I'm not a lawyer, so this isn't legal advice. And, really, truly, you need a lawyer. However:
Was it legal for him to lease you a home even though he wasn't making mortgage payments. Possibly. He certainly had the right to lease it to you. The question probably was: Was there fraud involved? And I suspect a lawyer would tell you that while there probably was, it'd be very, very difficult to prove.
Who drew up your documents? And who reviewed them? Again, I'm not a lawyer, but your problem could have been avoided in any number of ways. For example, you should have had him sign an "Authorization to Disclose," which would have allowed you to contact his lender to make sure he was paying his mortgage.
Or you could have had a third party--a lawyer, for instance--serve as an intermediary. You'd have made your monthly payments to the lawyer, and he would have forwarded on the proper amount to the lender.
Or you could have set it up as a land trust. The property could have been put into a trust. You'd have paid the trustee every month, and the trustee would have forwarded the appropriate sums to the lender and to the landlord.
Or you could have purchased subject to the existing mortgage. He would have deeded the property to you and you'd have made the mortgage payments.
Right now, you're in bad shape. The option (the agreement to lease the home) is worthless if the owner isn't able to convey it to you.
As far as renewing the lease, what does your lease and your option provide? It should have specified under what conditions your lease could be renewed. And that should have been written to mesh with the option portion. Basically, it should have said that so long as you were current on your payments, you'd have the right to renew for x number of years. And the point is that "x number of years" would be long enough for you to have purchased the home. Again, who wrote these documents? And who reviewed them?
But, really, your right to purchase gets flushed down the toilet if the property is foreclosed upon. Or--most likely--if he isn't able to sell the property to you. (Again, depends on what the option or purchase agreement provides, specifically regarding payment of damages for inability to provide clear title.)
So, see a lawyer. But definitely do NOT see the lawyer (if there was one) who either drafted or reviewed your documents initially. He/she clearly had no idea what he/she was doing.
Hope that helps.