By Michelle Clark, Esq.

Trott Law, PC*

USFN Member (MI, MN)

Lenders, servicers, and investors encounter situations in which necessity prompts them to set aside a foreclosure sale. Prior to 2018, a lender would accomplish the process in Michigan by recording an affidavit. There were no published appellate cases on the issue and title underwriters accepted the expedient process.

In 2018, the Michigan Court of Appeals ruled that “a party cannot set aside a foreclosure sale simply through the unilateral filing of an expungement affidavit.” Wilmington Savings Fund Society v. Clare, 323 Mich. App. 678, 686-690. The narrow ruling provided no clear guidance regarding how a lender might successfully vacate a foreclosure sale via affidavit, whether unilateral or bilateral. What Clare did make clear was that MCL 565.451a “does not include any indication that an affidavit may be used to create a condition.”*

On May 26, 2022, the Michigan Court of Appeals provided partial clarification on this unsettled issue in 1373 Moulin, LLC v. Wolf, 2022 Mich. App. LEXIS 3062.** The question: Can an affidavit effectively set aside a foreclosure sale? The answer is yes, if it recites knowledge of an independent condition or event.

Unlike the mortgagee in Clare, a representative of [lender] filed an affidavit that stated facts about a “happening of [an] . . . event” that affected the interests of [lender] and [borrower] in the property.

Thus, unlike the affidavit in Clare, the affidavit in this case did not create the condition that affected an interest in the property. Rather [the parties’] agreement created the condition, and the affidavit merely stated facts concerning the representative’s knowledge of that agreement.

The Court suggested, but did not state unequivocally, that such affidavits should be recorded within the statutory redemption period and prior to a post-foreclosure conveyance.

Additionally, at the time the affidavit was executed and recorded, [borrower] still had a present interest in the property as the holder of the redemption rights. ...This is unlike the mortgagor in Clare. Indeed, the affidavit in Clare was filed years after the redemption had expired and after the mortgagee that had purchased the property purported to convey the property to another entity.

Prior to the Wolf decision, many industry attorneys correctly interpreted Clare in a manner consistent with the new ruling. The case eliminates some uncertainties, but questions remain. The suitability of using an affidavit to vacate a foreclosure sale should be determined on a case-by-case basis.

It remains to be seen if title underwriters will insure transactions involving similar affidavits. What is clear is that lenders wishing to utilize them should proceed quickly and craft a document that recites a legitimate and independent “condition or event” underlying the set aside.

Questions regarding this case can be directed to Michelle K. Clark at Trott Law, P.C.

*     The relevant portion of the Michigan statute reads (emphasis added):

An affidavit stating facts relating to any of the following matters that may affect the title to real property in this state and made by any person having knowledge of the facts and competent to testify concerning those facts in open court may be recorded in the office of the register of deeds of the county where the real property is situated:

(b) Knowledge of the happening of any condition or event that may terminate an estate or interest in real property[.]

**  The opinion is subject to revision until final publication in the Michigan Appeals Reports.

Copyright @2022

USFN August e-Update

By Mike Wiery, Esq. and

Darryl Gormley, Esq.

ReimerLaw Co. *

USFN Member (KY, OH, WV)

For some time, homeowners with mortgages insured by the U.S. Department of Housing and Urban Development (“HUD”) have been utilizing HUD regulations as a defense to foreclosure proceedings. While versions of the HUD model promissory note and mortgage may differ slightly, many versions contain language imposing HUD regulation exceptions to the lender’s remedies upon default.

Limiting Language in HUD Notes and Mortgages:

Certain versions of the HUD model note provide that "[i]f Borrower defaults by failing to pay in full any monthly payment, then Lender may, except as limited by regulations of the Secretary [of HUD] in the case of payment defaults, require immediate payment in full of the principal balance remaining due and all accrued interest.”  These versions of the HUD note typically state: “[i]n many circumstances regulations issued by the Secretary will limit Lender's rights to require immediate payment in full in the case of payment defaults” and that; “[t]his Note does not authorize acceleration when not permitted by HUD regulations…”

A common provision in HUD model mortgages, captioned "Grounds for Acceleration of Debt[,]" often contains similar language to the model note:  "Lender may, except as limited by regulations issued by the Secretary, in the case of payment defaults, require immediate payment in full . . . " and that "[i]n many circumstances regulations issued by the Secretary will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclosure if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary."

Defenses Provided by Contract:

The HUD regulations do not provide an independent private right of action to a borrower. However, Ohio courts have held that HUD regulations do provide a defense to foreclosure when incorporated into the default sections of the note and mortgage and a lender fails to comply with these sections.[1] These cases have found that it makes no difference whether HUD regulations are meant to govern only the relationship between HUD and mortgagees.[2] Rather, the focus is that  the mortgagee and the mortgagor agreed to limit the mortgagee's rights to accelerate and foreclose based on applicable HUD regulations.[3] Thus, by contract, the lender is required to comply with the HUD regulations governing acceleration and foreclosure, and borrowers are entitled to use any failure to do so as a shield in a subsequent foreclosure case.[4]

Commonly Litigated HUD Regulations and Their Requirements:

Some Ohio courts consider failure to comply with HUD regulations to be an affirmative defense to foreclosure, though the majority of Ohio appellate districts consider HUD regulatory compliance to be a condition precedent to the foreclosure action.[5] The HUD regulations most commonly litigated in Ohio are the HUD face-to-face interview requirement under 24 C.F.R. § 203.604 and the HUD delinquency notice requirement under 24 C.F.R. § 203.602.[6]

Section 203.604 requires that a lender conduct a face-to-face interview with a borrower before three full monthly payments are due and unpaid. This interview is required unless one of the following exemptions applies:

1. The mortgagor does not reside in the mortgaged property.
2. The mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.
3. The mortgagor has clearly indicated that they will not cooperate with an interview.
4. A repayment plan is entered into consistent with the mortgagor’s circumstances.
5. A “reasonable effort” to arrange a meeting is unsuccessful.

A “reasonable effort” is defined as:

1. Minimum of one letter sent to the mortgagor certified by the postal service as having been dispatched.
2. At least one trip to see the mortgagor at the mortgaged property.

Section 203.602 requires a mortgagee give notice to each mortgagor in default. This notice must be on a form supplied by HUD or approved by HUD and be sent by the second month of any delinquency in payments. If an account is reinstated and again becomes delinquent, this notice must be sent to the mortgagor again, except that the mortgagee is not required to send a second delinquency notice to the same mortgagor more often than once each six months. The HUD 4000.1 Handbook currently sets forth what information a HUD delinquency notice is required to provide, along with what Informational Brochure must be enclosed. Currently, the mortgagee must send a HUD “Save Your Home: Tips to Avoid Foreclosure”[7] brochure with a cover letter that includes information concerning:

• Availability of language access services for borrowers with limited English proficiency.
• In regard to the delinquent mortgage: the number of late payments, total amount of any late charges incurred, the month of each late payment, and the original due date of each late payment.
• The mortgagee’s mailing address and toll-free telephone numbers for borrowers needing to contact the mortgagee’s assigned loss mitigation and/or customer assistance personnel.
• A request for current borrower financial information necessary for loss mitigation analysis.
• Toll-free telephone numbers for borrowers needing to contact the mortgagee’s loss mitigation and/or customer assistance personnel; and
• Toll-free telephone numbers for borrowers seeking information on HUD-approved housing counseling agencies, toll-free Federal Information Relay Service number for borrowers who may need to utilize a Telecommunication Device for the Deaf (TDD) to call the housing counseling line.

Consequences of Non-Compliance:

Failure to comply with a condition precedent prior to filing a foreclosure complaint warrants dismissal of the foreclosure case under Ohio law. Following a dismissal for failure to satisfy conditions precedent, a lender may fulfill the HUD regulations and re-file the foreclosure action.  While §203.604 requires that a lender conduct the face-to-face interview or make a reasonable effort to arrange such a meeting “before three full monthly payments are due and unpaid,” Ohio courts have not strictly enforced this requirement against lenders. The courts have held that, under their reading of the regulations, the specific time deadlines of §203.604 are aspirational, whereas the obligation to perform those conditions (i.e., the requirement to actually have a face-to-face meeting, absent one of the stated exceptions), is mandatory.[8]

HUD’s Changes to their Notes and Mortgages Likely to Bring Different Results:

In September 2014, HUD removed from the default provisions of its model mortgage all language which limited a lender’s right to accelerate or foreclose in the case of payment defaults.  In January 2015, HUD also removed this language from the default provisions of its model note. While these changes to the HUD model note and mortgage occurred several years ago, they are “recent” in that case law has not been developed on these changes. Additionally, little public information is available concerning the intent of HUD in making these changes.  It is possible that HUD made these changes because it was never HUD’s intention that they be used by borrowers as a defense to foreclosure. HUD went so far as to add an additional section to its model mortgage wherein borrowers agree they are “not entitled to enforce any agreement between Lender and the Secretary, unless explicitly authorized to do so by Applicable Law.”  The model mortgage defines “Applicable Law” to include all applicable, final, non-appealable judicial opinions.  In Ohio, as explained herein, a borrower’s ability to use HUD regulations in defense of foreclosure is based on the express language of the HUD note and mortgage. Therefore, as HUD has removed the contract language that once served as the platform for HUD regulation defenses, it follows that courts should decide future cases involving these defenses differently.

COVID-19 Partial Waiver of HUD’s Face-to-Face Requirement:

Temporary changes to HUD’s requirement that lenders comply with §203.604 went into effect on March 13, 2020.  On that date, the Federal Housing Administration (“FHA”) published partial waivers of the HUD face-to-face interview requirement in response to public health concerns due to the COVID-19 pandemic. The FHA face-to-face interview waiver allowed mortgagees to utilize alternative methods such as phone interviews, email, and video conferencing services in lieu of conducting actual face-to-face interviews with borrowers. The partial waivers were extended and currently remain effective through December 31, 2022. The waivers provide a counter argument to any borrower defenses alleging the lender failed to comply with a face-to-face interview during the applicable period.

With the passage of time, the number of HUD notes and mortgages containing language limiting a lender by the HUD regulations will decrease. Conversely, loans with the current model note and mortgage will increase, and most likely change the litigation landscape regarding foreclosure of HUD loans. As HUD has changed language in their notes and mortgages in the past, so are they likely to change it in the future. Accordingly, lenders (and their counsel) who remain alert to the specific language contained in the default provisions of HUD notes and mortgages will be well prepared to address future HUD regulation defenses.

[1] BAC Home Loans Servicing v. Taylor, 2013-Ohio-355, 986 N.E.2d 1028, ¶ 19 (9th Dist.)

[2] Id.

[3] Id.

[4] Id.

[5] U. S. Bank, N.A. v. Detweiler, 191 Ohio App.3d 464, 2010-Ohio-6408, 946 N.E.2d 777, ¶ 53 (5th Dist.)

[6] Id..

[7] HUD-2008-5-FHA

[8] PNC Mtge. v. Garland, 7th Dist. Mahoning No. 12 MA 222, 2014-Ohio-1173, ¶ 30

Copyright @2022

USFN Summer Report

By James F. Lewin, Esq.

The Mortgage Law Firm, PLC *

USFN Member (AZ, CA, HI, OK, OR, WA)

A recent California Supreme Court ruling resolves an issue which has divided the lower appellate divisions and federal district courts in California for almost a decade. On March 7, 2022, in Sheen v. Wells Fargo Bank, N.A., 12 Cal. 5th 905, 2022 WL 664722 (Cal. 2022), the California Supreme Court expressly disapproved four lower appellate court decisions to the contrary and held that, when a borrower requests a loan modification, a lender owes no tort duty under general negligence principles to “process, review and respond carefully and completely to” the borrower’s application.

In Sheen, the borrower, under a second deed of trust, sued Wells Fargo Bank, N.A. (“Wells Fargo”) for negligence. Several years after purchasing his home (which purchase was secured by a first trust deed), the borrower used the home as collateral for two junior loans he took from Wells Fargo secured by second and third trust deeds. The borrower later suffered financial setbacks and missed payments on these junior loans. He submitted applications to Wells Fargo to modify the loans, but Wells Fargo did not respond. Instead, it sent letters informing him of the actions it might take because of the delinquency of his accounts. The letters did not specifically mention foreclosure. The borrower alleged that, because Wells Fargo did not provide him with a written determination regarding his eligibility for modification of the loans prior to sending him the letters, he believed the letters meant the loans had been modified such that they had become unsecured loans and his house could never be sold at a foreclosure auction, even if said loans were in default. Eventually, Wells Fargo sold the borrower’s second trust deed loan. In 2014, four years later, the new owner of the second trust deed loan foreclosed, and the borrower sued Wells Fargo.

Specifically, the borrower asserted a negligence claim against Wells Fargo, alleging that the bank owed the borrower a duty of care to process, review and respond carefully and completely to the loan modification applications he submitted.  The borrower alleged that Wells Fargo breached this duty, causing him to “forgo alternatives to foreclosure,” and hence Wells Fargo should be liable for monetary damages relating to the loss, including the value of the home, the hotel and storage costs he incurred when he had to vacate the property, and the damage to his credit rating. Wells Fargo filed a demurrer in the trial court, arguing that it owed the borrower no such duty. The court of appeal affirmed the trial court’s decision to sustain the demurrer, concluding that the relevant authorities “decisively weigh against extending tort duties into mortgage modification negotiations,” but noted “the issue of whether a tort duty exists for mortgage modification has divided California courts for years.”  The borrower appealed to the Supreme Court.

No Duty Pursuant to Statute

Initially, the Supreme Court (“Court”) noted that the borrower failed to identify any statute or regulation that required Wells Fargo to treat his loan modification applications with due care.  California’s Homeowner Bill of Rights (“HOBR”) and federal law apply only to first lien mortgage modifications, and California’s general negligence statute, Civil Code § 1714, does not impose a general duty to avoid purely economic losses.

No Duty Under Common Law: The Economic Loss Rule

Next, the Court found that because the borrower’s claim arose from, and was not independent of, the mortgage contract, it was barred by the “economic loss rule” which provides that there is no recovery in tort for negligently inflicted “purely economic losses,” meaning financial harm unaccompanied by physical or property damage.

“Plaintiff and Wells Fargo did not agree that should plaintiff default and attempt to renegotiate his loan by submitting a modification application, Wells Fargo would “process, review and respond carefully and completely to the ... applications Plaintiff submitted,” and could foreclose only after discharging such obligations. Sheen, 2022 WL 664722 at *7. To impose a tort duty in such circumstances would go further than creating obligations unnegotiated or agreed to by the parties; it would dictate terms that are contrary to the parties’ allocation of rights and responsibilities. The proposed duty would impede Wells Fargo’s right to foreclose by permitting foreclosure only after Wells Fargo discharges a tort duty to “process, review and respond carefully and completely to [a borrower’s] loan modification application[s].”

The Court further noted that California generally follows the judicially created economic loss rule within the lender-borrower context citing the “well-established principle of state law” from Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096, 283 Cal.Rptr. 53: “A financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” Moreover, citing cases from other jurisdictions, the Court noted that the application of the economic loss rule was consistent with well-reasoned decisions from other federal and state courts, including the views of other state supreme courts that have addressed the issue.

The Court further concluded no duty could be imposed through the use of the factors articulated in the Biakanja v. Irving case. See Biakania v. Irving, 49 Cal. 2d 647, 650 (Cal. 1958). Biakanja makes clear that its multifactor test finds application only when the plaintiff is a “third person not in privity” with the defendant. “Biakanja does not apply when the plaintiff and defendant are in contractual privity for purposes of the suit at hand.”

Finally, the Court distinguished the borrower’s claim from those in which tort recovery has been allowed despite the existence of a contract between the parties such as “insurance contracts” and “professional services contracts.”

Legislative Role

Deferring to the expertise of the legislature, “In sum, the Legislature is better situated than we are to tackle the “significant policy judgments affecting social policies and commercial relationships implicated in this case,”  the Court expressly declined the borrower’s invitation to

become the first state high court to create a judicial rule imposing a duty on lenders to exercise due care in processing, reviewing and responding to loan modification applications.

Bottom Line

Sheen is not a panacea for all loan modification application claims. The Court expressly acknowledged and left the door open for possible causes of action against servicers for negligent misrepresentation and promissory estoppel in the loan modification context. However, the decision may assist to reduce defense litigation costs for servicers of California loans where borrowers attempt to rely solely on a theory of general negligence when they are unable to plead or prove statutory violations of the HOBR or federal law.

@Copyright 2022

April e-Update

by RobertWichowski, Esq.

Bendett &McHugh, PC*

USFN Member (CT, MA, ME, NH, RI, VT)

The Connecticut Supreme Court in JP Morgan Chase v. Virgulak (341 Conn 750 (2022)) further clarified Connecticut’s stance on the reformation of mortgages when attempting to foreclose.

The subject mortgage was given by Theresa Virgulak, securing a note given by Robert Virgulak. The note was not signed by Theresa, and the mortgage was not signed by Robert. Robert obtained a Chapter 7 discharge of the debt through bankruptcy, and therefore, was no longer obligated on the note. Plaintiff brought the action which contained three counts: 1) it sought reformation of the mortgage to order that the mortgage secured Robert’s indebtedness; 2) it sought to have the court order that Theresa was unjustly enriched in that she benefited from the loan, and; 3) it sought foreclosure of the mortgage, as reformed.  After a one-day trial, the trial court entered judgment in favor of Theresa holding that plaintiff failed to sustain its burden of proof that it was entitled to have the mortgage reformed to include Robert, and that it failed to prove that Theresa was unjustly enriched by the loan, and therefore, the claim of foreclosure necessarily failed.

The trial court found that Robert signed the note, but the note was not signed by Theresa. The court also found that Theresa signed the mortgage which recited that it was given to secure the $533,000 note. The court further found that Theresa never signed a guarantee of the debt. Although the court held that many of the documents were signed by Theresa, including the HUD-1 settlement statement, the Truth in Lending Statement, and the Notice of Right to Cancel, the note was not signed by her. The trial court also held that even though Theresa testified that the mortgage was used to pay a prior mortgage, she did not receive any of the funds, a portion of which were also used to pay off Robert’s unsecured debt and a portion of which were used to renovate the subject property in which she lived. The record was silent as to any understanding that plaintiff may have had regarding Theresa’s responsibility under the loan. On that basis, the court found that plaintiff was not entitled to the remedy of reformation of the mortgage. Notably, the plaintiff conceded that there was no evidence that required the trial court to find that Theresa intended that the mortgage secure Robert’s debt.

The Supreme Court held there was no sufficient evidence presented and that plaintiff fell short of meeting the very high burden required to prove that there was a mutual mistake of the parties, which would require reformation of the mortgage to conform with the understanding of the parties. In making its holding, the Court reiterated its stance that reforming written instruments is something that should be done cautiously. Because there was a discharge of the debt secured by the mortgage, Theresa did not guarantee the debt, and there was insufficient evidence that she intended to, the court ruled that the documents should not be reformed. Accordingly, given that there was no debt secured by the mortgage due to the bankruptcy discharge, plaintiff could not foreclose on Theresa’s interest in the property.

This case reveals the high burden that must be met in Connecticut for those that seek to foreclose on mortgage documents where the foreclosing plaintiff is seeking to “fix” defects in the mortgage documents by adding parties or additional obligations.

@Copyright 2022

USFN Report - Spring 2022