While litigation frequently involves multiple and overlapping claims, for the sake of convenience, I consider mortgage modification litigation produced to date by the financial crisis to be proceeding in "three waves." This comment reviews these waves.
In the first wave of litigation, homeowners who lost income in the financial crisis or faced increased interest rates and balloon payments struggled to retain their home ownership and stop foreclosures. This litigation focused upon alleged oral promises by lenders to reduce the monthly payments or to delay foreclosure proceedings.
Several lines of legal argument by borrowers against foreclosure in these circumstances included intentional misrepresentation or fraud by the lender, breach of contract, detrimental reliance by the borrower upon a lender's promise (promissory estoppel), lack of good faith by the lender, and that the acceptance of partial payments by the lender created a binding modification. These arguments frequently failed since statutes require that mortgage modifications be written and signed by both the lender and borrower. Furthermore, the mortgage agreement itself typically stated that modifications must be written and signed and that an acceptance of a partial payment did not create a modification or surrender of legal rights by the lender. Additionally, the lender asserted that the lender's employee in question lacked the authority to modify the mortgage.
A second wave of litigation focused upon borrowers' attempts to discharge mortgage payment obligations in bankruptcy. Borrowers were confronted with the unclean hands doctrine. Lenders informed the bankruptcy court that mortgage applications that misstated income or assets involved fraud by the borrower. Also, since the borrowers had failed in some alleged manner to act in good faith to make payments, they should not be granted bankruptcy relief.
A third wave of mortgage modification litigation is currently focused upon the provisions of the Home Affordable Modification Program (HAMP). Borrowers are facing a number of legal barriers. The following are some of the defenses that lenders are making against borrowers' claims:
. The borrower in some manner failed to follow the HAMP provisions or was otherwise not qualified for a modification.
. While the borrower may have submitted documents, the lender never signed or agreed to the asserted modification.
. HAMP does not contain provisions allowing a private party to sue.
. Asserted agreements between mortgage lenders and governmental agencies do not allow a borrower to sue for an alleged breach of these agreements.
. General assertions that the lenders engaged in fraud, unfairness, or lack of good faith are factually and legally inadequate.
. In bankruptcy proceedings, even under HAMP, the lender continues to have preferred status as a secured claimant.
Appellate courts in some cases are writing one paragraph opinions upholding a trial court's decision to dismiss a borrower's lawsuit. However, disputed factual matters may prevent an outright dismissal of a lawsuit by summary judgment. Another assertion by borrowers, that gives some courts pause, is that the lender violated various state consumer protection or real estate statutes. The relevance and application of state law to HAMP litigation is disputed and a subject of continuing judicial review.
Statutory language may be narrowly interpreted by courts. Federal legislation may preempt state legislation. The "third wave" of mortgage modification litigation will likely continue for some time with lenders frequently prevailing.