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My Mortgage Lender has Declared My Mortgage in Default? What are my Legal Rights in Alabama?

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The only real option in this situation is for the borrower to apply for a modification of the loan, which can lower the monthly payment, extend the term of the loan, and lower the interest rate. It all depends on who owns the mortgage. If it is a loan bought by Fannie Mae, Freddie Mac, HUD, U.S.D.A. Rural Loans, or Veterans Administration there is a good chance this can be accomplished. A pending application for a loan modification prohibits this type of government bought loan from going to foreclosure sale, until a determination is made on the application.

There are other types of mortgages that were divided up and sold as mortgage backed securities, especially in the mid 1990s through about 2008. These securities were purchased in bulk by several investment trusts on Wall Street, and large financial institutions. The problem with trying to modify these loans is that the securitization of the mortgages terminated the privity of contract between the borrower and the original lender, so that it is not clear who has authority on the lender's side to modify the loan. Any financial institution that modifies one of these securitized mortgage loans risks being sued by the investors who purchased the securities, because modifying the loan would reduce their expectation of profit from the security, and will usually breach any trust agreement set up to pool the securities in investment vehicles.

A borrower can find out who owns a mortgage loan at the HUD website (U.S. Department of Housing & Urban Development). In summary, if the government owns the mortgage loan then the government can modify that loan since the aggrieved party is the American taxpayer, who really have no right to complain about such actions.

Alabama is a state that permits a "power of sale" clause in a mortgage. This means the lender does not have to file a foreclosure lawsuit. They can move forward with foreclosure sale once the loan is declared in "default," which makes the entire balance due. This severely limits what a lawyer can do for the borrower at this stage. Most of the litigation in Alabama by borrowers relates to wrongful foreclosure claims, which arise after the home as been sold at foreclosure sale.

Only the filing of a bankruptcy ( and receiving a Discharge Order in the case) can wipe out the liability the borrower has on the mortgage loan post foreclosure sale. A Ch 13 bankruptcy filing operates to stop the foreclosure sale by law ( 11 U.S Code, Section 362, the "automatic stay") In a Chapter 13, the borrower must start making the current mortgage payment direct to the lender after the case is filed, and the arrears is paid in a Chapter 13 Plan of reorganization.

If the home is sold at foreclosure sale, then the lender can file a 1099 with the Internal Revenue Service and write off ( deduct) the costs of sale, any losses, together with fees and expenses associated with the foreclosure sale. The borrower who receives the 1099 must report the amount as income on his or her federal income tax return. The IRS has a Form 982 IRS FORM 982 .pdf which is a declaration of insolvency that the borrower can file with the IRS to avoid having to count the 1099 losses to the lender as personal income.

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