LENDERS CANNOT FORECLOSE DURING LOAN MODIFICATION
In response to rapidly deteriorating financial market conditions in the late summer and early fall of 2008, Congress enacted the Emergency Economic Stabilization Act. The centerpiece of the Act was the Troubled Asset Relief Program (TARP), which required the Secretary of the Treasury to ‘implement a plan that seeks to maximize assistance for homeowners and … encourage the servicers of the underlying mortgages to take advantage of available programs to minimize foreclosures. Congress also granted the Secretary the authority to use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.
Pursuant to this authority, in February 2009 the Secretary set aside up to $50 billion of TARP funds to induce lenders to refinance mortgages with more favorable interest rates and thereby allow homeowners to avoid foreclosure. The Secretary negotiated Servicer Participation Agreements (SPAs) with dozens of home loan servicers. Under the terms of the SPAs, servicers agreed to identify homeowners who were in default or would likely soon be in default on their mortgage payments, and to modify the loans of those eligible under the program. In exchange, servicers would receive a $1,000 payment for each permanent modification, along with other incentives. The SPAs were required to follow a three-step process:
First, the borrower had to meet certain threshold requirements, including that the loan originated on or before January 1, 2009; it was secured by the borrower’s primary residence; the mortgage payments were more than 31percent of the borrower’s monthly income; and, for a one-unit home, the current unpaid principal balance was no greater than $729,750;
Second, the servicer calculated a modification using a ‘waterfall’ method, applying enumerated changes in a specified order until the borrower’s monthly mortgage payment ratio dropped ‘as close as possible to 31percent;
Third, the servicer applied a Net Present Value (NPV) test to assess whether the modified mortgage’s value to the servicer would be greater than the return on the mortgage if unmodified. The NPV test is ‘essentially an accounting calculation to determine whether it is more profitable to modify the loan or allow the loan to go into foreclosure. If the NPV result was negative-that is, the value of the modified mortgage would be lower than the servicer’s expected return after foreclosure-the servicer was not obliged to offer a modification. If the NPV was positive, however, the Treasury directives said that ‘the servicer MUST offer the modification.‘
Where a borrower qualified for a HAMP loan modification, the modification process itself consisted of two stages.
(1) After determining a borrower was eligible, the servicer implemented a Trial Period Plan (TPP) under the new loan repayment terms it formulated using the waterfall method. The trial period under the TPP lasted three or more months, during which time the lender ‘must service the mortgage loan in the same manner as it would service a loan in forbearance.
(2) After the trial period, if the borrower complied with all terms of the TPP Agreement-including making all required payments and providing all required documentation-and if the borrower’s representations remained true and correct, the servicer had to offer a permanent modification.
Sadly, despite the foregoing requirements, lenders regularly completed foreclosures while the borrower was in the Trial Modification or even after the borrower had complied with all requirements. Lawsuits challenging the foreclosures were routinely shut down by the Courts which said the borrowers had no right to challenge a HAMP decision by a lender. So thousands lost their homes while doing everything that HAMP required and there was nothing they could do about it…. until recently.
In 2012, a Federal Court in Illinois ruled in the case of Wigod v Wells Fargo Bank that when a borrower complies with all the terms of a TPP, and the borrower’s representations remain true and correct, the loan servicer must offer the borrower a permanent loan modification. As a party to a TPP, a borrower may sue the lender or loan servicer for its breach. This was significant in that it was the first Federal case to state that a borrower had a right to sue under HAMP. (We thank the Wigod court for the HAMP history above).
Then, just two weeks ago, a Court of Appeals here in California ruled in the case of West v JP Morgan Chase Bank (citing the Wigod case) that, although the borrower could not reverse the foreclosure that had already occurred, they could sue for damages for fraud, breach of contract, promissory estoppel, and more. Significantly, this case echoed a fact pattern tat we’ve heard many times: for months after the foreclosure, Chase continued to contact West offering loan modification or other loan assistance. The bottom line, in many cases, after the lenders hand-off the foreclosure to professional foreclosure agents, they lose track of that part of the process or they intentionally ignore it. In either event, a homeowner loses their home.
Today in California, we have the Homeowner Bill of Rights that, starting January 1, 2013, has given homeowners some recourse to stop wrongful foreclosures and get loan modifications when they qualify. For the thousands of others for whom HBOR came too late, these two case may offer some level of recovery for the loss they have suffered.
BPE Law has been assisting our clients with their real estate, business, and other legal needs ever since we started doing business. And, we’ve advised over 6,000 upside down property owners since this market crash has started. If you lost your home to a wrongful foreclosure while in a HAMP Trial Modification, perhaps we can help. To schedule a Consultation, please contact our office at (916) 966-2260 or e-mail me at firstname.lastname@example.org
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.