Borrower Allowed To Sue Lender For Breaching Mortgage Modificaton Agreement

In a decision that all lenders should read carefully, the Appellate Division recently reiterated that a borrower may have a private cause of action against a lender if the lender breaches the terms of a mortgage modification agreement under the Home Affordable Modification Program ("HAMP").

Earlier this year, I wrote about the Appellate Division's decision in Arias v. Elite Mortgage. (In case you forgot, click here to review the post.) In that case, the Appellate Division faced an issue of first impression involving mortgage modifications under HAMP. Specifically, the Appellate Division was faced with the question of whether a borrower could sue a lender if the lender breached the terms of a Trial Period Plan (“TPP”) agreement. As I noted in that post, a TPP is essentially the first step in obtaining a mortgage modification under HAMP. In a TPP agreement, the borrower agrees, among other things, to make reduced monthly payments in a timely manner during a relatively short period. As the name suggests, this is a trial period during which the lender can determine whether the borrower is able to make payments similar to those the borrower would be required to make under a modified mortgage. If the borrower satisfies the conditions of the TPP, including making the monthly payments, then the lender agrees to modify the mortgage. In Arias, the Appellate Division held that a lender could face a lawsuit from a borrower if it failed to hold up its end of this bargain. In that case, however, the borrower had not made the required payments in a timely manner during the trial period — i.e., the borrower failed to hold up its end of the bargain — so the lender did not have to offer the borrower a modified mortgage.

Now, the Appellate Division has returned to the same issue in Aiello v. OceanFirst Bank. In Aiello, plaintiffs entered into a TPP agreement with defendant that required them to provide certain financial documentation, submit to credit counseling if necessary, and make monthly payments of $1,386.75 during the trial period.The TPP agreement stated that it was not a loan modification and that if plaintiffs failed to comply with its terms, no modification would be offered. It also stated that the monthly payment during the trial period was an estimate of the payment that would be required under a modified mortgage, and the actual amount under a modified mortgage might be greater.

Unlike Arias, plaintiffs in Aiello complied with the terms of the TPP agreement. Nonetheless, Fannie Mae initially rejected plaintiffs' application for a modified mortgage because their loan was originated prior to January 1, 2009, a fact, the Appellate Division observed, that defendant was aware of when it first entered into the TTP agreement with plaintiffs. Defendant eventually did offer plaintiffs a modification, but it included monthly payments almost $400 higher than the payments made under the TPP agreement. Plaintiffs rejected the offer and sued defendant for breaching the TPP agreement. Both sides moved for summary judgment. The trial court denied plaintiffs' motion and granted defendant's motion.

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The Show Must Go On, Despite the Uncertainty in Affordable Housing Legislation

by: Katharine A. Muscalino

The Appellate Division recently held that the pending uncertainty regarding affordable housing legislation, resulting from the elimination of the Council on Affordable Housing and Appellate Division’s rejection of the Third Round Fair Share rules is no excuse for courts to dismiss builder’s remedy lawsuits. In Bonnabel v. Township of River Vale, the trial court dismissed a builder’s remedy lawsuit because it was uncertain as to the legal standard that would ultimately apply to the builder’s remedy. In addition to the builder’s remedy lawsuit, the builder had filed an appeal of COAH’s third round certification of the Township’s plan. If the builder fails to prevail in his challenge to the third round certification, the fair share plan enjoys a presumption of validity and the builder must prove his builder remedy claims by “clear and convincing evidence”. If the builder were successful in his appeal of the third round certification, the Township’s fair share plan would not have a presumption of validity and the builder’s remedy suit would be subject to a less stringent standard. Because the appeal of the third round certification remains in limbo pending the Supreme Court’s consideration of the third round rules, the trial court dismissed the builder’s remedy action without prejudice, specifying that the plaintiff could refile his complain once the COAH appeal was decided, the governing standard was established. All time periods, causes of action, and defenses were to be preserved.

The Appellate Division overturned the trial court’s dismissal, finding that the uncertainty surrounding the applicable legal standard did not constitute a failure to state a viable claim or non-justiciability. It ordered that the case be reinstated, and directed the trial court to either 1) stay the case in full until the COAH waiver appeal was decided; 2) stay a trial but allow discovery to proceed; or 3) let the case proceed to trial, with the court making findings under both scenarios. If the court were to proceed with trial, the judge would address whether the builder’s trial proofs overcame the presumption of validity, and if they fail to do so, whether they at least satisfy the lesser proof standard.

The case will be helpful to builders who struggle to make progress in development while municipalities and courts continue to drag their feet as they await the New Jersey Supreme Court’s decision on the Third Round rules.

You Got A Better Idea?!? Government Opens Suggestion Box For Ideas On How To Rent Out Foreclosed Properties

by: Peter J. Gallagher

The New York Times is reporting that the government is soliciting ideas for turning its glut of vacant, foreclosed houses into rental units that could be managed by private parties or sold in bulk ("U.S. Seeks Ideas On Renting Out Foreclosed Property"). The goal of the program would be to "stabilize neighborhoods where large supplies of empty, foreclosed properties have hurt property values" and "clear the nation’s balance sheet of real estate holdings that, because they have been difficult to sell individually, have hung over the housing market and stunted sales of existing homes and new construction." The request for ideas comes from the Federal Housing Finance Agency, the Department of Housing and Urban Development, and the Treasury Department, and you can click here to submit your ideas.

As the article notes, the percentage of homes owned by the government that are currently in foreclosure is somewhat staggering:

Of the 248,000 homes owned by Fannie Mae, Freddie Mac and the F.H.A. at the end of June, 70,000 were listed for sale, said Corinne Russell, a housing finance agency spokeswoman. The remainder were not yet on the market or the agencies had already received an offer from a prospective buyer.

But it is possible that hundreds of thousands of more homes that are now in the foreclosure process could come into the possession of the federal government in the next few years, housing experts say.

The government is now looking for a few good men ideas for how to deal with this crisis. Among those already proposed are "rent-to-own programs, in which previous homeowners or current renters could lease properties as a path to ownership, and ways in which the properties can be used to support affordable housing."

If you have any thoughts, be sure to let us know when you let the government know.

Surprise! You Don’t Have To Pay As Much As You Thought On That Mortgage

by: Peter J. Gallagher

Last week, Bank of America agreed to a multi-billion dollar settlement with upset investors who had purchased securities comprised of subprime mortgages originated by Countrywide Financial (which Bank of America acquired in 2008) and serviced by Bank of America ("Bank Of America Settles Claims Stemming From Mortgage Crisis"). Among other things, the investors claim that that Countrywide "created securities from mortgages originated with little, if any, proof of assets or income," and that Bank of America then "failed to heed pleas for help from homeowners teetering on the brink of foreclosure." While the settlement still needs to be approved by a judge, and has already run into some opposition ("Investors Challenge Bank Of America Settlement" and "Bank Of America's Proposed Mortgage Debt Settlement Criticized"), it was generally seen as the first major concession by a bank in connection with its role in the mortgage meltdown

On the heels of this settlement comes news that Bank of America (along with JPMorgan and a few other lenders) is also taking a more proactive approach with homeowners who are not even in default. As the New York Times reports in its article, "Big Banks Easing Terms On Loans Deemed As Risks," the banks are "quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk." The article tells the story of Rula Diosmas, a Florida (of course) woman who had $150,000 shaved off of the mortgage of her Miami condominium by JPMorgan even though she did not request a modification and was not in default. The bank explained its reasoning as follows:

Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.

. . .

Option ARM loans like Ms. Giosmas’s gave borrowers the option of skipping the principal payment and some of the interest payment for an introductory period of several years. The unpaid balances would be added to the body of the loan.

. . .

“By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm [a spokesman for Bank of America] said.

The banks' efforts have not come without some critism, however, including the claim that the banks are behaving in "contradictory and often maddening ways" — showing concern for those who might get in trouble while at the same time being punished by regulators for doing a poor job modifying mortgages that are already in default.

Update: Maybe HUD Is Not A Dud And The Washington Post Was Just Slinging Mud?

by: Peter J. Gallagher

Earlier this week, we posted a story about the Washington Post's year-long investigation into HUD's HOME Program which was designed to provide affordable housing to the working poor ("HUD Is A Dud According To Washington Post Investigative Report"). As you might recall, the investigation slammed HUD's management of the HOME Program as "dysfunctional." HUD has now posted a response on its blog (the cleverly title HUDdle), called "Setting The Record Straight: What The Washington Post Got Wrong About The HOME Program." After reading the response, you may be left with the impression that HUD could have shortened it to one word — "everything" — because it offers a strikingly different view of the HOME Program than the one presented in the Post. Among other things, HUD criticized the Post's study for: (1) unfairly focusing on a small percentage, approximately 2.5%, of the more than 28,000 active developments underway pursuant to the HOME Program; and (2) failing to factor the nationwide housing crisis into the equation.

In a follow up article, "Members Of Congress Call For Probe Of HUD's Affordable-Housing Program," the Post noted that it never intended to track all 28,000 projects, but instead analyzed 5,100 deals worth $50,000 or more, hundreds of which were started before the housing crisis began. The Post also reported that, in response to its study, a bipartisan group of Senators and Congressmen were calling for investigations into the program.