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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“Get Your Priorities Straight!” Refinanced First Mortgage Maintains Priority Over Junior Liens

by:  Peter J. Gallagher (@pjsgallagher)

New Jersey is a "race-notice" jurisdiction when it comes to mortgage priority. What this means, in its simplest terms, is that if Party A obtains a mortgage on a piece of property before Party B does, but Party B records its mortgage first (i.e., it wins the "race" to the clerk's office), then Party B's mortgage has priority unless Party B had "actual knowledge" of Party A's previously-acquired interest. But what happens when a first mortgage is refinanced? The original mortgage is technically paid off and replaced with the refinanced mortgage. Does this "newly-recorded," refinanced mortgage maintain the first priority status of the original mortgage or does it go to the back of the line? The answer to this question — as discussed in a recent decision from the Law Division, Wells Fargo Bank, NA v. Kim — is that the refinanced mortgage generally takes the original mortgage's first priority position.

In Kim, defendant borrowed $328,000 from Washington Mutual Bank, FA ("WaMu") to buy a home and secured repayment of this loan with a purchase money mortgage on the home. Later, defendant obtained a home equity loan from Plaintiff, Wells Fargo Bank, N.A. ("Wells Fargo") that was also secured by a mortgage on defendant's home. Defendant then refinanced her original, purchase money mortgage with WaMu. Defendant used the entire amount of the refinance loan, which was secured by a mortgage on defendant's home, to pay off the original purchase money mortgage (i.e., she did not borrow and more money through the refinance) and the purchase money mortgage was discharged of record. WaMu did not obtain a subordination of the Wells Fargo mortgage in connection with the refinance.

Approximately three years after the refinancing, defendant defaulted on the Wells Fargo home equity loan, and Wells Fargo moved to foreclose. Defendant did not file a contesting answer and the court entered default against her. However, U.S. Bank Trust, N.A. ("U.S. Bank"), the successor to WaMu's interest in the refinance loan and mortgage, filed a contesting answer claiming that its mortgage stood in first priority position ahead of  Wells Fargo's mortgage.

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It is Still Not a Breach Of The Duty Of Good Faith And Fair Dealing For Lenders To Enforce The Terms Of Their Loan Documents

         by:  Peter J. Gallagher (@pjsgallagher)

It seems like I read cases like this every few weeks: A borrower defaults on a loan, tries to work something out with the bank, but the bank for some reason decides not to work out a deal and instead decides to enforce the terms of the underlying loan documents (usually through foreclosure or some other means). The borrower then sues, alleging that the lender acted in bad faith by thinking about working out a deal, and maybe even taking some steps to do so, but eventually deciding not to. Although I have obviously summarized these cases in broad terms and the devil is often in the details, the result is almost always the same – the borrower loses.

The reason for this is simple. The law in New Jersey is well settled that a lender will not generally be deemed to have acted in bad faith when it seeks to enforce the terms of a note or mortgage as written.  Stated differently, lenders cannot be barred from enforcing loan and mortgage documents merely because they seek to enforce their express contractual rights.  Indeed, “a creditor's duty to act in good faith does not extend to foregoing its right to accelerate upon default or otherwise compromising its contractual rights in order to aid its debtor.” Glenfed Financial Corp. v. Penick Corp.   For instance, in Creeger Brick & Building Supply, Inc. v. Mid-State Bank & Trust Co., — a decision cited by the Appellate Division with approval in Glenfed — a Pennsylvania appeals court held:

. . . a lending institution does not violate a separate duty of good faith by adhering to its agreement with the borrower or by enforcing its legal and contractual rights as a creditor. The duty of good faith imposed upon contracting parties does not compel a lender to surrender rights which it has been given by statute or by the terms of its contract. Similarly, it cannot be said that a lender has violated a duty of good faith merely because it has negotiated terms of a loan which are favorable to itself. As such, a lender generally is not liable for harm caused to a borrower by refusing to advance additional funds, release collateral, or assist in obtaining additional loans from third persons. A lending institution also is not required to delay attempts to recover from a guarantor after the principal debtor has defaulted.

Try as borrowers might, New Jersey courts have repeatedly and consistently rejected efforts to hold lenders liable for violating the duty of good faith and fair dealing when those lenders have simply attempted to enforce the terms of their loan agreements.

 

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Borrower Can Sue Lender To Compel Loan Modification (But Only If It Does What It Promised To Do First)

by:  Peter J. Gallagher (@pjsgallagher)

A recent published decision from the Appellate Division — Arias v. Elite Mortgage — resolved a question of first impression in New Jersey that is important as the State continues to dig its way out of the credit crisis. The issue in Arias involved mortgage modifications under the federal Home Affordable Mortgage Program, and specifically modifications that involve Trial Period Plan (“TPP”) agreements. As the name suggests, TPP agreements require borrowers who cannot make their regular monthly payments to make agreed upon reduced monthly payments in a timely manner for a trial period. Essentially, it allows borrowers to demonstrate to lenders that if their monthly payments are reduced then they can make their monthly mortgage payments. Accordingly, if they are able to make these payments during the trial period, then the lender agrees to modify their mortgage.

In Arias, Plaintiffs defaulted on their mortgage and then pursued a loan modification with their lender, which included a TPP agreement. However, the lender eventually refused to modify plaintiffs’ mortgage. Plaintiffs argued that this amounted to a breach of the promises the lender made in the TPP agreement, or alternatively, violated the implied covenant of good faith and fair dealing contained in the TPP agreement. The trial court rejected their claims and the Appellate Division affirmed.

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Another Lesson From A New Jersey Court On The UCC And Standing To Foreclose

by: Peter J. Gallagher (@pjsgallagher)

The running battle between lenders and borrowers over standing to foreclose continues in the Garden State. A recent decision from the Appellate Division — Bank of New York v. Ukpe — is the latest in an ever-growing body of case law addressing this issue from seemingly every conceivable angle. 

The facts in Ukpe will be familiar to anyone who has followed the wave of residential foreclosures in recent years. Defendants applied for a mortgage from Countrywide Home Loans, Inc. (“CHL”). They claimed that they told the broker that they could not afford a monthly payment over $1,000 and were assured by the broker that the monthly payment would not exceed this amount. However, at the closing, they learned that the monthly payment would be almost $1,500 per month. They alleged that the broker told them not to worry because they could refinance the loan a few months after closing. Nonetheless, two years later, after several unsuccessful attempts to refinance the loan, Defendants defaulted. 

Defendants’ note was made "payable to lender," and the mortgage, after it was recorded, was held by Mortgage Electric Recording System ("MERS") as nominee for the lender. Shortly after being recorded, the mortgage was securitized along with other mortgages. As part of this process, several entities entered into a "Pooling and Servicing Agreement" ("PSA"). Under the PSA, CHL was identified as a "seller," CWABS, Inc. was identified as the "depositor" and "master servicer," and the Bank of New York ("BNY") was identified as the "trustee." Under the PSA, the CHL and the other “sellers” transferred the mortgages to CWABS, Inc., which then transferred them to BNY, which held the mortgages for the benefit of the investors in the newly-created security. The PSA also required the original mortgage notes to be endorsed in blank and delivered to BNY.

After Defendants defaulted, BNY filed a foreclosure complaint. In response, Defendants claimed, among other things, that BNY lacked standing to foreclose because it was not a holder in due course. The trial court rejected this claim and the Appellate Division affirmed. In doing so, the Appellate Division provided a crash course in what it means to be a holder in due course.

 

 

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