Ruling may ease loan modification runaround for homeowners facing foreclosure
After falling behind on mortgage payments in 2008, Joyce
McNair reached an agreement with Bank of America to modify her loan and
made 14 payments under a trial payment plan, but now is threatened with
foreclosure again. A recent court ruling may help homeowners like McNair
hold lenders to such agreements.
After six months on a plan that would make her payments a little more affordable, the bank said, it would make the modification permanent. So McNair, whose own mortgage company had failed during the housing crash, made all six payments -- then eight more while waiting for paperwork to show up finalizing the arrangement.
Instead, she received notices that her loan had been transferred and that her new loan servicer would foreclose unless she paid $231,000 in back payments and fees by the following month.
Trial payments that go on endlessly or that squeeze a few thousand dollars more from the homeowner before the lender forecloses anyway were a common complaint among struggling homeowners trying to save their homes and get back on their feet during the recession with the help of the federal Home Affordable Modification Program, or HAMP. Consumer advocates and regulators say problems converting trial modifications continue today.
Banks have argued that the trial payment plans aren't a binding contract and that completing the trial was never intended to offer a guarantee about permanent modification.
A new federal court ruling upends that argument.
The 9th Circuit Court of Appeals in San Francisco ruled this month that lenders are required under HAMP to make a loan modification permanent upon completion of a set of trial payments. Consumer attorneys and advocates say the decision is a big win for homeowners in the 9th Circuit, which includes Oregon and Washington.
Far-reaching effects
The decision in Corvello v. Wells Fargo is binding for lower federal courts in 9th Circuit states. It's not binding for state courts, but consumer attorneys say it's likely to be taken into consideration by courts that had routinely rejected modification cases in the past. "Corvello is a very important decision and should put lenders in the 9th Circuit on notice that they can't play bait and switch with borrowers anymore," said Kelly Harpster, a foreclosure defense attorney in Lake Oswego.
In the case, plaintiffs Phillip Corvello and Karen and Jeffrey Lucia, whose two cases were consolidated before the appellate court, each said Wells Fargo offered them a trial-payment plan. They said they made the required payments but were never offered the permanent modifications they had been told would be forthcoming.
"It allowed banks to avoid their obligations to borrowers merely by choosing not to send a signed modification agreement, even though the borrowers made both accurate representations and the required payments," the court ruled.
The court called the idea that Wells Fargo could be allowed to keep the trial payments unfair and an "injustice" that would be averted by its ruling.
Bank's reaction
In a statement, Wells Fargo downplayed the significance of the decision: "The 9th Circuit did not rule on the merits of the underlying cases and found only that the District Court should consider the arguments put forth by the plaintiffs. Wells Fargo has strong defenses to those arguments and is prepared to present its case in the district court." The decision follows a similar ruling by the 7th Circuit Court of Appeals in Chicago.
According to government reports on HAMP, 88 percent of completed trial modifications are successfully converted to permanent modifications after an average of three or four months of trial payments.
For the rest, a lot can go wrong.
The Consumer Financial Protection Bureau, a federal agency created in 2011 to oversee the nation's largest banks and financial firms, said this month that its reviews of mortgage servicers have uncovered disorganized and missing files for foreclosure mitigation programs, including loan modifications.
And without naming specific institutions, it faulted lenders for sloppy handling of documents when mortgage servicing is transferred, including "lack of controls" regarding the handling of documents, including modification paperwork.
"Breach of contract"
When McNair's paperwork finally did arrive in March 2013, the documents had expired even before they were sent via FedEx. She contacted the bank and was assured new documents were on the way, she says, but those never arrived. Instead, she received a notice that her loan servicing had been transferred to Nationstar Mortgage's portfolio. Rather than picking up where Bank of America left off, the new servicer threatened foreclosure unless she paid off her default within a month.
Bank of America did not return phone calls seeking comment. Nationstar declined to comment specifically on McNair's loan.
"If there's a valid modification in place when (a loan) comes to us, then we would honor that," Nationstar spokesman John Hoffman said.
Whether the trial payment plan constitutes a contract has been a point of contention virtually since the HAMP program launched, but courts rarely sided with homeowners, said Terry Scannell, a Portland foreclosure defense attorney.
"Before, judges were chucking these cases out," Scannell said. "To get one to trial on any theory was a win."
Now, Scannell says, homeowners can bring a contract claim in federal court against mortgage servicers who fail to offer a modification once the homeowner has met the terms of a trial-payment plan.
"And the statute of limitations on a contract in Oregon is six years," Scannell said. "If this happened to them and they were foreclosed on, I think they've got a breach of contract claim."
McNair has retained an attorney and set aside the amount she'd be making in payments in the meantime.
And for the former mortgage professional, the lapses seem like double the betrayal.
"I did good mortgage loans. There was no greater joy than seeing people get into their new house," she said. "Right now I feel like I couldn't put someone in a loan in good conscience."
-- Elliot Njus
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