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From Banking and Finance Law Daily, December 31, 2013

Borrowers could not assert servicer’s agreement with Treasury Department in modification dispute

By Richard A. Roth, J.D.

Mortgage borrowers attempting to stop their loan servicer from foreclosing on their home could not rely on the Servicer Participation Agreement between the servicer and Fannie Mae (the Treasury Department’s agent), the U.S. Court of Appeals for the First Circuit has decided. The borrowers were not third-party beneficiaries of the SPA, and the agreement did not impose on the servicer any duties toward the borrowers, the court determined (MacKenzie v. Flagstar Bank, FSB, Dec. 30, 2013, Stahl, Circuit Judge).

According to the court, the borrowers’ mortgage was given in 2007 to Mortgage Electronic Registration Systems, Inc., as the nominee for Bankstreet Mortgage, LLC, the lender. The note soon was assigned to Flagstar Bank, FSB. Flagstar had signed an SPA with Fannie Mae under the Home Affordable Modification Program, which required the bank to consider borrowers for loan modifications and offer other foreclosure prevention services under the HAMP guidelines.

In 2009, the borrowers and Flagstar agreed to a loan modification that reduced the loan’s interest rate, extended its term, and added some unpaid interest to the principal. The borrowers’ request for a second modification was denied in 2011, after which they sought a modification under HAMP. While this effort was ongoing, MERS assigned the mortgage to Flagstar, and the bank’s attorneys took the first steps toward foreclosure.

Flagstar then began dual-tracking the mortgage, simultaneously considering the borrowers for a HAMP modification and moving toward foreclosure. The borrowers were offered a modification, which the court inferred they rejected. They sought an injunction against the foreclosure in Massachusetts state court and attempted to rescind the 2009 modification under state law.

Flagstar removed the suit to the federal district court. After that court dismissed the suit, the borrowers appealed.

Claims on appeal. The borrowers abandoned six of their original theories when they filed their appeal. However, they continued to assert claims for:

  • breach of the implied covenant of good faith and fair dealing;

  • violation of Massachusetts laws on consumer credit disclosure and rescission of the 2009 modification;

  • negligence;

  • promissory estoppel; and

  • invalidity of the mortgage assignment.

Ultimately, all of their theories failed.

Covenant of good faith. The court began its opinion by expressing some confusion over whether the borrowers claimed that Flagstar had breached a covenant of good faith and fair dealing that arose from the SPA or that arose from the modified mortgage. In the end, however, it did not matter.

There was no covenant in favor of the borrowers under the SPA because they were not third-party beneficiaries of the agreement, the court said. A government contract does not create third-party beneficiaries unless it includes a clear intent to do so. The SPA, on the other hand, expressed a clear intent to limit enforcement rights to the servicers and the government.

Mortgagees do have a duty of good faith toward borrowers under Massachusetts law, the court then said. However, that duty required the mortgagee to protect the interest of the borrowers during a foreclosure. There was nothing in the mortgage, either initially or as modified, that required the mortgagee to consider a modification before beginning a foreclosure.

Disclosures and rescission. State law requires that borrowers be given specified disclosures when they are refinancing a mortgage and permits them to rescind the transaction in the absence of those disclosures, the court noted. The borrowers rested their rescission theory on that state law.

The borrowers’ problem, though, was that the 2009 loan modification was not a refinancing under state law, the court determined. A transaction that did no more than change the loan’s annual percentage rate and payment schedule was not considered to be a refinancing.

The court rejected the borrowers’ efforts to expand the results of the modification. There was no new lender, the court said, because Flagstar was the assignee of the original lender and thus was in the same position as the original lender. Capitalizing the unpaid interest did not change the principal amount, the court added; the amount owed remained the same.

Negligence. To prevail on their negligence claim, the borrowers were required to establish that Flagstar breached some legal duty it owed to them, the court said. Since the borrowers were not beneficiaries of the SPA, no such duty existed. Even if Flagstar had violated HAMP the borrowers had no negligence cause of action because HAMP did not create a duty between them and Flagstar.

Promissory estoppel. The borrowers’ promissory estoppel claim required them to articulate a promise made by Flagstar on which they relied to their detriment. They had not done so, the court said.

The borrowers had not described any specific promise by Flagstar. Even if they were permitted to rely on Flagstar’s general course of conduct and implicit promise to modify the loan, the fact was that a HAMP modification had been offered. The borrowers could not show how they would have fared any better had Flagstar acted differently, according to the court.

Validity of assignment. The borrowers’ last argument was that MERS had no ability to assign the mortgage to Flagstar, so Flagstar had no legal authority to foreclose. According to the borrowers, the initial mortgage had been securitized and the resulting trust later dissolved. This meant that MERS had nothing it could assign to Flagstar.

Under such a situation, the borrowers would have standing to challenge the assignment of the mortgage, the court agreed. However, the factual assertions that were relevant to this legal theory all were included in theories of recovery the borrowers had abandoned on appeal. Those factual claims were not relevant to the theories on which the borrowers had based their appeal.

The case is No. 13-1236.

Attorneys: Brian J. Wasser (Law Offices of Brian Wasser) for Lynne MacKenzie. Carol E. Kamm (Bulkley Richardson & Gelinas LLP) for Flagstar Bank.

Companies: Bankstreet Mortgage, LLC; Fannie Mae; Flagstar Bank, FSB; Harmon Law Offices, P.C.; Mortgage Electronic Registration Systems, Inc.

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