motion for summary judgment to eliminate one of the borrowers remedies. Reyna v. State Nat. Bank of Iowa Park, 911 S.W. 2d 851 (Tex.App.Fort Worth 1995, writ den) and Carrow v. Bayliner Marine Corp., 781 S.W. 2d 691 (Tex.App.Austin 1989, no writ). Reyna and Carrow also seem to indicate that fair market value of the mortgagors use of the property during litigation must be credited against any damage award. To retain possession of the property by rescission of the foreclosure sale, the mortgagor must cure the default by paying the total amount due under the note. Bracken v. Haid & Kyle, Inc. 589 S.W. 2d 501 (Tex.Civ.App.Dallas 1979, writ refd n.r.e.). The amount due cannot be paid in the form of a letter of credit, but must be in cash or cash equivalent. Baucum v. Great Am. Ins. Co. of New York, 370 S.W. 2d 863 (Tex.1963) and Fillion v. David Silvers Co., 709 S.W. 2d 240 (Tex.App.Houston [14th Dist.] 1986, writ refd n.r.e.). A mortgagee cannot rescind a foreclosure sale because the propertys condition failed to match the mortgagees profit expectations for sale of the REO. Bonilla v. Robertson, 918 S.W. 2d 17 (Tex.App. Corpus Christi 1996). In Bonilla, the mortgagee discovered the inside of the foreclosed property was severely damaged. Therefore, Robertson, as the F.

4.

5.

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mortgagee, directed the trustee to rescind the sale and re-foreclose so that Robertson could substantially reduce the bid price and thereby create a deficiency against Bonilla. The court held that a trustee cannot rescind a foreclosure sale simply because the mortgagee does not like the original sales results. However, the mortgagor and mortgagee can always set aside a foreclosure sale by agreement. Ogden v. Gibraltar Sav. Assn., 640 S.W. 2d 232 (Tex.1982). Return to Status Quo If a foreclosure sale is set aside, all parties must be returned to the same status that existed prior to sale with the caveat that he who asks for equity must do equity. Price v. Reeves, 91 S.W. 2d 862 (Tex.Civ.App.Fort Worth 1936, no writ). If the foreclosure sale is rescinded or overturned, the buyer is not entitled to the benefit of the bargain. Diversified Inc. v. Walker Mortgage, 702 S.W. 2d 717 (Tex.App. Houston [1st Dist.] 1985, writ refd n.r.e.). But the foreclosure sale is entitled to the return of the bid price plus interest, any payments made for delinquent taxes, insurance, and the cost of any improvements made to the property. Keda Development Corp. v. Stanglin, 721 S.W. 2d 897 (Tex.App.Dallas 1986, no writ). If a borrower was clearly in default under the loan agreement prior to the foreclosure sale and subsequently sues the mortgagee and its representatives for wrongful foreclosure, a creative mortgagee should plead the well established rule that a party to a contract who is himself in default cannot maintain a suit for its breach. Dobbins v. Redden, 785 S.W. 2d 377 (Tex. 1990) citing Gulf Pipe Line Co. v. Nearen, 135 Tex. 50, 56, 138 S.W. 2d 1065, 1068 (Tex.Commn App.1940, opinion adopted). To rescind a foreclosure sale, the mortgagor must cure the default. Bracken v. Haid & Kyle Inc., 589 S.W. 2d 501 (Tex.App.Dallas 1979, writ refd n.r.e.), Loomis Land & Cattle Co. v. Diversified Mortgage Investors, 533 S.W. 2d 420 (Tex.Civ.App.Tyler 1976, writ refd n.r.e.), Lambert v. First Nat. Bank of Bowie, 993 S.W. 2d 833 (Tex.App.Fort Worth 1999, no writ), Durkay v. Madco Oil Co., 862 S.W. 2d 14 (Tex.App.Corpus Christi 1993, writ den), and Bracken v. Haid & Kyle Inc., 589 S.W. 2d 501 (Tex.Civ.App.Dallas 1979, writ refd n.r.e.). During foreclosure litigation, if the borrower is required to pay the monthly mortgage payments into the registry of the court, a frivolous lawsuit by a borrower who seeks to live rent-free in the property while the suit is pending may be curtailed. Mills v. Haggard, 58 S.W. 3d 164 (Tex.App.Waco 2001). Lenders are not entitled to attorney fees under the collection clause of the loan agreement if the attorney fees relate to the lenders defense in a wrongful foreclosure suit. Slivka v. Swiss Ave. Bank, 653 S.W. 2d 939 (Tex.App.Dallas 1983, no writ).
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Any person in possession of a wrongfully foreclosed property is liable to the rightful owner for the fair market rental value of the property. Criswell v. Southwestern Fidelity Life Ins. Co., 373 S.W. 2d 893 (Tex.Civ.App.Houston [1st Dist.] 1963, no writ). Bona Fide Purchaser Generally, a bona fide purchaser is not subject to certain claims or defenses made by the borrower against the purchasers predecessors in interest. Carter v. Converse, 550 S.W. 2d 322, 329 (Tex.Civ.App. Tyler 1977, writ refd n.r.e.). However, to receive the special protection of a bona fide purchaser, the property must be acquired in good faith, for value, and without notice of any third party claim or interest. Houston Oil Co. v. Hayden, 104 Tex.175, 135 S.W. 1149, 1152 (Tex. 1911). Notice may be constructive or actual, with actual notice premised on personal information or knowledge. Constructive notice is notice the law imputes to a person not having personal information or knowledge. Flack v. First Natl Bank of Dalhart, 226 S.W. 2d 628, 631 (Tex. 1950). Therefore, anyone purchasing land has a duty to ascertain the rights of a third party in possession. Collum v. Sanger Bros., 83 S.W. 184 (Tex. 1904). The purchaser is also charged with notice of all the occupants claims that might be reasonably discovered on proper inquiry. Dixon v. Cargill, 104 S.W. 2d 101, 102 (Tex.Civ.App.Eastland 1937, writ refd). However, this duty arises only if possession is visible, open, exclusive, and unequivocal. Strong v. Strong, 128 Tex. 470, 98 S.W. 2d 346 (1936). Purchasers of foreclosure property buy at their peril. Henke v. First Southern Properties, Inc., 586 S.W. 2d 617 (Tex.Civ.App.Waco 1979, writ refd n.r.e.). Therefore, the good faith purchaser for value without notice rule does not apply to a foreclosure buyer at a void sale. Diversified Inc. v. Walker Mortgage, 702 S.W. 2d 717 (Tex.App.Houston [1st Dist.] 1985 writ refd n.r.e.) citing First Southern Properties, Inc. v. Vallone, 533 S.W. 2d 339, 343 (Tex. 1976). In addition, the foreclosure buyer is not a consumer. Tex. Prop. Code 51.009. 3. Malpractice A malpractice cause of action does not accrue until the facts establishing the alleged liability are discovered using reasonable care and diligence. Independent Life & Acc. Ins. Co. v. Childs, Fortenbach, Beck & Guyton, 756 S.W. 2d 54 (Tex.App.Texarkana 1988, no writ). 4. 2.

1.

Emotional Distress In most wrongful foreclosure lawsuits, the borrower alleges emotional distress and mental anguish. A Westlaw search for emotional distress in foreclosure cases produces many opinions; however,

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few of these decisions are designated for publication under Tex. R. App. P. 47.7. Therefore, there is little case law precedent on emotional distress and mental anguish in a wrongful foreclosure context. One exception is LaCoure v. LaCoure, 820 S.W. 2d 228 (Tex.App.El Paso 1991, writ den). Ms. LaCoure was awarded $300,000 in exemplary damages for mental anguish and emotional distress against her former father-in-law, who foreclosed her property using forged documents after LaCoure divorced the defendants son. There can be no award for mental anguish if there is no finding of liability against the mortgagee. Dickerson v. DeBarbieris, 964 S.W. 2d 680 (Tex.App.Houston [14th Dist.] 1998). But see Weiler v. United Sav. Assn of Texas, FSB, 887 S.W. 2d 155 (Tex.App.Texarkana 1994, reh. den), where the mortgagees unconscionable conduct in deducting attorneys fees from the borrowers escrow account, resulting in a putative DTPA violation, did not rise to a emotional distress claim. 5. DTPA In most wrongful foreclosure suits, a Deceptive Trade Practice Act (DTPA) allegation is made. Tex. Bus. & Com. Code 17.41-17.63. Though many DTPA wrongful foreclosure cases generate written opinions, very few of these opinions are designated for publication under Tex. R. App. P. 47.7. The elements that must be alleged and proved in a DTPA cause of action involving a mortgage transaction are found in Brown v. Bank of Galveston, Natl Assn, 963 S.W. 2d 511 (Tex.1998) as follows: a) b) The mortgagor must be a consumer; The mortgagee either committed a false, misleading, or deceptive act under Tex. Bus. & Com. Code 17.46(b), breached an expressed or implied warranty, or engaged in an unconscionable action or course of conduct; and The mortgagees DTPA violation was the producing cause of the consumers damages.

Court found a borrower was a DTPA consumer because the loan was used to purchase a house, which was a good under the DTPA. Clearly a purchaser at foreclosure sale takes the property as is, without any warranties except as to title from the mortgagor. In addition, a foreclosure purchaser is not a consumer. Tex. Prop. Code 51.009. Therefore, a disgruntled foreclosure buyer has no DTPA cause of action because he or she is not a consumer. The key to whether a borrower is a consumer is whether the goods or services sought or acquired by the borrower were the object of the transaction instead of being incidental to the transaction. FDCI v. Munn, 804 F. 2d 860, 863-864 (5th Cir. 1986). Several cases that opine that a loan is not a good or service for purposes of the DTPA are Maginn v. Norwest Mortgage Inc., 919 S.W. 2d 164 (Tex.App. Austin 1996, no writ) and Ogden V. Dickinson State Bank, 662 S.W. 2d 330 (Tex. 1983). DTPA causes of action must be brought within two years of the false, misleading, or deceptive act or within two years after the consumer, using reasonable diligence, could have discovered the bad act, not when the consumer actually suffered out-of-pocket expenses. Cal. Fed. Mortgage Co. v. Street, 824 S.W. 2d 622 (Tex.App.Austin 1992, reh. overruled). Alamo Natl Bank v. Kraus, 616 S.W. 2d 908 (Tex. 1981) sets out five elements to consider when assessing damages under the DTPA, which are: 1. 2. 3. 4. 5. Nature of wrong; Character of conduct; Degree of culpability of wrongdoer; Situation and sensibilities of parties concerned; and Extent the conduct offends a public sense of justice and propriety.

c)

Though it is an unpublished opinion, Mosk v. Thomas, 2003 WL 22901046 (Tex.App.Houston [14th Dist.] Dec. 4, 2003) contains an analysis of many frivolous and groundless DTPA claims in a real estate transaction. G. Void or Voidable Sale A voidable foreclosure sale, unlike a void sale, is valid until set aside, and a voidable sale can pass title to the purchaser. West Trinity Properties, Ltd. v. Chase Manhattan Mortg. Corp., 92 S.W. 3d 866 (Tex.App. Texarkana 2002, no writ). If a foreclosure sale is void, the trustees deed should be rescinded immediately. Otherwise, the void foreclosure sale deed will create title problems in the chain of title. Whether a substitute trustees deed is void or voidable depends on its effect upon title at the time it was executed and delivered. If it was void, title was
36

Whether a mortgagor in a real property loan transaction is or is not a consumer under the DTPA is confusing. Cases holding that borrowers are not consumers within the meaning of the DTPA are Briercroft Service Corp. v. De Los Santos, 776 S.W. 2d 198 (Tex.App.San Antonio 1988); Smith v. United States Nat. Bank of Galveston, 767 S.W. 2d 820 (Tex.App.Texarkana 1989); and Longview Savings and Loan Assn v. Nabours, 673 S.W. 2d 357 (Tex.App.Texarkana 1984). These cases were decided after Flenniken v. Longview Bank & Trust Co., 661 S.W. 2d 705 (Tex.1983) where the Texas Supreme

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never passed and no legal rights were conveyed. If the foreclosure deed passed title subject only to the rights of the borrower to set it aside, the sale is voidable. Slaughter v. Quales, 139 Tex. 340, 162 S.W. 2d 671 (1942). Situations that can void a foreclosure deed are fraud, failure or lack of capacity to execute an instrument, no loan default, or failure to properly appoint a substitute trustee. A trustee was permitted to void a foreclosure sale based on a defective foreclosure notice in Savers Federal Savings & Loan v. Reetz, 888 F. 2d 1497 (5th Cir. 1989). However, in Savers, the mortgagee acquired the property at both the original and subsequent foreclosure sales. Also see Shearer v. Allied Live Oak Bank, 758 S.W. 2d 940 (Tex.App. Corpus Christi 1988, writ den). A pending bankruptcy voids any foreclosure. Continental Casing Corp. v. Samedon Oil Corp., 751 S.W. 2d 499 (Tex.1988) and Graham v. Pazos De La Torre, 821 S.W. 2d 162 (Tex.App.Corpus Christi 1991, writ den). The difference between a void and voidable sale when the foreclosure sale took place after the borrower filed a bankruptcy is discussed in Oles v. Curl, 65 S.W. 3d 129 (Tex.App.Amarillo 2001, no writ). Irregularities that cause no injury to the mortgagor are not grounds to void a sale. Charter Nat. BankHouston v. Stevens, 781 S.W. 2d 368 (Tex.App. Houston [14th Dist.] 1989, writ refd n.r.e.). However, mistakes in handling an escrow account, which ultimately caused a technical default foreclosure, are an irregularity that can support a wrongful foreclosure. Wieler v. United Savings Association of Texas, 887 S.W. 2d 155 (Tex.App.Texarkana 1994, reh. den). During foreclosure litigation, using the registry of the court for depositing funds is a good strategy. If the county or district clerk pays out funds to the wrong person, the county is liable to the rightful owner. Tex. Loc. Govt Code 117.083, Tex. Civ. Prac. & Rem. Code 7.002 and Tex. Loc. Govt Code 117.052. H. Foreclosure in the Future Looking to the future, some of the national mortgage servicers may attempt to persuade Congress to preempt state foreclosure laws with a national foreclosure statute. Though probably coincidental, the American Bar Association has approved and published a proposed Uniform Non-judicial Foreclosure Act under the aegis of the National Conference of Commissioners on Uniform Law, dated Oct. 31, 2002. Copies of the Uniform Non-judicial Foreclosure Act can be obtained from the National Conference of Commissioners on Uniform State Laws at www.nccusl.org or by writing to:

National Conference of Commissioners on Uniform State Laws 211 E. Ontario Street, Ste. 1300 Chicago, Illinois 60611 Under the preemption doctrine, HUD is now requiring certain types of Texas FHA loans to be judicially foreclosed under 12 U.S.C. 3751-3768 and 24 C.F.R. 27.100-27.123, rather than non-judicially under Tex. Prop. Code 51.002. Foreclosure Accountability Compared to most states, the Texas non-judicial foreclosure process is one of the quickest and most efficient foreclosure proceedings. B. Dunaway, THE LAWS OF DISTRESSED REAL ESTATE (1986). For borrowers who pay their bills on time, non-judicial foreclosure may be good for the Texas economy because an efficient foreclosure process does not subsidize credit abusers. This assumption is based on a study done by Karen Pence, a Federal Reserve System economist, who found that in adjacent consensus tracts separated by state lines, borrowers in a borrower-friendly state suffered more than a $13,500 loss on a $100,000 loan compared to a similar property in a lender-friendly foreclosure state. In addition, Pence found that the maximum loan amount in a lender-friendly foreclosure state was four to six percent higher than in a borrowerfriendly foreclosure state. Karen Pence, Federal Reserve System Report, NATIONAL MORTGAGE NEWS, Sept. 1, 2003. With the loss mitigation alternatives readily available for those who clearly need a helping hand when a financial crisis strikes, the Texas foreclosure process provides discipline and accountability on credit abusers. V. TEXAS HOME EQUITY LOAN FORECLOSURE A. Introduction The amendments to TEX. CONST. art XVI 50(a)(6)(Q)(x) (xi), which allow mortgagees to cure most loan origination defects in home equity loans, removes the risk of the borrower claiming the line is invalid when foreclosure is initiated. See In Re Adams 307 B.R. 549 (Bankr.N.D.Tex. 2004) for a discussion of how the cure provisions work. Various Westlaw searches using the terms home equity in conjunction with foreclosure produced only fifty two cases, most of which are unreported or not designated for a signed opinion under Tex. R. App. P. 47.2. There is one reported case that holds that a judgment in a Rule 736 foreclosure case cannot be appealed. Grant-Brooks v. FV-1, Inc. 176 S.W. 3d 933 (Tex.App.Dallas 2005). Otherwise, see Cornejo v.
37

I.

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Wells Fargo Bank Texas, 2004 WL 1688336 (Tex.App.Houston [14th Dist.] 2004) and Thomas v. U.S. Bank Trust National Association, 2001 WL 699323 (Tex.App.Houston [14th Dist.] 2001) which are unreported cases where the court held it did not have jurisdiction to hear a Tex.R.Civ.P. 736 foreclosure appeal. In the larger metropolitan counties, District Judges are referring Rule 736 home equity foreclosure applications to associate judges or magistrates for determination. Once an associate judge or magistrate issues a ruling, the applicant or respondent has three days from date of receipt of the judgment to appeal to the District Court. Texas Govt Code 54.510. For guidance in preparing a Rule 736 home equity application, see Green v. Duetsche Bank National Trust Company, 2005 WL 1244604 (Tex.App. Houston [1st Dist.] May 26, 2005) that analyzes the documents and affidavits used to prove up a home equity case on a motion for summary judgment, and Lambert v. Dealers Electric Supply Inc. 629 S.W. 2d 61 (Tex.App.Dallas [5th Dist.] 1982, reh. den) which holds that the name of the applicant must be contained in the body of the original petition and not merely in the style of the case. An unreported eviction appeal after a home equity foreclosure, where the applicant was not the entity that obtained the foreclosure order, demonstrates the need for careful attention to detail when preparing and pleading a home equity case. A Plus Investments, Inc. v. Rushton, 2004 WL 868866 (Tex.App.Fort Worth, April 22, 2004). A home equity case that had not been released for publication at the time this paper was prepared, but was decided by the El Paso Court of Appeals on Aug. 23, 2005, concerns the mortgagee seeking to use an arbitration clause in the security instrument to force the borrower in arbitration. In Re Peoples Choice Home Loan Inc., 2005 WL 2012769 (Tex.App.El Paso, Aug. 23, 2005). Another interesting reported home equity foreclosure case concerns the rights of divorcing spouses when a home equity loan, created during the marriage, encumbers one spouses separate property. Langston v. Langston, 82 S.W. 3d 686 (Tex.App. Eastland 2002, revd and remanded). Since no changes have been made to the home equity foreclosure rules found in Tex. R. Civ. Proc. 735 and 736 and there is no appeal of a Rule 736 foreclosure, there is little case law guidance on home equity foreclosures. Law review articles providing insight on home equity issues are: Julia Patterson Forrester, Home Equity Loans in Texas, 55 S.M.U. L.Rev. 157 (2002); Patton Zarate, An Ailing System: Possible Solutions for Curing the Texas Home Equity Loan Amendment, 31 St. Marys L.J. 461; Charles Boettcher, Taking Texas
38

Home Equity for a Walk, But Keeping it on a Short Leash, 30 Tex. Tech. L.Rev. 197 (1999); and Jerry Patterson, Home Equity Reform in Texas, 26 St. Marys L.J. 323. Foreclosure Overview From a practical standpoint, the most important variable in conducting a home equity loan foreclosure is not TEX. CONST. art XVI 50(A)(6) or Tex. R. Civ. P. 735 and 736, but the idiosyncrasies in interpretation of the law by the 424 District Court judges and how their court administrators administer the Rule 736 process. When a home equity loan goes into default, a court order must be obtained to foreclose. 50a(6)(D). Otherwise, foreclosure of a home equity loan is the same as a conventional loan except that after acceleration and before posting the foreclosure sale notice, the mortgagee must obtain a court order from the district court. Tex. R. Civ. P. 735 and 736 provide the statutory procedure for obtaining the required court order. Rule 735(1) provides for a judicial foreclosure just as judicial foreclosures have been conducted in Texas for more than 168 years. Rule 735(2) contemplates a suit or counter-claim seeking a foreclosure order under the relevant security instruments. Rule 735(3) refers to Rule 736, which sets out an expedited court order process. The objective of Rule 736 is to simplify the process of obtaining the court order without clogging courts dockets and minimizing case management responsibilities of the clerks office and courts staff. Contrary to popular belief, when a judge signs a home equity foreclosure order, the borrowers property is not foreclosed. The property must still be posted for sale and sold at public auction. The borrower can cause the dismissal of a Rule 736 proceeding by filing a regular lawsuit in district court challenging the foreclosure or any aspect of the loan transaction. Application A Rule 736 application is an in rem proceeding directed against the property because the borrower has no personal liability for the home equity loan. The property must be identified by both the mailing address and the legal description. The mortgagor and mortgagee are not identified as defendant and plaintiff but rather as respondent, i.e., the person obligated for the debt, and applicant, i.e., the mortgagee. The mortgage servicer may be the applicant for Rule 736 proceeding pursuant to Tex. Prop. Code 51.0025: A mortgage servicer may administer the foreclosure of property under Section 51.002 on behalf of a mortgagee if: (1) the mortgage servicer and the mortgagee have entered into 1. B.

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an agreement granting the current mortgage servicer authority to service the mortgage; and (2) the mortgage servicer discloses in the notice required under Section 51.002: (a) that the mortgage servicer is representing the mortgagee under a servicing agreement with the mortgagee; and (b) the name and address of the mortgagee. In a Rule 736 application, the security instruments sought to be enforced must be specifically identified by either attaching a copy of the security instrument or identifying the pertinent recording reference from the security instrument in the official real property records. A Rule 736 application must also contain a verified statement by the mortgagee that: (1) a debt exists; (2) the debt is secured by a valid 50a(6) lien which encumbers the property; (3) the loan agreement is in default; (4) the applicant has given all necessary foreclosure notices; and (5) states the facts which establish the existence of a default. When the mortgagee signs the verification required under Rule 736, the mortgagee should also execute an affidavit drafted in accordance with Tex. R. Civ. Evid. 802 and 902(10), to prove up the application pursuant to Rule 736(6). According to the Texas Supreme Court, proof by affidavit is sufficient evidence. Texas Commerce Bank, N.A. v. New, 3 S.W. 3d 515 (Tex.1999). Also see the use of a Rule 803 affidavit to prove up ownership and the amount in default in Diversified Financial Systems, Inc. v. Hill, Heard, ONeal, Gilstrap & Goetz, P.C., 99 S.W. 3d 349 (Tex.App.Fort Worth 2003, no writ). Rule 736 specifically requires the application to state the applicant seeks a court order required by 50a(6) to sell the property under both the terms of the security instruments and 51.002 Tex. Prop. Code. This statement should be recited verbatim in the application. In those instances where the application is brought in the name of the mortgage servicer, but the judge objects to the servicer being the proper party, refer to Tex. Prop. Code 51.0025, which allows a mortgage servicer to administer the foreclosure for the mortgagee. 2. Notice All persons obligated for the debt must be served with a formal notice advising that an application has been filed seeking a court order to foreclose the mortgagors homestead. The form of the notice is set out in Rule 736(2)(c) to eliminate disputes over the form and substance of the notice. The notice sent to the borrower must contain the cause number, the court the application is filed with, the specific date the response is due, and the mailing address of the district clerk where the response must be filed.
39

The notice contains a certificate of service section, so the applicant has a convenient way to certify that the notice was mailed to the respondent. Notice is properly served when placed in the U.S. mail with postage prepaid and sent by certified and regular mail. The notice must be sent to the mortgagor at the mortgagors last-known address, which should be the property address under new Tex. Prop. Code 51.0001(2)(A). If the mortgagee knows the borrower is represented by counsel, a copy of the notice must be sent to the debtors attorney. Debtors Response The mortgagors response is due on or before 38 days and the next Monday after the application and notice were mailed to the respondent. The response date must be specifically described in the notice, i.e., Oct. 31, 2003, so that the borrower is not confused by 38 days and the next Monday. Though the 38-day requirement seems unusual, it is intended to prevent an inadvertent violation of the Fair Debt Collection Practices Act, 15 U.S.C. 1692g, if the notice is the first communication with the borrower by the debt collector. In the response, the respondent must provide a current mailing address and the facts, based on the respondents personal knowledge or belief, that rebut the allegation contained in the Rule 736 application. Once a response is filed, Rule 736(6) requires that a hearing be set within 10 days, unless otherwise agreed to by the parties. The intent of the Home Equity Task Force, charged with creating the court order procedure by the Texas Supreme Court, was that Rule 736 proceedings be resolved within 90 days of the application being filed. As a practical matter, most courts treat a Rule 736 proceeding as a regular lawsuit and the case is managed on the courts docket the same as any other district court lawsuit. 4. Default Order If the respondent does not file a timely response and the notice has been on file with the clerk of the court for 10 days, exclusive of the date of filing, the applicant is entitled to a default order without the necessity of a hearing. In practice, many district courts ignore Rule 736(5) and require a hearing even though no response was filed. Rule 736(5) was intended to free courts dockets from uncontested home equity foreclosure cases. A case that might be used to convince a judge that the court is bound to enforce a foreclosure action even though foreclosure is a harsh remedy is Cottonwood Valley Home Owners Assn v. Hudson, 75 S.W. 3d 601 (Tex.App.Eastland 2002, no writ). 3.

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Only Issue The only issue to be decided in a Rule 736 preceding is whether the applicant is entitled to an order that allows a non-judicial foreclosure to proceed under the terms of the security instrument and Tex. Prop. Code 51.002. Any determination of law or fact made in a Rule 736 proceeding cannot be used for res judicata, collateral estoppel, or estoppel by judgment purposes in any other proceeding. In addition, a Rule 736 order is without prejudice and does not prevent either party from filing a separate suit in another court. No discovery is permitted under Rule 736 and any evidence presented to the court can be by affidavit. Rule 736 orders are not appealable. Rule 736(8)(a). 6. Abatement If the mortgagor files a lawsuit challenging any aspect of the home equity loan or the foreclosure process prior to an order being granted, the Rule 736 foreclosure proceeding is immediately abated. Once the clerk of the court where the Rule 736 application was filed is given notice of the new lawsuit, the Rule 736 application is dismissed. 7.

5.

federal law. Without mortgage insurance, Fannie Mae, which purchases approximately 90 percent of the reverse mortgage loans nationally, refused to buy Texas reverse mortgage loans. To cure the conflict with federal law, Texas voters approved a constitutional change in November 1999 that became effective Jan. 1, 2000. The Texas Supreme Court also modified Rule 735 and 736 to provide for the court order needed to foreclose a reverse mortgage. Effective Oct. 29, 2003, the rule of once a home equity loan always a home equity loan was modified so that a reverse mortgage could be used to refinance a home equity loan. TEX. CONST. art XVI 50(f). In November 2005, Texas voters approved reverse mortgage lines of credit loans. Since reverse mortgages are such an esoteric loan product, few lenders understand or originate these types of loans. Financial Freedom Senior Funding Corporation has a website that provides comprehensive information on reverse mortgages at www.financialfreedom.com. VI. MERS (MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC.) A. Introduction The Mortgage Electronic Registration System, or MERS, is best understood by going back to the late 1960s and early 1970s. Wall Street was booming, but its backrooms were swamped trying to physically transfer the stock and bond certificates that were being bought and sold in a trading frenzy. Because stock and bond certificates were not being delivered timely, clients frustration and anger reached alarming levels. To stop the crisis, Wall Street was forced to adopt a computerized, book entry system that electronically tracked ownership of securities, thereby eliminating paper security certificates. Today, stock and bond certificates are obsolete. Ownership of most securities is registered through the National Securities Clearing Corporation as part of the Wall Street Depository Trust Company. Thirty years later, after experiencing its own paperwork crisis when assignments were not being recorded in the real property records when loans were bought and sold in mortgage backed securities, the mortgage banking industry copied Wall Street and created its own computerized book registration system. This utility for tracking all the beneficial interest or bundle of rights connected with both residential and commercial mortgages is the MERSSystem, which operates under the corporate umbrella of MERSCORP, Inc. and is called Mortgage Electronic Registration System or MERS. MERSSystem does not purchase or sell mortgages and is not the owner or holder of any note or security interest but merely tracks electronically all the
40

Posting and Public Sale Once the Rule 736 order has been obtained, the mortgagee must give the 21-day advance notice of the date, time and place of the foreclosure sale. This notice must be filed and posted in accordance with Tex. Prop. Code 51.002. The public auction element of a Rule 736 foreclosure is conducted in the same manner as a non-judicial foreclosure sale under the terms of the security instruments and Tex. Prop. Code 51.002(a). 8. Third Party Purchasers If a home equity foreclosure is proved to be void later, a third party purchaser is protected from rescission of the sale if the foreclosure buyer was neither the mortgagee nor an assignee of the mortgagee and did not have knowledge of the lien invalidity. 50a(6)(i). 9.

Reverse Mortgages Reverse mortgages allow any person and their spouse, one of whom must be at least 62 years old, to use the equity in their homestead to collateralize a taxfree, periodic payment loan that operates like an annuity. TEX. CONST. art XVI 50a(7). The reverse mortgage is paid off when the mortgagor dies, sells or transfers the property, or ceases to occupy the property for more than 12 consecutive months without prior written approval from the mortgagee. Though reverse mortgages were a part of the 1997 constitutional amendments, the Department of Housing and Urban Development (HUD) refused to insure Texas reverse mortgages because of a conflict with

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beneficial interest or bundle of rights connected to a mortgage that is owned or serviced by a MERS member. MERS is recognized in Tex. Prop. Code 51.0001(1) with the following definition: (1) Book entry system means a national book entry system for registering a beneficial interest in a security instrument that acts as nominee for the grantee, beneficiary, owner, or holder of the security instrument and its successors and assigns. The MERS membership list includes the 20 largest mortgage banking organizations in the United States, as well as Fannie Mae, Freddie Mac, Ginnie Mae, VA, FHA, and HUD. The Mortgage Bankers Association, American Land Title Association, PMI, Merrill Lynch, most title company underwriters, and all the Wall Street rating agencies, i.e. Moody, Fitch, and Standard & Poor, are members of MERS. MERS claims to have registered 40,000,000 loans since 1998 23,000,000 loans are currently active or 50 percent of all loans originated in 2004. MERS also claims that 37,000 loans per day are being registered on MERSSystem. Beginning in August 2003, MERSCommercial became operational. MERSCommercial registers the various bundle of rights connected with commercial mortgages, e.g., owner or holder of various tranches and the servicer for each tranche, if different. The newest MERS mortgage banking utility is MERSRegistry, which will automatically register ecommerce notes and security instruments, in accordance with the Uniform Electronic Transactions Act (UETA) and the Federal Electronic Signatures in Global and National Commerce Act (E-SIGN). Once the security issues related to accessing a loan servicers records for the pay-off of a borrowers loan are resolved, MERS plans to roll out MERSPay-Off, which will provide pay-off information to title industry members on any loan registered on MERS. The mortgagee of record in the real property records for all security instruments registered on MERS should be Mortgage Electronic Registration System, Inc., as nominee for Lender or Lenders successor or assigns regardless of the number of times a beneficial interest in a mortgage is bought or sold. Because MERS remains the mortgagee of record for purposes of the recording statutes and the real property records during the life of any loan registered on MERS, no assignment is needed if a MERS registered loan is bought or sold. As has been the practice for many years, mortgage servicers will remain responsible for all the day-to-day loan administration duties for mortgages registered on MERS. Since MERSSystem offers two toll-free
41

telephone numbers, anyone can obtain the name and phone number of the mortgage servicer for any loan registered on MERS by a phone call to the MERS Help Desk. Once the name of the mortgage servicer is obtained, the name, address, phone number, and e-mail address of a person in the mortgage servicers organization who is supposed to be the MERS expert for the servicer can be obtained from the MERS website at www.mersinc.org by typing in the servicer name in the Member Directory menu. Therefore, an escrow officer or loan closer needing a pay-off quote or lien release information can obtain immediate access to the mortgage servicer organization servicing the loan. As the mortgagee of record and beneficiary of the security instrument, MERS as nominee can initiate foreclosure. In addition, most security agreements signed by the borrower contain a clause that allows MERS to foreclose the security instrument. In a bankruptcy proceeding, as the mortgagee of record, MERS holds an in rem security interest in the property. As the mortgagee of record, MERS has standing to seek relief from the automatic stay. However, MERS is not the creditor and so the address for the creditor in all bankruptcy documents should be the servicers address so that all trustee payments go to the servicer, not to MERS. A Motion for Relief from Stay may be filed either in the name of MERS or jointly with the servicer. Stewart, Chicago, Fidelity, and First American Title have modified their underwriting requirements so that a MERS loan can be insured in the name of the mortgagee as well as MERS for no additional premium or fee. By electronically registering the various bundle of rights connected with a mortgage, mortgagees and their servicers can reduce loan level servicing costs by an average of $25.00 per loan and save another $25.00 plus the filing fees for every transferred loan, because an assignment is no longer necessary. In addition, lenders and servicers will reduce the costs to release a lien by an average of $7.50 per release. Beginning in early 2000, security instruments naming MERS as the mortgagee of record dramatically changed the foreclosure practices nationwide because, according to MERS, 30,000 MERS loans are originated daily and MERS appears as the grantee of more than 40 million security instruments recorded nationwide. In all probability, eighty to ninety percent of all recorded, single-family residential and commercial real estate security instruments will be in the name of MERS in the near future. In the simplest terms, MERS is a mortgage industry utility that registers the various beneficial interest related to a real estate note. For example, the

Foreclosure From The Lenders Perspective

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MERSSystem, tracks the name of the borrower, property address, loan number, note holder or tranche owners in a commercial transaction, note custodian and servicer and sub-servicer for every loan registered on the MERSSystem. This allows loans secured by real estate to be bought, sold, and securitized efficiently with little transaction costs. Further, since MERS is the mortgagee of record, no assignment or transfer of lien has to be recorded in the real property when a loan registered on MERS is bought or sold. Though MERS appears to be a radical development, it is not. MERS simply emulates Wall Streets book entry system used to track ownership of stocks and bonds, i.e., the National Securities Clearing Corporation as part of the Wall Street Depository Trust Company and Clearinghouse. It just took the mortgage banking industry thirty years to follow Wall Streets example. In a foreclosure context, one of the unintended consequences of MERS being the mortgagee of record but not the owner or holder of the note sought to be foreclosed caused havoc when attorneys foreclosed in the name of MERS and the foreclosure statutes required that only the owner or holder of the note could foreclose. Over the years, the legal and title community had gotten used to assuming that the mortgagee of record was also the owner or holder of the note. This was true forty years ago when the local bank or savings and loan was the owner or holder of the note because they originated and serviced the borrowers real estate loan. However, today, this assumption is generally wrong because most loans are sold into the secondary market to be securitized immediately after origination and the daily loan administration responsibilities are handled by a large mortgage servicer. Consequently, the mortgagee of record listed in the security instrument or assignment filed in the real property records is neither the owner nor holder of the note but the mortgage servicer. This is critical, because only the note owner or holder or their agent or representative can enforce the debt. Tex. Bus. & Com. Code 3.301, Shephard v. Boone, 99 S.W. 3d, 301 (Tex.App.Eastland 2003, no writ) and Leavings v. Mills, 175 S.W. 3d, 301 (Tex.App.Houston [1 Dist.], 2004). Wrongly assuming the mortgagee of record is the note owner or holder is caused by confusing the legal principles associated with enforcing a note under the U.C.C. or Texas Business and Commerce Code and the recording statute, Tex. Prop. Code 13.00, that puts the world on notice that a lien encumbers a particular property. In fact, the owner or holder of a note can enforce its security interest against the borrower without ever recording the deed of trust. Tex. Prop. Code 13.001(b) (1).
42

When MERS started appearing as the mortgagee of record, lawyers continued to use legacy foreclosure forms that alleged that MERS was the owner or holder of the debt. But MERS was not the owner or holder; MERS was merely the mortgagee of record of the security instrument filed in the real property records. When a Florida judge dismissed more than twenty foreclosure suits on his own Show Cause Order because MERS was alleged to be the owner or holder of the note sought to be enforced, shock waves rippled through the mortgage banking industry. Texas was not materially affected by the Florida ruling because, contrary to most states, the Texas foreclosure statute has been amended to allow a mortgage servicer to administer the foreclosure process. Tex. Prop. Code 51.0075. The MERS Foreclosure Recipe presented in this paper seeks to provide a roadmap on how to handle a MERS foreclosure by a mortgage servicer because MERS and the mortgage servicers role in foreclosure upset traditional notions of the foreclosure process. Registering Loans on MERSSystem One of the ways a loan can be registered on MERSSystem is if the loan is closed as a MERS as Original Mortgagee or MOM loan. A MOM loan can be identified if the same or similar language is found in the security instrument: MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lenders successors and assigns. MERS is the beneficiary under this Security Instrument. MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501-2026, tel. (888) 679-MERS. Subject to the MERS Membership Agreement, members can register the following categories of information on MERSSystem: 1. The owner or holder of any type of beneficial interest or servicing right connected to a mortgage; The transfer of servicing or sub-servicing rights by and from a member to another member or non-member; The renewal, extension, or modification of any loan registered on MERSSystem that involves recording a new security instrument that changes something more than the rate, principal balance, or term of the note; B.

2.

3.

Foreclosure From The Lenders Perspective

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4. 5.

Foreclosure of any loan registered on MERSSystem; and Release of any lien registered on MERSSystem.

custom software designed to generate a MIN. The MIN must be placed on all security instruments and assignments registered on MERS. D. Certifying Officers The Certifying Officer resolution makes the MERSSystem work. MERS furnishes each member with a corporate resolution that appoints one or more employees of the Member as an assistant secretary or vice president of MERS. Therefore, any interest of a Member registered on MERS can be transferred by, to, and from the Member on behalf of MERS, by and through the certifying officer. For example, the appropriate certifying officer can: 1. Release, assign, or foreclose any lien registered to the MERS Member on behalf of MERS if MERS as nominee is the mortgagee of record; Take any action necessary to protect the Members interest in a bankruptcy proceeding on behalf of MERS as nominee; Take any action and execute all documents necessary to refinance, amend, modify or protect any beneficial interest registered to the Member on behalf of MERS as nominee; and Endorse checks erroneously made payable to MERS for the pay off of any loan registered to the Member.

If the servicing rights of a particular mortgage are transferred to a non-member, the loan must be deactivated on the MERSSystem. However, if the new servicer is a MERS member, the name of the loan servicer changes but the loan remains registered on MERSSystem. MERS role with respect to loans registered on MERS is indicated by the following language that should be contained in any security instrument or assignment of any mortgage registered on MERSSystem: Mortgage Electronic Registration Systems, Inc., as a separate corporation that is acting solely as a nominee for Lender and Lenders successors and assigns Once a MERS document is recorded in the real property records, the MERS member must update MERSSystem with the official real property recording information. Within ten business days after receiving notice from a member that a loan has been paid in full, MERS gives notice of the pay-off to all members shown on MERSSystem as having an interest in the loan. The servicer or member handling the pay-off is responsible for preparing and recording a release of lien in the real property records. If the servicer or member fails to record a release, MERS has the right to execute and record the release. However, the negligent member must reimburse MERS for all penalties and out-of-pocket costs, plus pay an administrative fee related to preparing and filing the release. C. Mortgage Identification Number (MIN) The Mortgage Identification Number (MIN) is the backbone of the MERS registration system. The MIN is a unique eighteen-digit number assigned to each loan registered on MERSSystem for the life of the loan. Once created, a MIN may be deactivated and reactivated, but it can never be duplicated or reused for another loan. The first seven digits of the MIN identify the MERS member organization (Org. ID) which first registered the loan on the MERSSystem. The next ten digits are loan identifier numbers and the last digit is a security code based on a Mod 10 Weight 2 algorithm, to ensure no MIN number is duplicated. A MIN number can be generated from various loan origination underwriter programs: MINGen, which is software provided by MERS, or a Members
43

2.

3.

4.

A Member is obligated to indemnify MERS for any loss, liability, or expense to MERS that was caused by any act or omission of a Members certifying officer. MERS as Assignee A loan assigned to a MERS member must be registered on MERSSystem within 14 calendar days of the purchase date of the note. With the exception of bulk portfolio purchases, assignments into MERS as nominee must be sent for recording within 14 calendar days of registration of the loan on MERS. Bulk portfolio assignments must be sent for recording within 30 days of registration. The MIN number and MERS Voice Response Unit telephone number (888-679-MERS/6377) are supposed to appear in the top center as well as inch from the bottom on all assignments that transfer a lien to MERS as nominee. F. Mail Center Because MERS as nominee should always be the mortgagee of record, MERS will receive service of process for court proceedings as well as funds intended for the servicer. Since MERS is NOT the servicer and has no loan administration responsibility, MERS has a sophisticated facility to ensure service of process and E.

Foreclosure From The Lenders Perspective

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correspondence are forwarded to the servicer for handling or resolution. The MERS Mail Center scans and converts all documents it receives into electronic images that are indexed to the appropriate MIN and routed electronically to the current servicer. Checks, money orders, and other funds are also scanned but sent by overnight delivery to the servicer. Examples of the documents handled by the MERS Mail Center are: 1. Recorded security instruments, assignments, releases, title policies, tax bills, government notices, pay-off requests and other mortgage documents sent to MERS by mistake; i.e., documents that should have been sent to the servicer; and Pleadings, bankruptcy proceedings, and foreclosure notices.

and press enter, which produces a screen with the name, phone number, and e-mail address of the person in the mortgage servicers organization who is supposed to be the servicers MERS expert. I. Foreclosure MERS was specifically designed to comply with the existing foreclosure laws in all 50 states and has recommended foreclosure procedures for each state posted on its web site at www.mersinc.org. The principles that make a MERS foreclosure work are: 1. MERS as nominee should be the mortgagee of record for all loans registered on MERSSystem; 2. Certifying officers have the corporate authority to execute all necessary foreclosure documents required for either MERS or the servicer; 3. A MERSSystem loan does not change the rule that the mortgagee of record should initiate foreclosure. Tex. Prop. Code 51.0025; and 4. The standard Fannie Mae/Freddie Mac security instrument form clearly states the relationship of MERS with respect to the security instrument, lender, or mortgagee. The language on page two, paragraph E of a standard MERS deed of trust can be used to educate opposing counsel or judges. Of course, the fecund minds of lawyers make any new procedure like MERS subject to attack. If title is taken in the name of MERS as nominee at the foreclosure sale, the member servicer, using its certifying officer authority, must promptly convey the property from MERS to the true mortgagee. However, with the new changes in Texas Property Code foreclosure statutes, it may not be necessary for the certifying officer of the servicer to go through the ministerial act of preparing and recording a substitute trustees deed from MERS to the mortgagee because the mortgagee will be disclosed in accordance with Tex. Prop. Code 51.0025. Instead, the grantee of a trustees deed should be the owner or holder of the note whose credit bid was used to acquire the property. To put a MERS foreclosure into context, beginning below is a tongue-in-cheek MERS Foreclosure Recipe. MERS FORECLOSURE RECIPE (Texas Style) This recipe takes real property, title and U.C.C. legal principles, adds mortgage banking and Wall Street business practices (the Ingredients), and then mixes
44

2.

The mortgage servicer never MERS is the contact for all loan administration matters related to a loan registered on MERSSystem. G. Customer Service MERS has a customer service organization that provides a Help Desk for the public and serves as the initial point of contact for all MERS related questions. If a person knows the MIN of a loan, the toll-free Voice Response Unit (VRU) at 1-888-679-MERS/6377 can be used by anyone to obtain the servicers name, address, and customer service telephone number. The VRU also has a fax back feature to confirm servicer information. The VRU is the fastest choice to obtain servicer information if the MIN is available. If the MIN is not available, or someone wants to talk to a real person, the MERS Help Desk at phone number, (888) 680-6377, will provide anyone with the name, address, and customer service phone number of the servicer of any loan registered on the system if the borrowers name, the property address, or the borrowers Social Security number is provided to persons manning the Help Desk. H. Helpful Nuggets Questions about MERS can be posted and promptly answered on the MERS website at the MERS Forum so that others can profit from both the question and answer. The MERS Forum is found at www.mersinc.org. Once the servicers name is obtained by calling either 888.679.6377 (if the MIN is available) or 888.680.6377 (if the MIN is unavailable), go to the MERS web site at www.mersinc.org and under the menu heading Member Search, type in the name of the servicer. Highlight the name of the servicer that was obtained by calling 888.679.6377 or 888.680.6377

Foreclosure From The Lenders Perspective

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them (the Preparation and Mixing stage) into a final MERS foreclosure Crme Brule. INGREDIENTS 1. Take one standard Mortgage Electronic Registration System, Inc. (MERS) deed of trust or security instrument. Take one foreclosure referral from any client. Take one copy of pertinent Texas foreclosure statutes: a. Texas Property Code (TPC) 51.0001 definitions for mortgagee, mortgage servicer, book entry system MERS; TPC 51.0025 Administration of Texas foreclosures by the mortgage servicer; TPC 51.0075 appointment of substitute trustee(s).

9.

2. 3.

Take one DOD Manpower Data Center Military Status Report used to prove military status as required by Servicemembers Civil Relief Act and universally accepted by trial judges as proof of military status (see Exhibit A, attached). 10. Take one business record that seeks to mimic functionality of the DOD Manpower Data Center Status Response to prove the name and address of the investor and servicer of any loan registered on MERS. a. See Exhibit B, attached, for suggested MERS business record NOT approved by MERS yet but trying; See Exhibit C, attached, for Servicers MERS business record;

b.

b. c.

4.

Take one Restatement of (Third) Property: Mortgages: a. Section 5.4(c) Mortgage may be enforced only by, or on behalf of, a person entitled to enforce the obligation the mortgage secures; Reporters Notes to Section 5.4(e) Mortgage servicer can enforce mortgage on investors behalf if investor has given mortgage servicer such authority as a trustee or through an agency agreement.

11. Take one copy of Mortgage Electronic Registration System, Inc. v. Nebraska Dept. of Banking and Finance, 270 Neb. 529, 704 N.W. 2d 784 (Neb. 2005) discussion of MERS by Nebraska Supreme Court in November 2005. PREPARATION 1. Clearly distinguish and separate so as to not confuse the legal principle associated with the enforcement of a delinquent note under the Uniform Commercial Code from the legal principles associated with a states recording and real property records statutes which hold that recording a lien simply establishes the existence of a lien and its priority. a. U.C.C. Principles: Tex. Bus. & Com. Code 3.117 enforcement of a note can be modified by other instrument, e.g., deed of trust or statute; Tex. Bus. & Com. Code 3.205 describes various note endorsement methods to include in blank; Tex. Bus. & Com. Code 3.301 persons entitled to enforce a note; Tex. Bus. & Com. Code 3.308 in an action, the authenticity of a note is admitted unless specifically denied by the borrower; Tex. Bus. & Com. Code 3.601(3) if a debtor pays-off a note, debtor cannot be made to pay twice if a mistake is made as to the true owner or holder of the indebtedness.

b.

5.

6.

7.

8.

Take one copy of Ginnie Mae Memorandum 0210 dated May 1, 2002 and Ginnie Mae MBS Guide Chapter 12: The Prospectus, Securities, and Securities Marketing all Ginnie Mae serial notes converted from Wall Streets Depository Trust & Clearing Corporation to the Federal Reserve book entry form (see www.ginniemae.com). Take one copy of Fannie Mae Single-Family MBS Prospectus related to the book entry of loans (see www.fanniemae.com). Take one copy of Evaluation of NSCC and DTC and No More Paper discusses the evolution of Wall Streets book entry system for stocks and bonds, which the mortgage banking industry adopted to create MERS (see www.dtcc.com). Take one standard MERSSystem screen print, which discloses: a. b. c. d. Debtors name, property address, number, note amount, and note date; Servicers name and address; Custodians name and address; and Investors name and address. loan

45

Foreclosure From The Lenders Perspective

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b.

Recording Statute Principles: Tex. Prop. Code 13.001(b) security instrument is binding on the parties to the instrument even though security instrument is NOT recorded in the real property records: The unrecorded instrument is binding on a party to the instrument, on the partys heirs, and on a subsequent purchaser who does not pay valuable consideration or who has notice of the instrument. Tex. Prop. Code 13.002 Purpose of a properly recorded security instrument is to give notice to all persons of the existence of the instrument.

successors and assigns) has the right: to foreclose and sell the property. Lender, at its options and with or without cause, may from time to time, by power of attorney or otherwise, remove or substitute any trustee, add one or more trustees, or appoint a substitute trustee to any trustee without the necessity of any formality other than the designation by Lender in writing. 4. From the client, obtain a copy of the MERSSystem screen print that provides the following: a. b. c. d. e. f. g. Property address; Borrowers name and Social Security number; Note amount and note date; Servicers name and address; Custodians name and address; Investors name and address; Subservicers name and address.

2.

Set aside from clients foreclosure referral for future use, the following: a. Name of the Investor, which receives the mortgagors mortgage payment from the servicer; Any reference that the loan may be registered on MERS, for example an eighteen-digit MIN number is listed.

MIXING THE INGREDIENTS 1. All correspondence to a borrower and all pleadings should clearly delineate the status or role of each of the principal players to the borrowers loan agreement, which are: a. The mortgagee or investor The mortgagee is owner or holder of the indebtedness owed by the mortgagor or borrower; The entity described as Investor in the clients foreclosure referral or on the MERSSystem status screen is the mortgagee (see Exhibit B or C). The servicer sends the sum of money representing the borrowers mortgage payment to the investor listed on the MERSSystem status screen. b. The mortgage servicer, which is defined in: Tex. Property Code 51.0001(3) the last person who the mortgagor has been instructed by the current mortgagee to send mortgage payments; 12 U.S.C. 2605 describes the mortgage servicers duties. c. MERS, which is: The mortgagee of record for purposes of the recording statutes Tex. Prop. Code 13.001 and 13.002;
46

b.

3.

Set aside from the recorded deed of trust for future use, the following: a. Name of the Lender which will be the original creditor for FDCPA purposes under 15 U.S.C. 1692(g); The language in a standard MERS deed of trust that states: Mortgage Electronic Registration System, Inc., (MERS) acting solely as a nominee for Lender and Lenders successors and assigns. The beneficiary of this Security Instrument is MERS (solely as nominee for Lender and Lenders successors and assigns) and the successors and assigns of MERS. Borrowers understand and agrees that MERS holds only legal title to the interest granted to Borrowers in the Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lenders

b.

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Acts solely as a nominee for a Lender and Lenders successors and assigns in a standard MERS deed of trust. 2. Recommended language to describe the mortgagee or investor, the mortgage servicer, and MERS is as follows: a. Mortgagee or Investor (Name of Investor from foreclosure referral or MERSSystem) is the mortgagee of the indebtedness owed by [debtor, borrower or mortgagor] as evidenced by a note which is secured by a security instrument that encumbers certain real property and improvements of the mortgagor (hereafter mortgagee). [NOTE: The mortgagor or obligor of indebtedness is referred to as debtor in the foreclosure statutes Tex. Prop. Code 51.002; as the consumer in the Fair Debt Collection Practices Act 15 U.S.C. 1601-1692; and as mortgagor, mortgage debtor, or borrower in BLACKS LAW DICTIONARY; as mortgagor in 12 C.F.R. 203 et seq. (HUD servicing regulations); as mortgagor in 38 F.C.R. 36.4300 (VA servicing regulations); as borrower in 12 U.S.C.A. 2605 (servicing regulations in RESPA); and as borrower in a standard MERS deed of trust.] b. Mortgage Servicer (Name of Mortgage Servicer from foreclosure referral or MERSSystem) is the mortgage servicer and the mortgagees duly authorized agent for loan service administration for the indebtedness owed by [debtor, mortgagor, or borrower] or is authorized to conduct the foreclosure of the secured property pursuant to Tex. Prop. Code 51.0025 (hereafter mortgage servicer). c. MERS Mortgage Electronic Registration System, Inc. (MERS), acting solely as a nominee for Lender and Lenders successors and assign, is the mortgagee of record for purpose of the real property recording statutes (Tex. Prop. Code 13.001 and 13.002) and is not the owner or holder of the indebtedness sought to be enforced. However, the security instrument [authenticated] by the mortgagor(s) and which encumbers the secured
47

property expressly states: (i) MERS has legal title to the secured property; (ii) MERS is the beneficiary of the security instrument; and (iii) MERS is authorized to exercise any and all rights and interest, including but not limited to, the right to foreclose and sell the property. [NOTE: The U.C.C. substitutes the word authenticate for the mechanical process of signing or executing a document.] THE RESULTING FORECLOSURE CRME BRULE 1. A mortgage servicer may administer a Texas foreclosure as either the: a. Duly authorized agent for loan service administration for the mortgagee or investor pursuant to a written loan servicing agreement; or b. Pursuant to Tex. Prop. Code 51.0025, so long as the mortgage servicer has a written servicing agreement to service the mortgage with the mortgagee the investor listed in the clients foreclosure referral or on the MERSSystem; The mandatory foreclosure posting notice required by T.P.C. 51.002(b), which gives the date, time, and place of the foreclosure sale and must be sent to the mortgagor and filed with the County Clerk discloses: (1) the name of the mortgagee; and (2) Either the address of the mortgagee or c/o of the address of the mortgage servicer. 2. If the loan is registered on MERSSystem and the mortgagee of record is MERS because: a. the deed of trust is a MOM (MERS as Original Mortgagee); or b. the security was assigned or transferred to MERS after origination, THEN c. There is no necessity to assign or transfer the lien from MERS into the name of the mortgagee or investor so long as the status or role of the mortgagee, mortgage servicer, and MERS are clearly described in each communication with the mortgagor and in the pleadings. 3. Acting solely as a nominee for Lender and Lenders successor and assigns and as the mortgagee of record for the purposes of the real

Foreclosure From The Lenders Perspective

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property records, MERS fulfills the principal purpose of the recording statutes, in that: a. The public at large has notice that the debtors property is secured by a lien; b. The public at large can obtain pertinent information about the lien by calling MERS at either 888-679-6377 or 888-680-6377, which will result in obtaining the mortgage servicers name and phone number; and c. Once the public at large obtains the name of the servicer, the public can obtain the name, address, phone and fax number, and email address of the servicers MERS liaison, by typing in the servicers name in the Member Directory menu on the MERS web site at www.mersinc.org. 4. Since the standard MERS deed of trust generally provides in Paragraph 24 that a Lender or its successors or assigns appoints the substitute trustee, either the Lender, the Lenders successor or assign, or MERS, as the nominee for the Lender, can appoint the substitute trustee to conduct the foreclosure of the secured property. However, beginning September 1, 2005, the appointment of the substitute trustee process in Texas is determined by statute, not by the terms of the deed of trust. a. Texas Prop. Code 51.0075(c) and (d) states: (c) Notwithstanding any agreement to the contrary, a mortgagee may appoint or may authorize a mortgage servicer to appoint a substitute trustee or substitute trustees to succeed to all title, powers, and duties of the original trustee. A mortgagee or mortgage servicer may make an appointment as authorized under this section by power of attorney, corporate resolution or other written instrument. (d) A mortgage servicer may authorize an attorney to appoint a substitute trustee or substitute trustees on behalf of a mortgagee under Subsection (c). b. 6. See suggested Power of Attorney (Exhibit D).

7.

8.

9.

5.

the mortgagors indebtedness. Generally, production of either B or C should be sufficient to independently establish the identity of the mortgagee, investor, or servicer, or, to shift the burden of proof to the mortgagor to prove the mortgagee or investor named in B or C is not the owner or holder of the indebtedness sought to be enforced. Since the mortgagee or investor is the owner or holder of the indebtedness foreclosed, only the mortgagee or investor has the right to make a credit bid for the secured property at the foreclosure sale. Therefore, if the credit bid purchased the property, the foreclosed property should be struck to the mortgagee or investor and the grantee of the Substitute Trustees Deed should be the mortgagee or investor. The insured under a Texas mortgagees title policy is defined as the holder of the indebtedness. Therefore, the continuation of coverage clause of a Texas mortgagee title policy means the investor as the holder of the indebtedness is insured under the mortgagees title policy after foreclosure, not MERS. Most title companies are now requiring evidence of the holder of the indebtedness for purposes of issuing a title policy for the REO. Either the clients foreclosure referral or the MERSSystem status screen has been acceptable to many Texas title underwriters as proof of the holder of the indebtedness foreclosed.

Based on the success of the DOD Manpower Center Response as proof in trial courts as to military status and based on management by exception business principles, Exhibits B and C taken from the MERSSystem status screen, seek to prove in an electronic business environment who is the mortgagee or investor and servicer of
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MERS LOAN REGISTRATION STATUS REPORT EXHIBIT B

BEFORE ME, the undersigned authority, personally appeared [Boilerplate: Name of MERS Official serving as Affiant] who, being by me duly sworn, deposed and said: 1. My name is [Boilerplate: Name] I am over 18 years of age, of sound mind, capable of making this affidavit, and personally acquainted with the facts stated in it. 2. I am the [Boilerplate: Affiants official position MERS] for Mortgage Electronic Registration Systems Inc. (MERS), which is the national mortgage banking industrys approved utility that provides a book entry registration system for mortgage loans in the same manner as the Wall Street industrys Depository Trust & Clearing Corporation registers stocks and bonds by a book entry system. I am the person responsible for or custodian of the MERS business record for borrowers mortgage referenced above which is registered on the MERSSystem. 3. The MERS record above is an original, as the term original is defined in the Federal Rules of Evidence (F.R.E) 1001 and the date compilation on MERSSystem is a business record, as the term business record is defined in F.R.E. 803(6) and (17) and is kept by MERS in the regular course of its business. It was the regular course of the business of MERS for an employee or representative of MERS with knowledge of the act, event, condition, or opinion recorded to make the MERSSystem data compilation or electronic record or to transmit information thereof to be included in such record. The business record was made at or near the time of the act, event, condition, or opinion recorded, or reasonably soon thereafter. The business record attached is a true and correct copy of the data compilation stored in the MERSSystem as required in F.R.E. 1001. 4. MERS, the Investor or the Servicer requests judicial notice be taken of the business record as an adjudicated fact pursuant to F.R.E. 210(d) and (e). 5. This document and the electronic signature is made in accordance with the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq. SUBSCRIBED and SWORN TO BEFORE ME on (Electronic Date) to certify which witness my hand and seal of office. (Electronic Signature ___________ ) Notary Notary for the State of Virginia

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MERSSYSTEM BUSINESS RECORD EXHIBIT C

STATE OF TEXAS COUNTY OF _____________________

BEFORE ME, the undersigned authority, personally appeared NAME OF AFFIANT, who, being by me duly sworn, deposed and said: 6. My name is NAME. I am over 18 years of age, of sound mind, capable of making this affidavit, and personally acquainted with the facts stated in it. 7. I am the DESCRIPTION OF AFFIANTS POSITION WITH BUSINESS, for NAME OF MORTGAGE SERVICER, the duly authorized agent for loan service administration for the mortgagee or investor of the indebtedness owed by the borrower (Servicer) and as such I am the person responsible for or custodian of the Servicers MERSSystem business record which is related to the borrowers mortgage which is referenced in the business record attached and made a part hereof for all purposes. 8. The record attached to this affidavit is an original, as the term original is defined in Rule 1001 Federal and Texas Rules of Evidence, the printout or date compilation is a business record, as the term business record is defined in Rule 803(6) and (17) Federal and Texas Rules of Evidence, and is kept by Servicer in the regular course of its business. It was the regular course of the business of Servicer for an employee or representative of the business with knowledge of the act, event, condition, or opinion recorded to make the data compilation or electronic record or to transmit information thereof to be included in such record. The business record or data compilation was made at or near the time of the act, event, condition, or opinion recorded, or reasonably soon thereafter. The business record attached is a true and correct copy of the data compilation stored in a computer as required in Rule 1001 Federal and Texas Rules of Evidence. 9. Servicer requests judicial notice be taken of the business record as an adjudicated fact pursuant to Rule 210(d) and (e) Federal and Texas Rules of Evidence. 10. This document and the electronic signature is made in accordance with the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq.

SUBSCRIBED and SWORN TO BEFORE ME on ___________________, 200__ to certify which witness my hand and seal of office. ____________________________________ Notary

Notary for the State of _________________

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MERSSYSTEM BUSINESS RECORD

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APPOINTMENT OF SUBSTITUTE TRUSTEE BY MORTGAGE SERVICER TO ATTORNEY(S) EXHIBIT D APPOINTMENT OF SUBSTITUTE TRUSTEE(S) RE: TEXAS PROPERTY CODE 51.0075(c) and (d)
In accordance with Texas Property Code 51.0075(d) and pursuant to a written servicing agreement with its Mortgagee client [MORTGAGEE], (Mortgagee) as well as Tex Prop Code 51.0075(c), [NAME OF MORTGAGE SERVICER] (Mortgagee Servicer) by and through [NAME OF OFFICER AND TITLE] and by this written instrument authorizes [LAW FIRM], its partners, attorneys and LAW FIRMS designated representatives (Firm) to appoint substitute trustees to exercise the powers of the original trustee, now removed, under all loan agreements referred to the Firm by Mortgage Servicer, or its agents or representatives, to conduct a foreclosure or other default-related legal procedure on behalf of Mortgage Servicer its Mortgagee client. The authorization contained herein eliminates a paper document to evidence the appointment of substitute trustees for each individual loan file referred to the Firm by Mortgage Servicer, or its agents or representatives, as long as this authorization to appointment substitute trustees is in effect. The Firm has full and complete discretion to designate the substitute trustees exercising the power of appointment under Tex. Prop. Code 51.0075(d) as authorized by Mortgagee to Mortgage Servicer under Tex. Prop. Code 51.0075(c). ADOPTION OF UNIFORM ELECTRONIC TRANSACTION ACT Mortgage Servicer and the Firm have agreed to conduct their default related transactions, to include but not limited to appointment of substitute trustees, by electronic means in accordance with Tex. Bus. & Com. 43.001 43.019 and the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et. seq. TERMINATION This authorization shall be effective on [DATE] and shall remain in full force and effect until specifically terminated in writing by any duly authorized officer of Mortgage Servicer subject to at least thirty days written notice of termination given by certified mail to: [NAME] [ADDRESS] [CITY,STATE, ZIP] Mortgage Servicer agrees that termination of this authorization is not effective as to a third party until the third party receives actual notice of termination. Subject to title company requirements, a copy of this instrument may, but is not required, to be recorded in the real property records of any Texas county. Signed this _____ day of ______________________, 200__. [NAME OF MORTGAGE SERVICER] ___________________________________ By: NAME CORPORATE ACKNOWLEDGMENT STATE OF _______________ COUNTY OF _____________

Before me, the undersigned Notary Public, on this day personally appeared _________________________, who is the _________________________ of [NAME OF MORTGAGE SERVICER], a corporation, on behalf of said corporation, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he/she executed the same for the purposes and consideration therein expressed.

Given under my hand and seal of office on this _____ day of _____________, 200__. My Commission Expires: Notary Public for the State of _____________________________ Printed Name of Notary Public

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