On July 15, Freddie Mac issued Bulletin 2014-14, which announced a new automated settlement process for mortgage modification settlements. Effective December 1, 2014, servicers must submit the required settlement data for a modification of a conventional first lien Freddie Mac-owned or guaranteed mortgage via the new “Loan Modification Settlement” screen in Workout Prospector. Servicers may begin doing so on or after August 25, 2014. In addition, the Freddie Mac is amending mortgage modification signature requirements to provide that a servicer and any borrowers can agree to extend, modify, forbear, or make any accommodations with regard to a Fannie Mae/Freddie Mac Uniform Security Instrument or the Note, as otherwise authorized by Freddie Mac, without obtaining the co-signer’s signature or consent on the condition that the Security Instrument that was signed by the co-signer contained a provision allowing for such action. The bulletin also, among other things, (i) updates transfer of ownership and assumption requirements; (ii) revises certain requirements for mortgages insured by the FHA or guaranteed by the VA or Rural Housing Service; and (iii) adds several new expense codes related to attorney fees and costs and updates certain attorney fees and costs reimbursement requirements.
On July 9, the New York DFS announced that it finalized a rule that allows for shared appreciation mortgage modifications, which permit banks and mortgage servicers to reduce the amount of principal outstanding on a borrower’s mortgage in exchange for a share of the future increase in the value of the home. The option is limited to borrowers who are 60 or more days past due on their loan or whose loan is the subject of an active foreclosure action and who are not eligible for existing federal and private foreclosure prevention programs. The regulations detail the method for calculating a holder’s share of the appreciation, and limit the share to the lesser of: (i) the amount of the reduction in principal, plus interest; or (ii) 50% of the amount of appreciation in market value. In addition, banks and servicers would be required to provide specific disclosures to borrowers about the terms and nature of the shared appreciation mortgage modification. The regulations also: (i) specify allowable fees, charges, and interest rates; (ii) detail the calculation of unpaid principal balance and debt-to-income ratio; and (iii) list certain prohibitions, including, among others, that the holder cannot require the borrower to waive any legal claims or defenses as a condition to obtaining shared appreciation modification. The new regulations took effect immediately.
Recently, Fannie Mae (Servicing Guide Announcement SVC-2014-12) and Freddie Mac (Bulletin 2014-11) introduced a temporary modification option targeted to borrowers located in Detroit, Michigan as part of the FHFA-directed Neighborhood Stabilization Initiative. The announcements provide the borrower, property, and mortgage eligibility requirements, borrower documentation requirements, and other program details. The announcements also establish requirements for servicers to process the new modification options, which servicers must implement for all evaluations conducted on or after September 1, 2014.
Recently, Colorado enacted legislation that requires servicers of residential loans, including lenders and other parties that offer a borrower a loss mitigation option or seek to enforce the power to foreclose and sell the residential real estate that secures a delinquent loan, to establish a single point of contact with a borrower. The bill obligates the single point of contact to inform the borrower about loss mitigation options, the status of the borrower’s loan, circumstances that may result in foreclosure, and procedures to submit a notice of error or information request. Further, the bill prohibits the servicer from initiating foreclosure proceedings unless the borrower has not qualified for, accepted, or complied with the terms of a loss mitigation option. The bill provides that if a servicer is engaging in prohibited “dual tracking,” the public trustee must follow certain procedures, including continuance of the foreclosure sale and withdrawal of the notice of election and demand, provided so the borrower is complying with all applicable terms of a loss mitigation option. In addition, the bill requires a foreclosing lender to disclose that it is illegal for a foreclosure consultant to require a deposit or charge fees in advance for providing services, and requires that the posted notice include a statement regarding the borrower’s ability to file a complaint with state and federal authorities if the borrower believes the lender or servicer has violated certain provisions of the bill. The bill takes effect January 1, 2015.
Texas Supreme Court Allows Capitalization Of Interest, Fees, Escrow Items For Home Equity Loan Modifications
On May 16, The Texas Supreme Court held that the state constitution does not prohibit the restructuring of a home equity loan as long as the original loan met constitutional requirements and terms of the original extension of credit are maintained. Sims v. Carrington, No. 13-638, 2014 WL 1998397 (Tex. May 16, 2014). The court’s holding came in response to a series of questions certified by the U.S. Court of Appeals for the Fifth Circuit, which asked whether (i) a modification agreement that capitalizes past due interest, fees, property taxes or insurance premiums into the principal, but does not satisfy or replace the original note, is a modification or refinance for purposes of the constitutional home equity lending provisions; (ii) the capitalization of past-due interest, fees, property taxes, or insurance premiums constitutes an impermissible “advance of additional funds” under regulations implementing the constitutional provisions; (iii) a modification must comply with constitutional requirements that a home equity loan have a maximum loan-to-value ratio of 80%; and (iv) repeated modifications convert a home equity loan into an open-end account that must comply with certain constitutional requirements related to home equity lines of credit. The Texas Supreme Court determined that the restructuring of a home equity loan that involves capitalization of past-due amounts owed under the terms of the initial loan and a lowering of the interest rate and the amount of installment payments, but does not involve the satisfaction or replacement of the original note, an advancement of new funds, or an increase in the obligations created by the original note, is not a new extension of credit, and is thus not required to comply with the constitutional requirements. The court further held that such a restructuring (i) is not an “advance of additional funds” if those amounts were related to the original loan; and (ii) is not subject to LTV limits because it is not a new extension of credit. Finally, the court held that repeated restructurings, as described, do not convert the loan into a line of credit subject to other restrictions, explaining that in the case of a line of credit repeat transactions are contemplated upfront, a situation that “does not remotely resemble” the modification at issue here.
On May 14, Massachusetts Attorney General (AG) Martha Coakley sent a letter to FHFA Director Mel Watt threatening legal action if the FHFA does not direct Fannie Mae and Freddie Mac, when they sell a foreclosed property, to comply with a state law that prohibits a creditor from conditioning that sale on a requirement that the new owner cannot resell or rent the property back to the former homeowner. The letter explains that the law allows non-profits in the state to purchase REO and sell them back to the same borrower with more favorable financing terms and at a lower value. The AG states that her office is “considering all available legal avenues – including litigation – to ensure compliance” with the state law. The letter also reasserts the AG’s view that Fannie Mae and Freddie Mac should include principal reductions as a loan modification option. Under its former Acting Director Edward DeMarco, the FHFA decided in July 2012 not to direct Fannie Mae or Freddie Mac to offer principal reductions.
On March 28, Fannie Mae issued Servicing Guide Announcement SVC-2014-05, which provides, as recently promised, updated guidance regarding standard and streamlined modification programs. The announcement informs servicers that, by July 1, 2014, for mortgage loans with a pre-modified mark-to-market loan-to-value ratio less than 80%, servicers must ensure that borrowers satisfy all eligibility requirements for a Fannie Mae standard or streamlined modification. The announcement details the specific steps servicers must take to calculate the terms of the trial period plan. It also provides information for servicers to use in determining the appropriate information to include in an evaluation notice or solicitation letter, and informs servicers that if a borrower is eligible for a trial period plan with more than one amortization term, the borrower may choose an amortization term but the trial period plan notice must inform the borrower that he or she will not be able to change the amortization term after the first payment is received. The announcement states that if a mortgage loan becomes 60 or more days delinquent within 12 months of the modification effective date, the servicer must not approve another modification. Finally, Fannie Mae states that if the first trial period plan payment submitted by a borrower does not correspond to an amortization term payment offered in the plan, the servicer must use the shortest amortization term provided in the plan that is covered by the borrower’s actual payment to determine the amortization term and monthly payment obligation.
On March 28, Freddie Mac announced in Bulletin 2014-4, that with regard to the processing of standard and streamlined modifications for mortgages with pre-modification mark-to-market loan-to-value ratios less than 80%, servicers must provide eligible borrowers the option to select a 480-month, 360-month, or 240-month term for the modification agreement. Servicers must include in the trial period plan notice each amortization term and its trial period payment only when the associated monthly principal and interest (P&I) payment reduction condition is met. For a 480-month amortization term, the estimated modified P&I payment must be less than or equal to the current contractual P&I payment. For a 360-month or 240-month amortization term, the estimated modified P&I payment must be at least 20% less than the current contractual P&I payment. Additionally, Freddie Mac eliminated the options for a borrower to request a term that is different than those provided in the trial period plan offer or to change the amortization term after the first trial period payment is made. The Bulletin also advises servicers that, effective July 8, 2014, Freddie Mac will evaluate market rates on a monthly basis to determine whether a change to the standard modification interest rate is necessary, and, if so, will post the new rate and its mandatory effective date on the Standard Modification Interest Rate web page by the fifth business day of each month.
On March 12, Fannie Mae issued a notice postponing the April 1, 2014 implementation deadline for changes to its standard and streamlined modification programs announced in SVC-2013-28. Those changes expanded the programs to include loans with a pre-modification mark-to-market loan-to-value (MTMLTV) ratio of less than 80%. In the “near future,” Fannie Mae will announce a new effective date and updated requirements for such loans. Until the new requirements become effective, loans with MTMLTVs of less than 80% will continue to be eligible for a standard or streamlined modification if the loan servicer has fully implemented the previously-announced changes. In a separate notice relating to its adjustable-rate mortgage (ARM) plans, Fannie Mae announced that it is requiring sellers and servicers to substitute certain LIBOR indices for the discontinued Federal Reserve Board CD index, and as a result it is retiring two standard ARM plans based on the discontinued index.
On February 20, the U.S. District Court for Central District of California dismissed with prejudice a putative class action against several large mortgage servicers because the named borrowers failed to properly plead their allegations that the servicers stonewalled loan modification applications in order to continue earning servicing fees. Casault v. Federal National Mortgage Association, No. 11-10520, 2014 WL 689884 (C.D. Cal. Feb. 20, 2014). In their third amended complaint, the borrowers alleged three causes of action against the servicers: (i) fraud; (ii) violation of California’s Unfair Competition Law (UCL); and (iii) violation of the Rosenthal Act, California’s version of the FDCPA. The court granted the servicers’ motion to dismiss the fraud allegation because they failed to allege any causal connection between the scheme and the borrowers’ foreclosure. The borrowers alleged only that the foreclosures were the result of their inability to make their mortgage payments, even after receiving loan modifications. The court dismissed the UCL claim because the borrowers could not demonstrate a right to a loan modification—through contract, promissory estoppel, or some other theory—and, as a result, could not prove injury in fact. Finally, the court dismissed the borrowers’ claims under the Rosenthal Act because they failed to allege facts demonstrating that their loans defaulted prior to the debt being assigned to the servicers.
On February 19, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent a letter asking Comptroller of the Currency Thomas Curry and National Mortgage Settlement Monitor Joseph Smith to “carefully scrutinize the sale of mortgage servicing rights from banks to nonbanks” to ensure nonbank servicers have the capacity to handle increased loan volume and that borrowers are not harmed. Representative Waters explained that consumer advocates are concerned that when a bank subject to the National Mortgage Settlement transfers MSRs to a nonbank not subject to the National Mortgage Settlement, the transferred loans are not afforded the same protections as they would be under that agreement. Ms. Waters is concerned that the CFPB rules that would apply to such transferred loans offer fewer protections than those in the National Mortgage Settlement. She also requested that the Comptroller and/or the Monitor examine the extent to which servicing transfers are potentially being used to “evade the modification of loans for borrowers who would benefit most from the terms of the Settlement.” Ms. Waters joins other policymakers, including the CFPB’s Deputy Director and New York’s banking regulator, who recently raised concerns about the impact on borrowers from the transfer of mortgage servicing rights.
On December 26, Illinois Governor Pat Quinn signed SB 1045, which extends through 2015 an existing state foreclosure protection. Under state law, a borrower facing foreclosure can seek to block a judicial foreclosure sale based on a pending federal HAMP modification. The state protection was set to expire at the close of 2013, but was extended to match the federal extension of HAMP through December 31, 2015.
On December 10, the New York Department of Financial Services (DFS) proposed regulations that would authorize and encourage “shared appreciation” mortgage modifications in that state. The DFS explained that under a shared appreciation modification, banks and mortgage servicers reduce the amount of principal outstanding on a borrower’s mortgage in exchange for a share of the future increase in the value of the home. The program would be limited to borrowers who are 90 or more days past due on their loan, or whose loan is the subject of an active foreclosure action, and who are not eligible for existing federal and private foreclosure prevention programs. The proposed regulations detail the method for calculating a holder’s share of the appreciation, and limit the share to the lesser of: (i) the amount of the reduction in principal, plus interest; or (ii) 50% of the amount of appreciation in market value. In addition, banks and servicers would be required to provide specific disclosures to borrowers about the terms and nature of the shared appreciation mortgage modification. The proposed regulations also: (i) specify allowable fees, charges, and interest rates; (ii) detail the calculation of unpaid principal balance and debt-to-income ratio; and (iii) list certain prohibitions, including, among others, that the holder cannot require the borrower to waive any legal claims or defenses as a condition to obtaining shared appreciation modification.
On October 30, Fannie Mae issued Servicing Guide Announcement SVC-2013-22, which describes various servicing policy updates. First, effective on or after February 1, 2014 for condominium insurance policy renewals, Fannie Mae is prohibiting the use of master or blanket insurance policies that cover multiple unaffiliated projects. Second, effective immediately for mortgage loan modifications, Fannie Mae is requiring that principal forbearance is payable upon the earliest of the maturity of the mortgage loan modification, sale or transfer of the property, refinance of the loan, or payoff of the interest-bearing unpaid principal. Third, effective January 1, 2014 for property inspection reimbursements, the Announcement updates the maximum amounts Fannie Mae will reimburse servicers for property inspections, outlines servicer responsibilities related to reimbursement requests, and clarifies the escalated case resolution process. Finally, the Announcement reminds servicers of their obligation to comply with both the Selling Guide and Servicing Guide, and informs servicers that requirements for maintaining eligibility and related fees were recently updated in the Selling Guide.
On September 23, in a brief order, a judge for the U.S. Court of Appeals for the Ninth Circuit withdrew his concurrence in a recent opinion in which the court held that HAMP Trial Period Plans (TPPs) create a contractual obligation for servicers to offer a permanent modification to borrowers who complete the TPP. Corvello v. Wells Fargo Bank, N.A., Nos. 11-16234, 11-16242 (9th Cir. Sept. 23, 2013). In the concurring opinion, the judge had argued that the bank created the trial plan document for “the fraudulent purpose of inducing [the borrower] to make the payments while the bank retained the option of modifying the loan or stiffing him.” The bank filed a motion for rehearing and asked the court to withdraw the concurrence because the Treasury Department, not the bank, drafted the trial plan document and required its use. Therefore, according to the bank, its actions should not be characterized as fraudulent because it adhered to its obligations by using the required HAMP documents.