I have previously written about my work as a foreclosure mediator. See Foreclosure
Mediation - Limitations and Concerns and How
a Mediator Can Help in Foreclosure - More Thoughts. A common defense raised on behalf of homeowners in mediation
is that a Bank has breached either HAMP guidelines or the duty to bargain in good faith for certain action taken in processing a loan modification request, or in proceeding with foreclosure while a loan modification application is pending. As I've noted before, a couple of state court case around the nation have indicated a willingness to entertain claims concerning a duty to try to settle foreclosure cases, or to exercise a duty of care in processing a loan modification request. See Foreclosure
Mediation, supra. However, recently the New Mexico Court of Appeals appears to have rejected this line of foreclosure defense.
In Charter Bank v. Francoeur, 2012-NMCA-078 (cert. granted), the homeowner had been
represented by a Florida foreclosure defense attorney that she located
on-line, and the attorney thereafter failed to file a timely answer in home when he was incarcerated for DWI after causing a fatal car accident.
The Homeowner sought to set aside the resulting default judgment after judicial sale on grounds that:
(1) Plaintiff engaged in misconduct during the foreclosure sale by assuring Defendant Homeowner that a loan modification was "imminent;" and
(2) Plaintiff did not comply with Treasury directives required by HAMP and the loan servicing agreement, because the loan mod application was not evaluated within 30 days, Homeowner was not notified whether the application was accepted or rejected, and the Plaintiff proceeded with foreclosure sale despite the pending loan mod application.
While concluding Homeowner's failure to file an answer was "excusable neglect" under the circumstances, both the trial court and the Court of Appeals nonetheless denied the motion to set aside the default, concluding that the Homeowner "did not have a meritorious defense."
HAMP Claims
As to the HAMP claims, the Court rejected the argument that the Homeowner was an intended third party beneficiary of the servicer participation agreement between US Bank (Charter Bank's loan servicer) and Fannie Mae. "As a general rule, a member of the public is not an intended third party beneficiary and cannot enforce a government contract unless the contract's terms provide for liability." Id. ¶ 13, citing Rest. (2d) of Contracts, § 313(2)(a). Here, the Homeowner pointed to no language in the loan servicing agreement indicating an intent that homeowners have a right to enforce the agreement.
Moreover, "[t]he vast majority of jurisdictions have rejected the arguments that a borrower has a direct cause of action under a HAMP servicer participation agreement or that a borrower can maintain a breach of contract under a third party beneficiary theory." Id. ¶¶ 15-16 and cites therein; but see Reyes v. Saxon Mortgage Services, No. 09cv1366, 2009 WL 3738177 (SD Cal. Nov. 5, 2009) (reflecting minority view that such a claim survives a motion for summary judgment because "arguably" homeowners are intended beneficiaries).
Equitable Estoppel
The Court also rejected the Homeowners claim that the Plaintiff should have been equitably estopped from proceeding with the foreclosure action and judicial sale while the parties negotiated a loan modification agreement, and after Plaintiff represented that loan modification was likely to be approved.
On this issue the Court concluded the Homeowner failed to establish false misrepresentations that the loan modification would be approved. Rather, she only demonstrated statements that certain Plaintiff employees believed the application would be approved, and perhaps "imminently." However, these statements "did not rise to the level of misrepresentation that Defendant would receive a loan modification."
The Court distinguished this situation from that in Aceves v. US Bank NA, 120 Cal. Rptr. 3d 507 (Ct. App. 2011), in which the California Court held the homeowner had adequately pled a claim for promissory estoppel based on the defendant lender's "clear and unambiguous promise not to proceed on the foreclosure of the plaintiff's home without first negotiating a loan modification."
Bad Faith
Finally, Homeowner raised a claim on appeal of bad faith in "fail[ing] to meaningfully engage in the loan modification process." See Sanders v. FedEx Ground Package Sys., 2008-NMSC-040 (every NM contract imposes a duty of good faith and fair dealing as to performance and enforcement). In support, she pointed again to alleged misrepresentations about likelihood of modification, the failure to notify her of the denial of the application, and the scheduling of sale while loan modification was ostensibly pending.
However, the Court of Appeals declined to address the merits of this claim because it was not raised in the original motion to set aside, and therefore was not preserved.
Conclusion
Ultimately, this cases may spell the death knoll for foreclosure defenses based on loan modification mishaps or misconduct. Cert has been granted and it will be interesting to see what the Supreme Court decides.
If
you are interested in mediation services for a foreclosure matter (residential
or commercial), please contact Pilar
Vaile, P.C. at (505)
247-0802 or info@pilarvailepc.com.
