Mortgage Law Roundup
No. 101 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. October 2013
Bankruptcy Discharge May Justify HAMP Re-review, Sale Suspension
By John T. Hundley, email@example.com, 618-242-0246
A mortgagee’s violation of 735 ILCS 5/15-1508(d-5) and of the Housing Affordable Mortgage Program (“HAMP”) rules may require denial of confirmation of a foreclosure sale held in violation of those rules, a panel in the Appellate Court’s Second District has held.
Moreover, the court said, at least absent an established internal rule to the contrary, a mortgagor’s receipt of a Chapter 7 bankruptcy discharge is a changed circumstance entitling him to review of a previously-denied HAMP application upon timely request for such reconsideration. CitiMortgage, Inc. v. Johnson, 2013 IL App (2d) 120719.
In CitiMortgage, the mortgagee refused to consider the debtor’s first HAMP reconsideration request, based on his bankruptcy discharge, on the theory that the foreclosure sale cancelled the mortgage debt. It proceeded to confirmation, and the trial court eventually confirmed the sale. The panel said this constituted an abuse of discretion.
The court noted that under HAMP guidelines a debtor is entitled to at least one reconsideration based on a change in circumstances, and it said that a bankruptcy discharge is a change in circumstance because it results in a change in the factors considered in performing the “net present value” (“NPV”) analysis under HAMP (presumably because the discharge generally results in cancellation of the debtor’s other debts and may result in discharge of the portion of the mortgage debt in excess of the property’s current value).
“Bankruptcy affects a credit score, which in turn affects an NPV analysis, which in turn affects whether a borrower will receive assistance under HAMP,” the court said. “[A]bsent an internal policy to the contrary, a borrower’s discharge from chapter 7 bankruptcy is a change in circumstance that can trigger continued eligibility for a successive HAMP application under HAMP guideline 1.2.”
However, to set aside a foreclosure sale, Illinois Mortgage Foreclosure Law § 15-1508(d-5) requires that the defendant file a motion before confirmation of the sale and prove, by a preponderance of the evidence, that the defendant applied for assistance under the Making Home Affordable (“MHA”) program and that the sale took place in material violation of the MHA’s requirements for proceeding to a judicial sale. It said that violation of the MHA program “is where materiality matters” and that whether the change in circumstances was material was not the issue.
It said that “[g]iven that the purpose of the HAMP is to assist borrowers in maintaining their properties, proceeding to sale in violation of a guideline that mandates that a servicer ‘must suspend the sale’ is clearly the type of material violation contemplated” by § 15-1508(d-5). The confirmation of the foreclosure sale was vacated and the case sent back to the Circuit Court so that the plaintiff could properly consider the borrower’s HAMP application.
The reader may find that the summaries of CitiMortgage and the other decisions discussed in this issue of Sharp Thinking result in confusion and uncertainty. That’s a fair reading of the situation of the law in this area. We’ll be following it and report further if clarity should happen to appear. But without claiming there to be clarity at this time, we further report. . . .
Bankruptcy Court May Order HAMP Review Report
Despite the emerging consensus that HAMP confers no federal private right of action, a federal bankruptcy court has ruled that it has authority and jurisdiction to order a HAMP review and a report thereon to a Chapter 13 bankruptcy debtor’s counsel. Noting the “all too frequent” occurrence that the mortgagee was not responsive, and stressing that it was not ordering the mortgagee to approve the HAMP request, the court said it acted under 11 U.S.C. § 105(a), which gives bankruptcy courts the authority to issue “any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code. In re Yarbrough, 490 B.R. 328 (Bankr. S.D. Ohio 2013).
Mortgagee Sanctioned in Loss Mitigation Program . . .
Citing Bankruptcy Code § 105(a), Federal Rule of Bankruptcy Procedure 9020, and a court’s “inherent power to supervise and control its own proceedings and to sanction counsel or a litigant for bad-faith conduct,” a bankruptcy judge in New York has imposed sanctions upon a mortgagee for failing to participate in loss mitigation proceedings in good faith. The court recognized that it could not order the creditor to agree to a mortgage modification plan, but it said that the creditor, instead of straightforwardly telling the mortgagors that it wasn’t interested, had “chose to ‘move the goalpost’ at every opportunity – stringing the Debtors and the Court along through a costly and drawn out process” and “a pattern of evasive delay tactics.” In re Bambi, 492 B.R. 183 (Bankr. S.D.N.Y. 2013).
. . . But Loss Mitigation Rules Create No Private Damage Action
Loss mitigation requirements of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) create no private cause of action which a mortgagee may use to seek damages prior to a foreclosure suit, a bankruptcy court in Maryland has held. However, the court implied that such requirements would support an injunction against a foreclosure sale, and might support damages if the sale goes forward without compliance with such requirements. In re McGinley, 490 B.R. 723 (Bankr. D. Md. 2013).