During the course of buying foreclosures, you will uncover many stories. Some are heart breaking bad luck stories and some reveal schemer's who get caught by their own deception. Each is unique. One must have the patience and perseverance of a detective to distinguish between the two. One must also draw on creativity to find the opportunities worth pursuing while not wasting time pursuing the dead ends.

Researching past foreclosure cases can add to your knowledge base, without having to learn through the school of hard knocks. This article reviews cases where the defendant presented a defense to stop foreclosure. They reveal the character of defendant's, plaintiff's and the attitude of the court. Next time you find a hot property, compare the characters and the facts of the case to these cases to determine the probable outcome.

Heritage Bank, N.A. vs. Patricia H. Ruh, 191 N.J. Super 53 (Ch. Div. 1983)

William Buehler and his wife and Patricia H. Ruh obtained a mortgage for $51,850 on a property at 1517 Haddonfield-Berlin Road in June 1980. The payment, including escrow, was $679 per month. A few weeks later, the Buehler's conveyed the property to Patricia Ruh for $52,900. The Buehler's moved to Somerdale. Patricia Ruh continued to live in the premises and made the mortgage payments for August, September and October of 1980.

In July 1980, The first correspondence from the lender was mistakenly forwarded to the Bueler's and the Bueler's hand delivered the document to Patricia Ruh. On January 1981, a delinquency notice, was also incorrectly forwarded to the Buehler's who hand delivered it to Ms. Ruh.

In February 1981, Ms. Ruh met with the president of the lending institution to arrange payments of $1,000 per month until the delinquency was made up.

At the same time, the lender advised her the total amount due was $3,503.54. Ms. Ruh did not make the $1,000 a month payment from her annual income of $13,000.

The original lender, who was now only servicing the accounts, went in bankruptcy and the files were taken over by the mortgagee, Heritage Bank. The mortgagee/lender sent Ms. Ruh's file to the foreclosure department since she was already four months behind in her payments. When Ms. Ruh contacted Heritage Bank, she said she had no account number and no coupon book. The representative told her they were in the process of transferring files and would contact her later. Ms. Ruh never mentioned she was behind in her payments.

Next, the bank sent Ms. Ruh the tax bill for the second quarter of 1981 and explained they could not identify the loan number and asked her to provide the loan number for the active mortgage. The same correspondence happened for the tax bill for the second quarter of 1982.

Foreclosure proceeding were instituted in November 1981 and Ms. Ruh was served in January 1982.

Ms. Ruh filed a pro se (representing herself without an attorney) answer and listed her defense as never being offered a reinstatement, no payment books, invoices or notice was received. Plaintiff never directed her to make payment to it at any location nor informed her that it was the mortgagee and no contact was made by phone or mail. Later, she changed her defense to failure of the mortgagee to follow HUD/FHA procedures which should prevent the foreclosure action and charges the mortgagee with unconscionable conduct to preclude it from relief in equity.

The FHA/HUD procedures do not supersede the state laws regarding foreclosure. The procedures outline the steps for recasting the mortgage, allow for special forbearance relief, and assignment to FHA to avoid foreclosure and present options to the defendant. The court concluded "The guidelines in their present form, therefore, cannot be used to require the mortgagees to pursue the alternatives listed therein, and, accordingly, do not give rise to a claim of a duty owed or a remedy." In addition, the procedure handbook is a guide for the relations between the mortgagee/lender and the government. They provide no claim or duty or remedy to the defendant / homeowner. However, the court has previously ruled "that even though the handbook does not impose legal obligation upon the mortgagees, it does not preclude foreclosure court from allowing mortgagors to raise non-compliance with the handbook as a defense to a 'quick' foreclosure. Ms. Ruh case was not a quick foreclosure; since the default occurred in November 1980 and the foreclosure was not commenced until November 1981.

The behavior of Ms. Ruh is contrasted with the facts of another case, Associated East Mortgage and Mr. Young. Mr. Young paid his mortgage for four years. During a strike, his income was reduced to $50 a week and he paid his mortgage from savings until it was depleted. Immediately after the strike, Mr. Young also informed Associated of his circumstances and requested a reduction in payments, which was refused. Eventually, Associated agreed to a forbearance agreement where an increase in monthly payments would make up the missed payments. Mr. Young was only able to make one of these payments.

Associated instituted foreclosure and the next month the strike ended. Mr. Young resumed his regular payments which were placed in escrow pending the outcome of the foreclosure action.

The Court considered Associated's conduct as "unconscionable" by not following the HUD handbook. As a result, Associated did not have "clean hands" and was not entitled to foreclose on the mortgage.

Mr. Young was proactive in contacting the bank and making every effort to pay his mortgage during difficult circumstances and had a track record of timely payments. Ms. Ruh, on the other hand, only made three payments and made no attempt to contact the lender after four months in default. Ms. Ruh personally knew the bank president from contact through her real estate business, but did not contact him for four months. When the tax bill was sent to Ms. Ruh, she responded that no account was assigned but did not mention she was eight months behind in payments. Ms. Ruh took no action to correct the misdirected mail at the post office or inform the mortgagee/lender about the conveyance of the property.

Ms. Ruh lived in the property for two years and made no payments toward the mortgage or escrow. She took no action to clarify the mix-up which occurred when the servicing was transferred to the mortgagee. Since Ms. Ruh did not act in good faith and the mortgagee actions were not unconscionable, the court decided foreclosure was justified. The principal balance on the mortgage was $51,798.71. The escrow due was $1,941.21. Interest over the period was $12,356.03 and late charges over 21 months were $202.90. The total judgment was $66,163.85 plus other costs, attorney fees and interest.

The observant reader will note, the original mortgage amount was $51,850 and after two years, the final judgment was over $66,000. It is doubtful the property appreciated to $66,000 over two years. Therefore, foreclosure buyers should have a complete understanding of market values and pursue purchases as soon as possible in the foreclosure process to minimize other costs and penalties.

Summit Trust Co. vs. Chichester, 233 N.J. Super 417 (App. Div. 1989)

In the fall of 1986, John and Sally Chichester decided to purchase a new home at 10 Thrumont Road and sell their old home at 10 Washington Ave. In October 1986, they paid $24,500 as a deposit on the new house and scheduled closing for January 1987.

The old house did not sell as quickly as anticipated and the Chichester's applied for a "bridge loan" from Summit Trust. They had a firm commitment from Citicorp to finance their new house. The bridge loan was temporary, once the old house was sold the bridge loan would be repaid. A business associate co-signed the bridge loan with the Chichester's in January 1987. Later, the defendants were notified the documents previously filled out were "filled out wrong". The Chichester's were asked to sign new documents for the bridge loan. Since closing on the new house was a few days away, they needed the proceeds quickly and signed the documents.

The bridge loan required interest only payments for two months at $420 and a lump sum payment of $42,000 in April 1987, the loan was secured by mortgages on both houses.

The defendants made interest payments until August 1987, but did not make the principal payment due in April 1987. Summit Trust filed the foreclosure complaint in August 1987.

The defendants conceded they were in default under the loan but argued that Summit did not provide the necessary disclosures under Regulation Z and The Truth in Lending Act. Summit did not dispute that the disclosures were not provided, but argued they were not required under this type of loan.

Regulation Z requires the lender to disclose, before consummation of the loan 1) the annual percentage rate 2) the finance charge 3) total amount financed 4) the total payments to be made 5) the payment schedule. In addition, the consumer is granted 3 business days to rescind a "credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling..." If the required notices are not provided to the consumer, then the consumer has three years to rescind the transaction. When the consumer rescinds, the money is returned but no interest or finance charge is paid.

The court concluded the bridge loan was temporary financing, not a "residential mortgage transaction" but was subject to the right to recession notification. Since Summit never provided notice of the right to recession, the defendant can void the underlying mortgage.

This case illustrates the importance of obtaining competent legal advise. This applies to the buyer, seller or investor. While every effort should be made to read all contracts and legal papers, an attorney should always be consulted. The attorney probably would have advised the client of the repercussions of the bridge loan. Later, the attorney did present a valid defense for the client.

Prudential Insurance Company of America vs. Jackson 270 N.J. Super 510 (App. Div. 1994)

In December 1968, Mr. Jackson and his wife purchased a residence at 126 Wade Street in Jersey City. The price of the home was $22,800 and the total amount was mortgaged by Commercial Mortgage Company (sold to Prudential on December 30, 1968) and guaranteed by the Veterans Administration. The mortgage was for 25 years and included an escrow for taxes and insurance. Prudential used Metmor Financial Inc. as it's servicing agent. On January 19, 1990, Metmor paid $14,333.25 to Jersey City to satisfy a sewer and water lien. In February 1990, Mr. Jackson was informed he was to pay the amount of the lien in 6 monthly installments. Therefore, his payments would increase from $385 per month to $1,966.76. Mr. Jackson paid $385 for his March 1990 payment. The servicer applied the entire payment to the sewer and water lien debt. Mr. Jackson protested and stopped making any payments.

The mortgagee, Prudential Insurance Co., filed a foreclosure complaint as of March 1990. The principal mortgage debt in February 1990 was $6,480.46 not including late fees, taxes or the sewer/water lien.

Mr. Jackson answered the complaint with three defenses; unclean hands, unfair dealing and failure to comply with VA procedures. Prudential filed a motion to strike the answer and continue with the foreclosure complaint and filed proof of debt as of October 1991, at $24,764.25. Eventually, Prudential motion was granted and on July 1993 a judgment was entered for $31,476.34.

Later, the judgment for foreclosure was reversed since the motion to strike the defenses was improperly granted. The defendant raised question of material fact which was not heard.

In this writers opinion, it was unfair for Prudential to expect Mr. Jackson to make up over $14,000 in 6 months. Mr. Jackson could have obtained a new mortgage loan for the amount of the sewer and water liens plus the principal balance, payable over many years. It is likely, the property appreciated since purchased and Mr. Jackson had proven his ability to make reasonable payments. As an investor, I would have provided the funds for a new first mortgage.

Somerset Trust Company vs. Sternberg, 238 N.J. Super 279 (ch. Div 1989)

When the Plaintiff/Lender prevails in a foreclosure case, the lender is allowed to include legal fees as part of the judgment (R. 4:42-9). The amount of the fees are computed using a formula. The purpose of this rule is to encourage lenders to loan funds for mortgages and allows the lender to recover legal fees if they are forced to foreclose.

In this case, the lender, who has already prevailed in the foreclosure, seeks to recover additional legal fees from the defendant due to the filing a "frivolous defenses", (N.J.S.A. 2A:15-59.1). The defendant's motion contained no legal or equitable defenses to the foreclosure. The purpose of this punitive statute is to discourage defendants from making frivolous defenses which delay justice, waste time and money and clogs the court system.

The court observed that many foreclosure actions include a defense filing by the defendant but fail to respond to the plaintiff's motion for summary judgment. The court concludes this is a delay tactic by the defendant to postpone the inevitable.

The plaintiff sought over $3,525. The defendant maintained only $850 is attributable to legal expenses incurred as a result of the frivolous defenses. The judge agreed and awarded $850 to the plaintiff due to the frivolous defenses.

It is interesting to speculate, the $850 penalty assessed against the defendant for the frivolous defense may have been worthwhile to the defendant. The court observed the defense was a method used to delay the eventual foreclosure. In this case, assume for example, the 'frivolous defense' delayed the foreclosure for only 2 additional months. If alternative housing (or their mortgage payment) cost more than $425 per month, they actually saved money by filing the defense rather than losing the home two months earlier. I am sure the court did not speculate about the facts this way, but it would also support why so may defendants file a "frivolous defense" and defeat the purpose of the statute.