When Sheila Smith got a look at what she thought was her dream home, she didn't hesitate to take it.

"I have eight kids -- four boys and four girls," Smith told ConsumerAffairs.Com, "so we couldn't exactly say no." Smith, a social services and business consultant in Independence, Missouri, and her family took the chance and signed the papers on the house in May 2000, only to find that something was amiss immediately.

"Among all the papers we had to sign at closing was a second mortgage," Smith said. "We certainly didn't expect or ask for that." Smith also noted that much of the necessary closing documentation to certify the house's sale was missing. On top of that, the home was riddled with defects and problems, but their mortgage broker persuaded them to take the deal anyway.

It wasn't long before the dream became a nightmare for Smith and her family.

Although Smith and her husband were "viable citizens with good credit," they were quickly steered into an expensive subprime loan with ballooning payments and hidden fees that they couldn't keep up with. Their home's builder was indicted and the mortgage broker was quickly revealed to be collaborating with the builder to, as Smith put it, "unload crappy homes for pretty quick money."

Trying to sell the home was fruitless, as they received conflicting appraisals due to all of the defects in its construction.

The story has all the hallmarks of a narrative from America's housing crisis, right up to the bank declaring foreclosure on the Smith residence. But in a twist, Sheila Smith was able to use the confusing and ambiguous rules of the modern mortgage market to fight back, and convince lenders and judges alike to let her and her family keep their home -- at least for now.

Smoke signals

When Smith received the first foreclosure notice in 2005, she tried to communicate with the mortgage broker, B&C Mortgage, only to find they had gone belly-up. The mortgage had been resold and they couldn't track down the current mortgage holder.

"We used every form of communication, including smoke signals," Smith said, but to no avail. Smith, a self-described "born fighter" from a family of seven brothers, decided to use the tangled mess of her situation to her advantage, contesting the foreclosure on the grounds that between the implosion of the lender, the lack of a paper trail, and the bad terms of the loan, they were essentially defrauded and couldn't be held liable.

The judge in the case agreed, issuing a default judgment in favor of Smith since the defunct mortgage broker "didn't even show up," Smith said.

The mortgage was eventually sold again to First National Bank in Missouri, but even though the Smiths struggled to renegotiate their loan for better terms, the bank attempted to foreclose again. Yet again, said Smith, the fact that there was "no deed of the sale and nothing recorded" enabled the Smiths to fight the foreclosure, a process that's still in litigation.

Securitized investments

The bundling and reselling of mortgage loans as securitized investments on Wall Street was one of the principal factors in the housing crisis, which bled over into a full-scale economic meltdown.

Lenders lured borrowers into expensive loans, often at subprime or below-prime mortgage rates, with hidden fees and penalties that they could not afford, while selling the loans on the secondary market. As more and more of the loans went into default, lenders' available funds decreased, forcing them to pull back from the market and cut down the credit available to their customers.

California and Illinois recently sued Countrywide Financial for using deceptive marketing tactics to convince borrowers to buy or refinance using complex "creative" loan products, while the lender routinely overrode its own standards to expand the number of loans it sold, in order to realize bigger profits from the resale.

Other homeowners have been able to use the Byzantine complexities of the mortgage market to their advantage, for both good and ill. A California judge recently ruled that a debt-ridden couple's home equity line of credit (HELOC) could be discharged in their bankruptcy filing, due to the bank's failure to perform due diligence and offering them the loan despite their clear financial problems.

Said Judge Leslie Tchiakovsky, "In general, a lender's reliance is reasonable if it followed its normal business practices. However, this may not be enough if those practices deviate from industry standards or if the creditor ignored a 'red flag'...[T]he Bank ignored a 'red flag' that should have called for more investigation concerning the accuracy of the income figures."

Action required

When Smith wanted help in bringing attention to her homebuilder's record of defective products, she contacted Nancy Seats, president of Homeowners Against Defective Dwellings (HADD). Seats, who through HADD has crusaded against KB Home and other builders, has been working with Smith on mortgage fraud for several years and has exposed numerous unscrupulous brokers and lenders.

"She has been able to stop foreclosure three times, maybe four by demanding that the servicer attempting to foreclose show proof that they own the mortgage and they can't," Seats told ConsumerAffairs.com. "Because mortgages were sold again and again and then to Wall Street where they were securitized and sold all over the world, I wonder how many homeowners have been foreclosed by a company that couldn't even show proof that they owned the mortgage."

Smith says that more homeowners should challenge foreclosures by lenders who can't prove they legitimately hold the loan, and that many innocent buyers are the victims of "very unscrupulous activity" propagated by lenders and investors who are motivated by "nothing but greed."

"They knew [the market] was all going to collapse eventually," Smith said. "They said, 'Let's just make as much money on the front end as possible and not worry about the back end."

Even Smith's hometown of Independence, a small city of 113,000, has been hit hard. "I've seen homes that were bought for $1.7 million go back on the market at $680,000 to get them sold quick," she said. "In a row of ten homes, maybe one-third of them will have foreclosure signs out front."

Although the Bush administration and Congress have both put forth numerous plans to help stem the tide of foreclosures, political gamesmanship and pressure from the financial industry has slowed progress. The largely voluntary mortgage rescue plans implemented by the financial industry have helped few homeowners to date.

Smith argues that "tougher laws and regulations" are needed to help troubled buyers renegotiate loans with better terms.

"Washington isn't interested in helping us," Smith said. "They're all millionaires -- too far removed from the people they're supposed to be representing. These lenders were making a tenfold profit at the expense of all Americans. Something needs to be done yesterday, and where are they?"