FEDERAL LOAN MODIFICATION PROGRAMS
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Home Affordable Modification Program (HAMP)
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FHA-HAMP
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VA-HAMP
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USDA-HAMP (for rural properties)
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Others
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Principal Reduction Alternative
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Second Lien Modification Program
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Foreclosure Alternatives Program
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Refinance Programs
HAMP
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Goal is to reduce homeowners’ monthly mortgage payments.
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First, the lender has to reduce payment to no more than 38%
Front-End DTI ratio, which is the ratio of:
P + I + taxes + insurance + HOA fees
Monthly Gross Income
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Treasury Dept. will make further reductions in monthly payment
dollar-for-dollar with the lender, down to a 31% Front-End DTI ratio.
The Problem:
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To get from 38% to 31%, the lender must follow the Standard
Waterfall:
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Step 1a: request Monthly Gross Income verification
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Step 1b: validate P+I+T+I+A
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Step 2: capitalize arrearage, including accrued interest, past due
real estate taxes, insurance premiums, delinquency charges paid to
third parties, required escrow advances already paid, and required
escrow advances that are currently due.
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Step 3: get to 31% by using the following strategies, in this order:
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Reduce the interest rate
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Extend the term of the loan
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Forbear principal at any point in the process
Why is this a problem?
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Adding unpaid interest to the debt, and charging interest on that
interest, could cause the effective interest rate to exceed the 18%
usury cap in Texas
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Adding unpaid interest to the debt could be considered an
advance of additional funds on behalf of the borrower
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Adding overdue taxes, insurance premiums, and escrow
payments could be considered an advance of additional funds
(assumes there is no escrow account in place)
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These actions may violate the Texas Constitution’s provision
governing home equity loans – Art. XVI, Sec. 50(a)(6)
Modification
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A modification occurs when one or more terms of a loan is changed
but the note is not satisfied and replaced. Capitalization of arrears
increases the principal amount due and is an accepted practice.
But this is Texas...
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Texas home equity loans can be modified at any time (no 1-year
waiting period),
but:
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The home equity requirements apply to the original loan and the
modification as a single transaction.
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The 3% fee cap applies to the original home equity loan and any
subsequent modification as a single transaction – fees include
any amount the owner is required to pay to any person to
originate, evaluate, maintain, record, insure or service the loan.
7 Tex. Admin. Code, Rule 153.14
It gets worse . . .
The advance of additional funds to a borrower is not permitted.
The principal amount may not be increased.
[153.14(2)(B)]•
Does this include overdue taxes, insurance premiums, and
escrow payments as required by “Step 3” of the Standard
Waterfall?
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Not if the Deed of Trust allows for them to be paid by the
lender and included in the principal amount, which is
common.
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Adding unpaid interest to the debt could be considered an
And worse . . .
The loan must be repaid in substantially equal successive periodic
installments . . . each of which equals or exceeds the amount of accrued
interest as of the date of the scheduled installment.
[Art. XVI, Sec.50(a)(6)(L)]
The first mod payment must pick up all the accrued interest, and yet all
subsequent payments must be the same as the first payment. Only possible if the interest rate, and therefore the payment amount, adjusts with the second payment.
No balloon payment as contemplated by HAMP
The four agencies that issue rules governing home equity loans (OCCC and the departments of Banking, Credit Unions, and Savings and Mortgage Lending) issued a Home Equity Modification Advisory Bulletin in April 2009, to clarify how modifications can be made consistent with Texas home equity law regarding accrued interest.
Home Equity Modification Advisory Bulletin
• The first payment and every subsequent payment must cover accrued interest, and all of the payments must be substantially equal (Variable interest rate is
acceptable, so the mod could call for a first payment equal to accrued interest, and then all other payments cover interest as they go, but does that meet the spirit of the law?)
• How can the lender do this if the loan is delinquent (and therefore qualified for HAMP)?
• Bulletin suggests the following actions:
• Have the borrower bring the loan current before the modification is signed. • Have the lender waive accrued interest.
• Under HAMP Guidelines, capitalization of arrearages is a required step before the lender can do any of the other steps - reduce the interest rate or extend the term
Forget HAMP – let’s refinance!
A refinance of a debt secured by a homestead that includes the
advance of additional funds will not be secured by a valid lien
unless:
(1) the refinance of the debt is a home equity loan; or
(2) the advance of all the additional funds is for reasonable
costs necessary to refinance such debt, or for (taxes, partition in
divorce or home improvements).
[Art. XVI, Sec. 50(E)]
Capitalization of accrued interest, past-due taxes, insurance
premiums and escrow payments already made may be OK, but do
not add late charges and other types of fees that are not the costs
of refinancing.
HAMP cases in general under Texas law
Gamez v. Wells Fargo Bank
Facts alleged:
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Should have been a home equity loan? Apparently the owners borrowed
money from family and made improvements to the property, intending for it to
be their homestead, but had not yet abandoned their present homestead.
The bank correctly gave them “cash advanced against non-homestead
property.”
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Force-placed insurance increased their monthly payment beyond what they
could afford.
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The bank sent them an application for modification but did not accept it. Oral
promise not to foreclose while in the modification process.
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Foreclosed anyway.
Gamez v. Wells Fargo Bank
Plaintiff’s claims:
Promissory estoppel – defendant made a promise, foreseeing that plaintiff would rely on it, and plaintiff did rely, to their detriment.
Promise not to foreclose would be an ”agreement to . . . delay repayment of money . . . or otherwise extend credit or make a financial accommodation” and because the amount exceeded $50,000, the promise must be in writing.
[Tex. Prop. Code sec. 26.02 (“Statute of Frauds”)]
Oral promise is not enforceable. If the promise had been in writing, or the bank had promised to put it in writing, plaintiff probably would have a valid cause of action.
Fraud and Fraudulent Misrepresentation – based on the claim that plaintiffs were told the loan was a home equity loan and that foreclosure would not take place.
Even if oral misrepresentations were made, the Statute of Frauds makes them unenforceable.
Gamez v. Wells Fargo Bank
• Negligence and Gross Negligence (reckless disregard for the possibility of harm) – defendant owed a legal duty, breached that duty and caused damages to plaintiff • Negligence is a tort. Here, the only damage was “economic loss” and therefore it
is only a contract claim. A tort requires damages beyond economic losses, such as physical injury or emotional distress.
• Defendant owed a duty to plaintiff under HAMP? • No private right of action under HAMP
• Only the government can require HAMP servicers and lenders to implement and manage their HAMP program “reasonably”
• Deceptive Trade Practices Act – the lending of money is not a “good or service”, and thus the plaintiff is not a consumer under the DTPA, and it is inapplicable. • Texas Debt Collection Act – misrepresenting the status or nature of the services
Gamez v. Wells Fargo Bank
• Plaintiff argued that the modification department existed to assist customers, and “failed them”, but the bank was not required to give plaintiff a modification and plaintiff was not entitled to expect one, just because the modification
department existed.
• Wrongful Foreclosure – a defect in the foreclosure proceedings and a grossly inadequate selling price that was caused in some way by the defect.
• Plaintiff claimed that the bank’s acts, statements and failure to act led plaintiff to disregard the foreclosure sale. Defendant was sole bidder at the sale.
• Plaintiff received notice of the sale, so any oral promises to the contrary were no longer correct, if they ever were.
• Breach of Contract – a valid contract, performance by plaintiff, breach by defendant causing damages to plaintiff
• Plaintiff claimed that fore-placed insurance led to unsustainable monthly
payments, but the bank got the insurance because plaintiff failed to maintain her own insurance. Therefore, plaintiff breached first.
HAMP cases involving home equity loans in Texas
Hawkins v. Wells Fargo Bank, N.A
.
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Loan was modified, with capitalization of interest. Interest was
capitalized to bring the loan current (as suggested by the Home
Equity Modification Advisory Bulletin)
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Claims:
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Capitalization of interest created a refinance of the home equity
loan, rather than a modification, and the notice and disclosure
requirements for a refinanced home equity loan were not given.
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The bank knew about these defects and did nothing to cure
them. Because the bank misled the plaintiff, bank should be
denied cure rights.
HAMP and home equity - continued
Report and Recommendations of the Magistrate – “no court has
addressed the issue [of] whether rolling past-due interest into the
principal of a home equity loan as part of a modification . . .
requires that the lender comply with all of the formalities of Section
50. [A] finding that Section 50 applies . . . will mean that
numerous modifications will be set aside, and the loans in those
cases will be forgiven.”
(Not necessarily, but forfeiture is a possibility.)
Summary judgment for bank is denied.
HAMP and home equity - continued
Sims v. Carrington Mortg. Svcs, LLC
• Loan was modified, with capitalization of interest.
• Plaintiff claimed that the modification violated the requirement of equal
payments that were at least the amount of accrued interest [Sec. 50(a)(6)(L)]. • Foreclosure proceeding withdrawn. New modification made with more past-due
interest capitalized. • Claims:
• CLTV exceeded 80% with the modification
• Modifications were a form of open-end credit, without proper terms or disclosure • Modifications were really refinancings without proper disclosures
Sims v. Carrington Mortgage Services
• Judgment
• Original note was not “satisfied and replaced”, so these were modifications, not refinances. Language in the modification agreement confirms that stance. • Capitalization of interest is not an advance of additional funds. Relied on
Meador v. EMC Mortg. Corp., 236 S.W.3d 451, 453 (Tex. App.—Amarillo 2007, pet. denied): “additional funds are monies obtained in excess of the pre-existing debt being refinanced.” The court found that this result was confirmed by
“common sense”. Rolling interest into the debt “gave plaintiffs no extra cash to do with as they wished.”
• Home Equity Modification Advisory Bulletin, by its own statement, does not prohibit other means of modifying home equity loans, and does not bear the authority of regulation.
Sims v. Carrington Mortgage Services
• Loan was not an open-end account because the parties did not anticipate
repeated transactions, repayments and re-borrowings, which are the hallmarks of an open-end account in Texas. [see Tex. Fin. Code sec. 301.002(a)(14)]
• Because the modifications were not refinances, the disclosure and timing requirements under Section 50(a)(6) did not apply.
The sad case of Traci Smith
Ms. Smith was not delinquent on her loan, she just wanted to reduce her payments.
• Sept. 2010 – the lender allegedly told her to stop making her usual payment and instead make reduced payments under a trial period that precedes the formal HAMP modification, so that she could show a “hardship”.
• Feb. 2011 – Ms. Smith completed the trial period and was sent a modification agreement.
• May 2011 – Ms. Smith was told that no modification could be done because the bank would be breaking the law if it did so.
• Foreclosure was scheduled for failure to make the full payments
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How about we reduce your payment to zero?
Traci Smith - continued
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Claims:
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The bank breached the TPP “trial period” contract by failing to give her a
modification when she successfully completed the trial period.
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The bank committed negligent misrepresentation when it “suggested”
that HAMP loan modifications are legal for home equity loans in Texas
when they really aren’t.
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Judgment
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Smith failed to meet the requirements of the TPP – she didn’t really
have the required “hardship”, because she had always been able to
make her payments.
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The bank did not sign the modification agreement, so was not bound by
it, and no “manifest mutual assent” or intention by the bank.
Traci Smith - continued
• Even if the bank was negligent in telling her that the modification was legal, Smith did not suffer the required “pecuniary loss by relying on the statements.:
• If she had a hardship, she still would have fallen behind on her payments • If she didn’t have a hardship, she wouldn’t have qualified for a modification
anyway, and would have still had to resume making her usual payments. • Promissory estoppel – requiring the bank to provide the modification because
she relied on their statements – does not apply:
• The bank’s promise was predicated on her complying with the terms of the TPP, which she couldn’t do because she didn’t have the required hardship. She “should have known” that she didn’t qualify for a modification, so it was unreasonable of her to rely on the bank’s statements to the contrary.
Last but not least . . .
Hawkins v. JPMorgan Chase Bank, N.A.
• Capitalization of past-due interest and escrow amounts.
• Modification was actually a refinance, and “in short, everyone gets a free house.” Judge is clearly leery of judgment for plaintiff because of the consequences for “thousands of class members”.
• Judgment
• Court relied on Sims and Hawkins v. Wells Fargo Bank (both cited above). Tracks the Sims decision in many respects.
• This loan was a modification, not a refinance. Cited the document statements to that effect. Agreed that a “common sense” reading of “additional funds” means funds that were not already owed by the borrower.
Hawkins v. JPMorgan Chase Bank - continued
• Modification agreement called for 5-year term of interest-only payments, after which the payments would readjust to “add back in” principal reduction over the remaining term of the loan. Apparently, the court read Sec. 50(a)(6)(L) to mean new interest accrued, the old interest having been capitalized. The interest-only payments met the test in 50(a)(6)(L), and there was no balloon payment at the end of the term, so the modification complied with the home equity requirements. (But, the payments overall were not substantially equal, and the interest rate
apparently did not vary, so this ruling is subject to dispute.)
• Another plaintiff was facing a balloon payment, in violation of 50(a)(6)(L), but the loan documents had a “savings clause” that allowed the bank to reform the
documents to the extent necessary to comply with 50(a)(6). Also, plaintiff did not give notice of the defect until he filed suit, and therefore the bank has the
A cautionary note
• The sad case of Traci Smith is the only one that was decided by an appellate court, and the court’s decision did not address the issues that are at the heart of these cases.
• The other cases were decided, or are pending. in federal district courts. The court’s decision is not binding precedent outside its district until the 5th Circuit agrees.
BE CAUTIOUS ABOUT MODIFICATIONS
• MODIFICATION OF HOME EQUITY LOANS SHOULD BE STRUCTURED CAREFULLY
• REFINANCE INSTEAD, IF FEASIBLE
• MAKE SURE YOUR LOAN DOCUMENTS HAVE A SAVINGS CLAUSE AND WORDING THAT EXPRESSLY DISAVOWS A REFINANCE WHEN A MODIFICATION IS INTENDED
• DO NOT GIVE WRITTEN ASSURANCES THAT A MODIFICATION WILL BE MADE UNLESS YOU ARE VERY SURE THE BORROWER – AND THE LOAN – WILL QUALIFY.
Paul Kellogg, Partner
HughesWattersAskanase, LLP
Email: [email protected]; Direct Dial: 713/328-2832
www.hwa.com
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