Loss Mitigation, HAMP and Lawsuits: A Recipe for Litigation
Unless you are living in a cave, you know by now that the near collapse of the residential real estate market in 2008 -and the continuing fallout- has led to a dramatic increase in the number of residential mortgage defaults and attempted workouts.
The loss mitigation process typically involves consideration of forbearance plans, short sales, loan modification plans or deeds in lieu of foreclosure.
The substantial increase in the number of defaults combined with the nature of the Home Affordable Modification Program “H.A.M.P.” has greatly increased the level of necessary communications between borrowers and loan servicers after default but prior to foreclosure. This increase in the level of communication combined with the increase in the number of defaults has increased the number of “wrongful foreclosure” lawsuits filed and a change in the types of allegations made by debtors attempting to stall or undo foreclosure.
Prior to the mortgage meltdown, the traditional wrongful foreclosure suit was predicated on challenges to whether the debtor was in default, improper notice, the bid amount at the foreclosure sale, or other alleged irregularities with the foreclosure sale itself.
Today, the new allegations are based in large part on alleged representations made by loan servicers during the loss mitigation process. The most common allegations now are “The Lender told me they would not foreclosure” or “The Lender promised to modify my loan”.
The explanation for the increase in swearing match lawsuits in this context is self evident. When faced with the loss of their home and the inability to pay their mortgage, it is not uncommon for borrowers to misunderstand or misrepresent the communications with the servicer during the loss mitigation process, especially when it serves their purpose; remaining in their home as long as possible without making mortgage payments. Compounding this problem is the internal separation of the loss mitigation department from foreclosure departments within mortgage servicers, a process referred to by the media as “Dual Tracking”.
The intent of this article is to provide a general discussion of the developing law in this new era of wrongful foreclosure litigation that is predicated, in large part, on issues stemming from the loss mitigation process.
Misunderstanding the Impact of HAMP
One of the new recurring claims in today’s wrongful foreclosure suit is that the lender or servicer violated HAMP by declining to modify their loan. This claim is predicated on the misplaced belief that HAMP and its progeny confer a right to a loan modification. For reasons discussed below, recent litigation has resulted in a near universal dismissal of these claims.
Broadly speaking, HAMP is a national modification program between loan servicers and the United States (with Fannie Mae operating as the agent for the United States). The relationship is between the servicer and the government – not the borrower. To date, courts have universally held that HAMP does not confer a private right of action on a homeowner against servicers who violate the guidelines. These holdings extend to the situation where the borrower has a pending HAMP application and is trying to forestall foreclosure. Even in that context, the courts have held that the borrower lacks standing to stop foreclosure based upon purported violations of the HAMP guidelines.
Courts have also rejected the theory that the borrower is a third-party beneficiary to the contract between the servicer and the government, holding that borrowers are assumed to be incidental beneficiaries to government contracts.
The recent trends clearly show that it is futile for a homeowner to attempt to assert a claim for damages, or to stall foreclosure, based upon purported violations of the HAMP guidelines. However, that is not to say that the HAMP guidelines do not cause or contribute to potential liability on the part of the lender.
A servicer who undertakes to participate in HAMP will find that it is fraught with rules and regulations. Encompassed within those rules are certain financial disclosures that must be made by the borrower (multiple times) and various other issues that require direct lender to borrower communication. These communications are often the homeowner’s last resort to stave off foreclosure.
As it is becomingly increasingly clear that they cannot use the HAMP guidelines as a vehicle to stall foreclosure proceedings, homeowners are tactically misrepresenting their communications with the lender. What was expressed as an offer to consider the homeowner’s application for a modification of his or her loan; is transformed into “the Lender told me they would not foreclose” or “the Lender promised to modify my loan.” These “promises” that a modification would be granted form the basis of myriad claims, including breach of contract and fraud. Thanks to the Statute of Frauds, these claims have frequently seen the same rate of success as those under HAMP.
To satisfy the Statute of Frauds under Texas law, all loan agreements involving amounts exceeding $50,000 must be in writing. Furthermore, a contract required to be in writing cannot be orally modified except in very limited circumstances. Specifically, parties to a written contract that is within the provision of the Statute of Frauds: ... may not by mere oral agreement alter one or more of the terms thereof and thus make a new contract resting partly in writing and partly in parol, the reason for the rule being that, when such alteration is made, part of the contract has to be proven by parol evidence, and the contract is thus exposed to all the evils which the statute was intended to remedy.
The current wrongful foreclosure litigation stems from loss mitigation attempts that occurred during the last two to three years when servicers were attempting to adapt to the brave new world of loss mitigation. Servicers continue to improve the process even as the default rates continue or rise, but the necessity of direct communications with the debtor is unavoidable. However, as the case law develops, a road map of how to defend against these claims is developing. One immediate method of improvement is to focus on minimizing oral communications with the debtor, ensuring the accuracy and maintenance of system generated notes regarding the loss mitigation process, and improved communications between loss mitigation and foreclosure departments. Interaction with outside litigation counsel regarding the relationship between loss mitigation and the defense of wrongful foreclosure claims is becoming increasingly imperative.
This article is intended as a general discussion and should not be construed or used as legal advice or a legal opinion. Should you seek legal advice you should consult with your attorney.
ABOUT THE AUTHOR: Michael F. Hord Jr. and Joshua A. Huber
Mr. Hord and Mr. Huber are civil litigators emphasizing their practice in complex business and commercial litigation. Their representative experience includes representation of national and regional financial institutions, servicers, insurers, businesses and individuals in a broad variety of litigation matters including banking, Uniform Commercial Code litigation, Truth in Lending Act, Fair Credit Reporting Act, lender liability, arbitration, DTPA, contract disputes, commercial landlord-tenant, and defense of personal injury claims.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.