The Lawletter Vol 37 No 6
In light of the recent and ongoing residential foreclosure crisis, the use of loan/mortgage modification agreements in the mortgage industry has become commonplace. However, homeowners will often believe that they have executed a binding loan modification with their mortgage lender, only to discover that the lender is continuing with the foreclosure of the home.
For example, in Barroso v. Ocwen Loan Servicing, LLC, No. B229112, 2012 WL 3573906 (Cal. Ct. App. Aug. 21, 2012), a California Court of Appeal analyzed whether the borrowers had a valid and enforceable loan modification agreement. The lender—actually, the loan servicer—after being sued by the borrower following the alleged wrongful foreclosure of the home, argued that there was no binding loan modification since the servicer had unilaterally failed to sign and send executed copies of the mortgage modification agreements to the borrower. Per the express terms of the loan modification, it would not take effect unless both the borrower and the servicer had signed the agreement and a fully executed copy had been returned to the borrower. Despite these defects, and despite the express requirement in the agreement that it would not take effect unless signed by the servicer and returned to the borrower, the court found that a valid contract had been formed. The court concluded that failing to find contract formation would make the contract extraordinary, harsh, unjust, or inequitable because it would grant the servicer sole control over the formation of the contract despite the borrower's alleged full performance. The court stated:
In its brief, Ocwen argues there was no agreement to modify Barroso's loan because she did not allege that she received a copy of any modification agreement signed by both her and Ocwen. Each modification plan offered to Barroso included language that it would not take effect unless both Barroso and Ocwen signed the agreement and a fully executed copy was returned to Barroso. While Barroso alleges that the signed documents are in Ocwen's possession, she does not allege Ocwen's signature and return to her of any of the loan modification documents. Significantly, at oral argument, counsel for Ocwen stated that Ocwen does not argue that its failure to sign and send executed copies of the modification agreements to Barroso precluded formation of the contract for modification. . . .
"'A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.' (Civ.Code, § 1643; Beverly Hills Oil Co. v. Beverly Hills Unified Sch. Dist. (1968) 264 Cal.App.2d 603, 609, 70 Cal.Rptr. 640.) 'The court must avoid an interpretation which will make a contract extraordinary, harsh, unjust, or inequitable.' (Strong v. Theis (1986) 187 Cal.App.3d 913, 920, 232 Cal.Rptr. 272.)" (Powers v. Dickson, Carlson & Campillo (1997) 54 Cal.App.4th 1102, 1111-1112, 63 Cal.Rptr.2d 261.)
The interpretation Ocwen had asserted below and in the briefing here would violate these fundamental principles of contract interpretation. Were we to adopt that interpretation, Ocwen would have sole control over the formation of the contract despite Barroso's full performance, simply by refusing to return a signed copy to her.
Id. at *7-8.
Barroso illustrates that borrowers should be very careful when attempting to procure a binding loan modification agreement. Even though the borrower may think that it has a valid loan modification in place (and is even paying the modified amount), the lender may later claim that no valid modification was ever formed. In order to avoid this result, the borrower should carefully read the language of the modification agreement and insist that the lender strictly comply with all of the requirements for contract formation, either as set forth in the agreement or arising under the law.