Judge Rules Against Bank In Mortgage Modification Suit
A recent ruling by a California appeals court clears the way for fraud charges against a lender that promised a loan modification but then foreclosed on the borrower.
The ruling throws into question the legality of hundreds of thousands of foreclosures.
Not only was the ruling a frontal assault on the empty promises made by servicers and banks, the case highlighted some despicable tactics often employed to force foreclosures.
Claudia Aceves, who originally sued U.S. Bank, NA in the Los Angeles County Superior Court, had taken out an $845,000 mortgage with Option One Mortgage Corporation. Option One later assigned the loan over to U.S. Bank.
The interest on Aceves’ adjustable rate note ratcheted up two years after it was entered into. By January 2008 she was falling behind on her payments. Shortly after March 26, 2008 when the loan’s servicer recorded a “Notice of Default and Election to Sell Under Deed of Trust,” Aceves filed for bankruptcy protection under chapter 7 of the Bankruptcy Code.
The bankruptcy filing imposed an automatic stay on the foreclosure proceedings.
After being offered financial help from her husband, Aceves converted her bankruptcy case from a chapter 7 to a chapter 13 case. Chapter 7, entitled “Liquidation,” would allow Aceves to discharge her debt on the home but not allow her to keep it. Chapter 13, entitled “Adjustment of Debts of an Individual with Regular Income,” has protections for homeowners that allows them to reinstate loan payments, pay arrearages, avoid foreclosure and keep their home.
U.S. Bank, upon learning of the original bankruptcy filing, filed a motion to lift the stay in order to execute a nonjudicial foreclosure and take the house back.
What happens next is indicative of the underhandedness of many servicers and banks.
Aceves’ bankruptcy attorney gets a letter from counsel to the loan’s servicer (American Home Mortgage Servicing, Inc.) that asks for permission to talk directly to Aceves to “explore Loss Mitigation possibilities.” Aceves calls the servicer’s attorney because she wants a loan modification, which they are promising. But they tell her they can’t do anything or talk to her until their motion to lift the bankruptcy stay is granted.
So, Aceves doesn’t oppose the motion to lift the stay and further decides not to file the chapter 13 bankruptcy. All in the hopes that a modification would be negotiated.
On December 4, 2008 the stay is lifted. And, unbeknownst to Aceves, on December 9, 2008 U.S. Bank schedules the home for public auction one month later on January 9, 2009.
On December 10, 2008 Aceves sends in documents to American Home aiming to modify and reinstate the loan. Then on December 23, 2008 the servicer tells Aceves a “negotiator” will contact her on or before January 13, 2009.
Too bad for Aceves January 13, 2009 is going to be four days after her home is sold at auction. Which it is, with none other than U.S. Bank as the buyer.
But just to cover its promise to modify the loan, one day before the home is to be sold at auction the negotiator for American Home presents a unilateral offer to raise the loan balance from the original $845,000 to $965,926.22 and make the new monthly payments $7,200 as opposed to the original monthly payment amount of $4,857.09.
Aceves told them where to go.
She lost her home and sued. She lost when the Superior Court found that the defendants had met their obligations. The three-judge panel Appeals Court disagreed in its January 27, 2010 ruling.
The crux of the ruling, which in part relied on a decision in a previous case (Garcia v. World Savings, FSB) determined that “To be enforceable, a promise need only be ”’definite enough that a court can determine the scope of the duty.”’
Further illuminating its stance the Court said the point is, “simply whether U.S. Bank made and kept a promise to negotiate with Aceves, not whether the bank promised to make a loan, or more precisely, to modify a loan” is what matters.
As far as the servicer’s offer of a modification, the Appeals Court found that the promise to negotiate is “not based on a promise to make a unilateral offer but on a promise to negotiate in an attempt to reach a mutually agreeable loan modification.”
With all the unkept promises by banks and servicers to negotiate loan modifications that were never entertained, new litigation on top of all the foreclosure cases already being pursued is bound to cloud the future of real estate for the foreseeable future.