NJ Supreme Court: If Borrower Abides By Terms Of Settlement Agreement, Lender Must Modify Mortgage

by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Mortgage (pd)Lawsuits arising out of foreclosures and mortgage modifications are common. (Even more common than lawsuits about gyms or health clubs if you can believe that.) Nearly every day there is a decision from the Appellate Division arising out of a residential foreclosure. Most of these fall into the same category — borrower defaults and loses home through foreclosure then challenges lender's standing to foreclose after the fact — but some are more interesting. That was the case with GMAC Mortgage, LLC v. Willoughby, a decision released yesterday by the New Jersey Supreme Court involving a mortgage modification agreement entered into to settle a foreclosure lawsuit.

Almost two years ago, I wrote a post about Arias v. Elite Mortgage, a lawsuit over the alleged breach of a mortgage modification agreements. In that case, borrowers entered into a mortgage modification agreement with their lenders that included a Trial Period Plan ("TPP"). As the name suggests, a TPP requires borrowers to make reduced monthly payments in a timely manner for a trial period, after which, if they make the payments, the lender agrees to modify their mortgage. In Arias, the Appellate Division held, as a matter of first impression, that if a borrower makes the trial payments under the TPP, the lender must modify the mortgage, and if it doesn't, the borrower can sue for breach. However, the holding was purely academic because the borrower in that case failed to make one of the trial payments in a timely manner so it could not sue. 

In GMAC Mortgage, the New Jersey Supreme Court faced a similar situation with a much less academic result. 

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Winning Bidder At Sheriff’s Sale Entitled To Recoup Some, But Not All, Of His Deposit After Sale Is Vacated

by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Auction (pd)A recent decision from the Appellate Division drives home (1) the duty of sellers at sheriff's sales to announce all material information about the property being sold at the sale, (2) the duty of bidders at sheriff's sales to perform independent due diligence about the property notwithstanding that announcement, and (3) the flexibility of Chancery Division courts to fashion remedies when both fail to fully satisfy their obligations.

In Wells Fargo Bank Bank, N.A. v. Torney, plaintiff foreclosed on property owned by defendant, obtained final judgment against defendant, and proceeded to sheriff's sale. In advance of the sheriff's sale, plaintiff submitted its "sheriff's sale package" to the Camden County Sheriff. Included in the package was a short form property description (required under N.J.S.A. 2A:61-1), which, among other things, disclosed that the property was subject to a $94,000 first mortgage. The existence of this prior mortgage was also disclosed in the conditions of sale attached to the short form property description, and in the Affidavit of Consideration submitted by plaintiff in connection with the foreclosure. Finally, the short form property description also contained the following disclaimer: "all interested parties are to conduct and rely upon their own independent investigation to ascertain whether or not any outstanding interest remain[s] of record and/or have priority over the lien being foreclosed and, if so[,] the correct amount due thereon."

Edward Shuman, who would eventually be the winning bidder at the sheriff' sale,  learned about the sale through the sheriff's website, which did not mention the prior mortgage. Also, at the sheriff's sale, plaintiff did not announce, as part of its "general announcements," that the property was subject to a prior mortgage. And, on the "printed condition of sale, the box next to 'subject to a first mortgage' was not checked." Shuman claims that he did not know about the prior mortgage when he placed his winning bid on the property, and did not learn about it until later that day when he inquired about the existence of any tax liens on the property. Once he learned about the mortgage, he contacted plaintiff and requested that the sale be vacated and his deposit returned. When plaintiff refused, Shuman filed a motion seeking the same relief. 

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When Is Possession Not Really Possession? (And By “Possession” I Mean In The “Mortgagee In Possession” Sense Of The Word)

by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Lenders are often faced with a dilemma when dealing with property that is in foreclosure and has been abandoned by the borrower. A lender must, under New Jersey law, maintain the property "to such standard or specification as may be required by state law or municipal ordinance." Also, the lender has an obvious interest in protecting the value of its collateral. But the lender does not want to take "possession" of the property and be deemed a "mortgagee in possession," because that would impose upon the lender the duty of a "provident owner," which includes the duty to manage and preserve the property, and which subjects the lender to liability for damages to the property and damages arising out of torts that occur on the property. Unfortunately, the point at which a lender takes "possession" of property is not entirely clear. I have written about this before, and the Appellate Division's recent opinion in Woodlands Community Association, Inc. v. Mitchell provides some additional guidance, which should be helpful to lenders.

In Woodlands, defendant was the assignee of a note and mortgage related to a unit in plaintiff's condominium development. The unit owner defaulted on the loan and vacated the unit. At the time, the unit owner was not only delinquent on his loan payments, but also owed "substantial sums" to the association for "unpaid monthly fees and other condominium assessments." After the unit owner vacated the unit, defendant changed the locks and winterized the property. (As the Appellate Division noted, "[w]interizing entails draining the  pipes, turning off the water and setting the thermostat for heat to protect the pipes.") After the unite owner vacated the unit, plaintiff sued him to recover the delinquent fees. It later amended its complaint to include the lender, "alleging that [[the lender] was responsible for the association fees as it was in possession of the property."

Both parties moved for summary judgment. The trial court granted plaintiff's motion, holding that defendant was a mortgagee in possession and therefore was liable for the maintenance fees. On the key of issue of what it meant to be in "possession" of the unit, the trial court held as follows: "[D]efendant held the keys, and no one else [could] gain possession of the property without [defendant's] consent. This constitutes exclusive control, which indicates the status of mortgagee in possession." Defendant appealed. 

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(I Swear This Is Not A Boring Post About) Foreclosures And Statutes Of Limitations

 by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Mortgage (pd)Although foreclosures have not been in the news as much lately as they were several months ago, New Jersey courts still issue at least one or two decisions per week involving residential foreclosures. While I have written about some of the more interesting ones in the past (here, here, and here), most now follow a familiar pattern – final judgment is entered against a borrower, the borrower moves to vacate the judgment arguing that the lender lacks standing, and (almost always) the court finds that the lender had standing and denies the motion. Every now and again, however, a court addresses an interesting issue worth writing about. The Law Division's decision in Deutsche Bank National Trust Company v. Hochmeyer is one of these cases.

In Hochmeyer, defendant entered into a mortgage with a maturity date of June 1, 2036 that was recorded on October 25, 2007. Defendant defaulted on December 1, 2006. Remember these dates. They will be important later on.

Under New Jersey law, a lawsuit to foreclose on a residential mortgage must be brought before the later of (1) six years from the date when the last payment is made or "the maturity date set forth in the mortgage," OR (2) thirty six years from the date the mortgage was recorded, OR (3) twenty years from the date of default. In other words, every foreclosure lawsuit has three potential end dates for the statute of limitations, but only the earliest one counts. 

In Hochmeyer, the parties agreed that calculating the limitations period using the second or third options would yield dates many years in the future — thirty six years from the date the mortgage was recorded would be October 25, 2043, and twenty years from the date of default would be December 1, 2026. They disagreed, however, over the calculation under the first option. The difference was important because, under defendant's approach, the date not only would have been the earliest one, and thus the operative one, but it would have expired before the complaint was filed rendering the complaint untimely. Plaintiff obviously disagreed with defendant's approach. For the reasons set forth below, the court sided with plaintiff.

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Borrower Allowed To Sue Lender For Breaching Mortgage Modificaton Agreement

 

Loan application (pd)

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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