Defending a Foreclosure: The ‘Produce the Note’ Defense

June 29, 2009 by Julio
Filed under Foreclosure

Defending a foreclosure is not easy, but there is a growing belief that it can be defended by means of the so-called ‘Produce the Note’ defense. Before discussing this defense we shall recap on exactly what a foreclosure is so that there is no misconception when discussing this defense.

If you miss a mortgage payment, your lender can legally foreclose. The foreclosure is not exactly a closure of the mortgage, or the enforced sale of your home, but has a more specific legal meaning. When you find yourself unable to meet your mortgage repayments for any reason, you can apply to an equity court for what is known as an equitable right of redemption.

This gives you the legal right to retain your home by paying it in full after missing one or more repayments. How you are going manage to do this if you cannot even make your monthly payments is another question, but your mortgage lender will want to try to avoid it. This is because it might preclude them from selling the house to regain their loan, so they will first apply for a foreclosure of this ‘equitable right of redemption’, which in effect takes away all of your legal rights to your home.

In other words, the home is no longer yours, and the lender can now sell it to recover the mortgage loan. The ‘foreclosure’ then, is not the foreclosure of your loan as such, but of your right to pay off the balance of your mortgage loan in a lump sum and keep your house. Once it has been granted, your home is no longer yours, even if it has not yet been sold.

There would appear to be few defenses against this, though the Truth in Lending Act is one that has had some success. If you can prove that the loan agreement did not detail the repayment schedule properly, or did not define the interest rates payable, for example, you could successfully bring a case for the loan to be rescinded. It is believed that most mortgage agreements contain breaches of the law in some form or other, and that it is up to you or your advisor to find the fault in yours, and determine if it can be grounds for defending a foreclosure.

However, the buzz defense at the moment is the ‘Produce the Note’ defense, where the defender challenges the mortgage lender to produce the original signed agreement that the money is in fact owed. If you deny owing the loan, then the burden of proof lies with the lender to prove that you do. This would normally be by production of the agreement, or promissory note you signed when taking the mortgage.

The question is whether this is an urban myth, or whether it has basis in fact. There are no doubts that over the past few years a large number of mortgages and other loans have changed hands, and been bought and sold and that somewhere along the line the original documents have gone missing or been mislaid. If the original Promissory Note was among them, then the lender has no proof that you actually owe the loan.

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Sounds great, but actually, there may be other burdens of proof that the lender can provide to satisfy the courts. One example is the mortgage form itself, which is also signed by the borrower, although such a defense against foreclosure could have two effects:

1. It could delay the foreclosure, and

2. It could prompt the lender to agree to a loan modification so that the borrower can keep hold of their home, while paying a lower and more affordable monthly sum.

There is actually no evidence on the internet that the ‘Produce the Note’ defense has ever worked to have a loan rescinded or a foreclosure refused, but it has frequently caused delay and a restructuring agreement as described above.

Such modifications could involve reducing the monthly payments through an agreed lower interest rate, an extension of the mortgage period or even a reduction in the capital sum owed. Once the borrower is back on track with the reduced payments, the foreclosure will be forgotten, although these new payments would have to be maintained without a single missed payment.

This defense appears realistically to be more of a stalling tactic than the wildly successful defense claimed, but it could give a few borrowers the shivers, and is attracting a lot of interest among borrowers. It is not, however, and probably never will be, a proper defense to a foreclosure or a defense that will result in any mortgage loans being annulled. At best, it will either delay the inevitable sale, or prompt a few lenders to agree to a loan modification rather than face having to prove their rights to force a foreclosure in court.