Friday, July 30, 2010

Class Actions for Modifications or Divine Intervention

There has been movement in some state courts to shore-up the failure of the legislation enacting the Making Home Affordable program initiatives to modify loans (HAMP etc); Federal Courts seem paralyzed.

As stated in an earlier post, there is no private right of action under the Home Affordable Modification Program ("HAMP") or any of its siblings. Congress, the Treasury, Federal Reserve, and all of the alphabet soup of regulators (FDIC, OCC, OTS, TARP Oversight, etc), evidently did not want (or caved-in to the mortgage investment community) homeowners to be able to sue mortgage servicers and actual lenders just because the servicers and lenders uniformly and regularly ignore the intent and actual RULES and REGULATIONS set out in the MHA/HAMP enacting legislation/rule-making.

The lack of this "private right of action" means that no matter how slip-shod, devious, lying, resistant, unethical, and immoral the servicers and lenders are in reviewing, analyzing, and denying modifications, homeowners/borrowers CANNOT sue in Federal Courts, and specifically Bankruptcy Courts, to force a modification OR sue because the servicer/lender has REFUSED to follow Federal regulation, rules, and guidelines. Even if the home is foreclosed and sold after the servicer/lender promised a modification, Congress and the White House, in their hurry to curry favor with the Banking interests (Goldman Sachs, Chase, Bank of America) and keep lobbyists happy, failed to put any teeth in its MHA/HAMP legislation.

Only the regulators like the Treasury, FDIC, Office of Thrift Supervision ("OTS"), Federal Reserve, can even recommend/urge/push the Banks and Investors in mortgages and Mortgage-Backed securities to follow the rules. There are no teeth in the rules and regulations.

Some State Courts have seen fit to force Lenders and servicers to show that they have acted in good faith when a Homeowner manages to get before a judge. The key here is "acting in good faith". If there has been no "good faith", or worse, demonstrated "bad faith", State Courts are allowing injunctions to stop foreclosures. No one expects there to be a modification when a homeowner is 30 months behind and cannot make a payment even if it based on 2% interest rate for 40 years, unless the problem was fraud in the origination of the loan. But most issues are regular people with regular problems in today's economy: job loss, reduced income, illness or death.

The exception may be CLASS ACTION SUITS. Simplifying a complicated legal issue, simply put, if there can be shown that as a pattern and practice a lender/servicer systematically and consistently rejects modifications, or acts so negligently as to de facto reject modifications (never gets paper processed etc), and there are enough diverse persons affected, then there may well be a "CLASS" of persons affected enough to demonstrate that all are "third-party beneficiaries" of the federal law.

Homeowners and their attorneys should begin to think about such Class Actions. Perhaps if there are enough suits against Lenders/servicers and the "investor-managers" of the Mortgage-Backed Securities, Congress may take action: Don't count on the mortgage industry or the Banks to help any more than they are forced to by some higher power (as morality is out, do not plan on Divine Intervention).

Author's Copyright by Richard I. Isacoff, Esq, July 2010


DaveinPhoenix said...

Great comments but I don't see how you can blame the current administration.

There is no HAMP law it was required under TARP for banks that took TARP funds. They were forced into signing participation agreements. But there was never any "law" that could be enforced from my understanding. Now most banks have repaid TARP.

In 2009 Treasury/Admin did all they could to get compliance. They set in the SWAT teams from Fannie, they required the monthly reports trying to shame the banks into compliance. They had the meeting at the White House with bankers where they promised to do better but have continued to ignore HAMP as much as they can.

They make far more money on foreclosures and extending as long as possible the trials since they get service fees. The servicers take no loss on foreclose sales.

Since 80% of 1st mortgages are GSE backed its the TAXPAYERS that take the loss and without HAMP legislation about the only thing more Treasury can do is withhold funds on completed mods till do more, but that may be counter productive.

Richard I. Isacoff, Esq. said...

No blame assessed to the current administration. What was done was the best Congress et al would allow. My point is that it is not close to enough. The Special Inspector General for TARP, Neil Barofsky, stated that "one of the greatest failures" by Treasury was the absence of goals for the program (from 7/21/10 NY Times).

The stats show that only 10%+/- of homeowners eligible have been helped and foreclosures continue unabated.

Elizabeth Warren, chairwoman of the Congressional Oversight Panel for TARP has said the same thing (perhaps she will end up running the new consumer protection oversight agency).

No teeth - no success