We were decieved into a negative ammortization loan and did not qualify at all. Do we have a defense against foreclosure?

Predatory lending is a term used to describe unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. Typically, predatory lending occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property. Unethical lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower's ability to pay is greater than it actually is. The lender, or others as agents of the lender, may well profit from repossession or foreclosure upon the collateral.

It sounds like you may have an "option ARM" loan. An "option ARM" is typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment. When a borrower makes a Pay-Option ARM payment that is less than the accruing interest, there is "negative amortization", which means that the unpaid portion of the accruing interest is added to the outstanding principal balance. Option ARMs are often offered with a very low teaser rate (often as low as 1%) which translates into very low minimum payments for the first year of the ARM. During boom times, lenders often underwrote borrowers based on mortgage payments that are below the fully amortizing payment level. This enables borrowers to qualify for a much larger loan than would otherwise be possible.

In your case, it appears that the mortgage lender failed to clearly and accurately disclose terms and conditions of the loan. The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to protect consumers in credit transactions, by requiring clear disclosure of key terms of the lending arrangement and all costs. This case would be especially egregious if you stated to the lender that you weren't sure you could afford the loan and they still said that they could lend to you.

If you believe you have been the victim of predatory lending, federal agencies such as the U.S. Department of Housing and Urban Development may be able to help. In addition, please consult with a foreclosure lawyer to determine the best course of action to take.