Homeowners’ payment alone under HAMP loan work-out plan does not save home from foreclosure

Posted in: Contract Law by Steven Vartabedian on

During these times of “underwater” home mortgages, many homeowners have enlisted in the federal Home Affordable Mortgage Program (HAMP). In Nungaray v. Litton Loan Servicing, LP (filed November 22, 2011) 2011 DJDAR 16868, plaintiffs executed a “loan work-out plan” for the lender’s review. Under HAMP, the lender accepts reduced mortgage payments as provided for in the plan during the time the lender reviews the plan to determine long-term acceptability. Here, plaintiffs had been delinquent in their normal mortgage payments to lender Bank of America for approximately 6 months and the notice of trustee’s sale had been set prior to the execution by plaintiffs of the loan workout plan. The lender suspended foreclosure proceedings as it reviewed the plan. Two of the four reduced mortgage payments made by plaintiffs were accepted. The lender eventually decided to reject the plan and its agent notified the plaintiffs it would move forward with the foreclosure, which it did.

Plaintiffs sued for breach of contract and quiet title, and defendants (Litton and Bank) moved for summary judgment. The Ventura County Superior Court granted summary judgment, determining the plan was not an enforceable agreement requiring defendants to enter into a loan modification because such modification was expressly contingent upon factors which never came to fruition. On plaintiffs’ appeal, the California Court of Appeal, Second Appellate District, Division Six, affirmed.

The appellate court rejected plaintiffs’ argument that they were lulled into believing their loan had been modified: that based either on contractual principles or on estoppel created by defendant’s acceptance of trial payments, they have stated facts that should go to trial. The court found that, as a matter of law, the plan expressly does not require defendants to provide plaintiffs with a permanent loan modification. Here the plan was only executed by plaintiffs and the defendants never tendered plaintiffs a permanent modification agreement because plaintiffs failed to submit complete financial information establishing that they qualified under HAMP. While, the defendants did accept two of the reduced mortgage payments, that was essentially consideration for defendant’s suspending foreclosure temporarily.

Plaintiff’s additional argument, that defendants violated the one-form-of-action and security-first rules of California Code of Civil Procedure section 726 by retaining two payments and applying them against the unpaid balance of the mortgage, also failed. These rules require a secured creditor to bring only one law suit and to proceed against the security before enforcing the underlying debt. Citing federal court authority, the appellate court noted that money paid as part of a forbearance agreement does not invoke these rules. (Mehta v. Wells Fargo Bank, N.A. (S.D. Cal. 2010) 737 F.Supp.2d 1185.) Accordingly, no set-off occurred here because this was not a matter of the lender pursuing the plaintiffs’ assets prior to foreclosure.

I doubt that most persons enlisting in the HAMP loan work-out plan fully understand that their reduced plan payments may only be buying them time. I do not disagree that this is the correct interpretation of the program’s legal provisions. I just feel badly for homeowners who make an effort, albeit imperfect, to pay their lender and get back on track with a loan modification. The law seems to treat them no better than those who stay in their homes making no payments or any efforts whatsoever until evicted, then walk away leaving a huge debt in excess of the property value behind.

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