When a mortgage is insured or guaranteed by the Federal Housing Administration (FHA), an agency overseen by the Department of Housing and Urban Development (HUD), servicing companies must follow HUD servicing guidelines. Some of these regulations involve the foreclosure process on a such a property, and failure to follow the guidelines may be used by homeowners to defend their foreclosure in court.
The following is a list and brief description of some of the court cases that have involved HUD and FHA loans that were improperly serviced, ones that were decided in favor of homeowners, and ones in which borrowers facing foreclosure were denied claims. Knowing some of the background of these cases may help homeowners decide if their loan is being properly serviced, or if it is worth their time to apply for an FHA loan.
One of the requirements to foreclose on a HUD loan is that the servicer must attempt to hold a face-to-face meeting with the homeowners before three payments have been missed. In Banker’s Life v. Denton, homeowners raised the failure to hold the meeting as a defense against foreclosure. Also, the servicer did not send the request for the meeting via certified mail or attempt to visit the borrowers at the property. The court found for the owners in this case.
Notices of default must also be sent to delinquent borrowers in accordance with the HUD regulations. In Federal National Mortgage Ass’n v. Moore, homeowners raised the argument that the lender had not sent out a notice of default that was in compliance with HUD’s regulations. The notice sent, according to the borrowers, was not valid because it was on a form that was not “approved by the Secretary” of HUD and was not sent in a timely manner as the regulations require.
Since these two cases had been decided, HUD’s regulations have changed, but the language of the preforeclosure servicing, including notice requirements and review guidelines, have remained the same. In fact, another court case, Mellon Mortgage Co. v. Larios, decided that the requirements are the same now as they were before the statue was revised. Lenders failing to comply with these guidelines can still be used as a defense against foreclosure.
The face-to-face meeting with homeowners is also an important aspect of foreclosing on a mortgage backed by HUD. The minimum requirement to comply with this regulation is visiting the borrowers at home and sending at least one letter via certified mail. The issue came up in Washington Mutual Bank v. Mahaffey, and the lender was denied summary judgment because it had not sent the letter, even though someone had been sent to the property to visit the homeowners.
Of course, this is not to imply that every homeowner will win a case and successfully defend against foreclosure. Courts have also ruled against borrowers who raised issues regarding servicing. In Miller v. G.E. Capital Mortgage Servs., Inc., the court ruled that private citizens have no right to sue for violations of HUD’s loss mitigation provisions. The law, according to the court, is meant to focus on regulation of lenders — not creating rights for borrowers facing foreclosure.
Also, courts have found that the language included in deeds of trust insured by the FHA are not negotiated contractual terms. Instead, they are imposed by the FHA on both the borrowers and lenders, and the borrowers may not raise defenses in relation to breach of contract if lenders fail to follow the FHA guidelines. This case was decided in Wells Fargo Home Mortgage, Inc. v. Neal. If the homeowners and mortgage company can not bargain for that aspect of the contract, there can be no breach of the contract.
Homeowners, their loss mitigation professionals, and their foreclosure attorneys should become aware of some of the issues involved with HUD loans if they have a mortgage insured by the FHA or are considering taking advantage of the new government programs. While some protections may be offered to borrowers, others seem to be taken away by the courts if there is a question about a foreclosure. Knowing the issues through previously-decided court cases can help educate borrowers.