Law Blog

FORECLOSURE DEFENSE: Bank Reduces Principal to Avoid Exposure

We are still waiting for the day a judge or government official orders a bank to write down a home loan.  It may never happen.  However, there may be other ways to get the same result through foreclosure defense.  In this case,[1] the bank voluntarily came out of pocket to pay down our client´s home loan.  Here is how it happened.


Trial Loan Modification

 A lot of people of been double-crossed by their lender[2] through a trial loan modification.  Things have improved recently, but there was a period of time in which it was very common for lenders to offer a trial modification, accept several months of payments[3] and then renege by (i) denying the modification, (ii) sending a permanent modification with much worse terms, and/or (iii) foreclosing after the homeowner gets tired of making “good-faith” payments with no sign of a permanent modification.

For homeowners who have been burned with a trial modification, my firm developed a special foreclosure defense.  We argue a trial modification constitutes a binding agreement such that the lender is estopped from foreclosing.

The argument fell on deaf ears a few times, and then we got the perfect client.  He had saved all documents and correspondences, he paid for the better part of a year without getting the permanent modification, and he was eloquent on the stand.  We won.[4]

Now, whenever this kind of trial modification shenanigan is part of the defense, lenders think twice about trying the case.

Washington, D.C. Case

My firm’s practice is mostly in Florida, but the facts of this DC case were egregious, so we came on-board.  The homeowner not only made all the trial modification payments, but she actually executed a permanent modification agreement and made 13 months of payments before the lender decided to renege and start foreclosure.  Crazy, right?

Since my firm had dealt with the situation previously, we already had well-developed arguments and supporting case law.  The phone rang shortly after we filed our amended answer with affirmative defenses.

In light of our foreclosure defenses, the bank was faced with a difficult choice.  It could go forward with a case that it might very well lose–thereby creating unfavorable foreclosure case law and bad press in the DC area–or it could cut a deal with the homeowner.

Actually, there is a third choice, which tends to be the path of least resistance in these cases.  The lender could resolve the whole problem by doing a brand new loan modification.  That is where this case gets interesting.

After the foreclosure began, our client applied for a brand new loan modification.  In this case, the bank is just a servicing company.  The note is actually owned by FannieMae (i.e. the government).  So, my client sent the application directly to FannieMae.

At mediation, the bank started the proceedings by announcing verbally–nothing in writing–that FannieMae had denied the application due to our client’s financial information.  First, why is this servicing company making the announcement at mediation?  Gamesmanship, maybe?  The denial should come from FannieMae, and it should be in writing.   Second, our client is an educator and her financial information has not changed at all since the last modification.  Why would she qualify previously but not now?

Despite the awkward start, the bank put an aggressive offer on the table.  Their analysis focused on the past-due amount accrued since the homeowner stopped paying[5] on the previously modification–which was about $70,000.  The bank offered to cover more than half the amount and reinstate the previous modification if our client could pay the difference as a lump-sum.  I have never seen this before, and the implications are intriguing.

The bank, acting strictly in the capacity of a servicing company, was offering to pretend the prior loan modification was never dishonored.

The bank was willing to pay most of the past due amount out of its own pocket, apply the payment to our client’s loan, and then just pretend the foreclosure had never happened.

That is essentially a principal reduction, and I had to tell our client–if she were able to swing the lump sum payment–it would not be a bad deal.  We adjourned, promising to follow up before the end of the week.

Things got even more interesting after the mediation when we followed up directly with FannieMae.  Apparently, FannieMae had no idea any of this was going on.  That solidified my theory.

We rejected the bank’s settlement offer, claiming the lump sum payment was a deal-breaker.  We said the most our client could pay would be $5,000.  The bank took the deal.

I do not pretend to know exactly what goes on behind the curtain, but I will tell you what I deduce from all of this.  To put it diplomatically, the bank was not being altogether forthcoming with FannieMae.  I do not know if the bank is guilty of foreclosure fraud or misconduct of any kind, but I do know it paid $65,000 out of its own pocket to escape discovery.

Specifically, it seems the bank paid in order to (i) avoid FannieMae knowing the bank had dishonored our client’s permanent loan modification, (ii) avoid FannieMae knowing about the resulting costly foreclosure litigation, and (iii) prevent the whole story from reaching the judge and/or the media.


Moral of the Story

Be on the lookout for dishonored loan modifications.  The thousands of homeowners who have been through that experience may have incredible leverage.

~ Jeff Harrington, Esq.

Foreclosure Defense Attorney

saint giving blessing

[1] CitiMortgage, Inc. v. Alice M. Thomas et al., 2013 CA 008183 R(RP), Washington, D.C.

[2] Or, servicing company.

[3] Well beyond the 3-month trial plan period.

[4] Wachovia v. Posti (Case No. 502009CA024722XXXXMB), in Palm Beach County, Florida.  Now on appeal with the 4th DCA.

[5] Remember, she stopped paying because the bank said the modification was not valid and started foreclosure proceedings.