The Lawletter Vol 35 No 8, May 27, 2011
The United States is in approximately the fourth year of a period that has seen residential mortgage foreclosures at unprecedented levels. Although the rate of filing of mortgage foreclosure notices has begun to decline recently, most of that decline is attributable to judicial foreclosure states such as Florida, Massachusetts, Connecticut, New York, and New Jersey, where judicial hostility to questionable procedures utilized by mortgage loan services has caused lenders to slow the process of initiating foreclosures.
An illustration of how skeptically courts view mortgage foreclosure procedures in some states is provided by In re Cruz, 446 B.R. 1, 2011 WL 285229 (Bankr. D. Mass. Jan. 26, 2011). In that case, a Chapter 13 bankruptcy debtor brought an adversary proceeding against a residential mortgage lender for improperly proceeding with foreclosure while the debtor's application for modification of his loan under the Treasury Department's Home Affordable Modification Program ("HAMP") was pending. The debtor asserted claims not only as an alleged third‑party beneficiary of the lender's obligations under HAMP, but also on the theory that the lender had violated its obligation of good faith and reasonable diligence under Massachusetts law. The debtor moved for preliminary injunctive relief to prevent foreclosure from proceeding.
The court observed that while the HAMP program was intended to benefit homeowners by helping them avoid foreclosure, the majority of courts considering the issue have held that consumers have no private cause of action as third-party beneficiaries to enforce HAMP violations by their servicers. See McKensi v. Bank of Am., N.A., Civ. Act. No. 09‑11940‑JGD, 2010 WL 3781841, at *5‑6 (D. Mass. Sept. 22, 2010) ("'[T]he existing case law weighs decisively in favor of defendant: numerous district courts have interpreted identical HAMP agreements and have come to the conclusion that a borrower is not a third party beneficiary.'" (quoting Hoffman v. Bank of Am., N.A., No. C 10‑2171 SI, 2010 WL 2635773, at *3 (N.D. Cal. June 30, 2010) (citing additional cases)). A few courts have decided otherwise. See Reyes v. Saxon Mortg. Servs., Inc., No. 09cv1366 DMS (WMC), 2009 WL 3738177, at *2 (S.D. Cal. Nov. 5, 2009) (plaintiff's complaint alleging a third-party beneficiary status with respect to a HAMP violation was "sufficient to state a plausible claim for breach of contract under a third party beneficiary theory").
The Cruz court agreed with the majority and held that the debtor had no private right of action as a third-party beneficiary of the HAMP program. But that was not the end of the matter. The court held that the mortgagee owed the mortgagor an obligation of good faith to attempt to find a way to cure the default and avoid foreclosure. It was persuaded that the mortgagee had scheduled and intended to conduct a foreclosure sale of the plaintiff's property while the plaintiff's request for a loan modification was pending before it. Even if the modification had been denied on January 19, 2011, eight days prior to the rescheduled foreclosure sale, the debtor was not given written notice of the denial, nor was he offered other foreclosure mitigation options as required under HAMP guidelines. Those facts convinced the court that the mortgagee might not have been acting in good faith in going forward with the foreclosure.
Most courts probably would not go so far as did the Cruz court in adjourning a scheduled foreclosure sale. Moreover, many states do not require judicial foreclosure, so the case has limited precedential value in those states. Still, the court's reasoning might be found persuasive, if not authoritative, to attorneys representing desperate mortgagors elsewhere who are looking for some authority to stay foreclosure, if only temporarily.