In New Jersey, You Can Now Disapprove A Real Estate Contract By Email Or Fax (But Not Telegram)

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

Anyone who has bought or sold real estate in New Jersey is familiar with "attorney review." When you buy or sell a house, you sign a contract that is almost always prepared by a broker. The contract must contain a standard provision stating that the buyer and seller have the right to have an attorney review the contract. This "attorney review" period lasts three days. The contract becomes legally binding if, at the end of that three-day period, neither the buyer's nor the seller's attorney disapproves of the contract. If either side disapproves, their attorney must notify the other side's broker by certified mail, telegram, or personal service. In Conley v. Guerrero, a case that seems to be a case study in the concept of raising form over substance, the New Jersey Supreme Court updated this requirement to allow the notice of disapproval to also be sent by fax or email. (Those of you still using telegrams may be out of luck, however, because this no longer appears to be an appropriate method of service for the notice of disapproval.)

In Conley, plaintiffs signed a form contract to purchase a condominium unit from sellers. It contained the standard "attorney review" provision. After signing the contract, but during the attorney review period, sellers received competing offers to purchase the property and eventually entered into a new contract to sell it to a new buyer for a higher price. Sellers' attorney sent a disapproval of plaintiffs' contract to both plaintiffs' counsel and the broker (who was a duel agent represented both plaintiffs and seller) during the attorney-review period. He sent the notice via email, which plaintiffs' counsel and the agent acknowledged receiving within the attorney review period. Nonetheless, plaintiffs claimed that the sellers were bound by the contract and had to sell to his clients because the disapproval was not sent in the proscribed manner — by certified mail, telegram, or hand delivery.

Plaintiffs sued, seeking specific performance. Both sides moved for summary judgment. The Chancery Division granted defendants' motion and dismissed the complaint. The Chancery Division held that, while seller did not comply with the method-of-delivery requirements set forth in the contract, this breach was only "minor" because plaintiffs' counsel acknowledged receiving the notice within the attorney review period. Therefore, the Chancery Division held that the "underlying justification for the attorney review clause" — to protect parties against being bound by broker-prepared contracts without the opportunity to review them with their attorneys — was accomplished.

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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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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.