Thursday, February 25, 2016

5th Circuit: Last Minute Approval for Mortgage Modification Does Not Excuse Mortgage Arrears

Posted by Trey Wilson San Antonio Texas Real Estate Attorney, Trey Wilson Real Estate Lawyer in San Antonio 

Last Minute Approval for Mortgage Modification Does Not Excuse Couple from Mortgage Arrears, Says 5th Circuit: Evidence insufficient to show a couple was damaged by the lengthy application process

In 2008, Ronald and Jennifer Joyce purchased a home with a mortgage, serviced by Wells Fargo (“Wells”), and secured with a deed of trust.  Two years later, the couple contacted Wells to discuss payment options because they were having trouble making their mortgage payments.  At that time, the homeowners submitted an application through Wells for a mortgage loan modification program under the federal Home Affordable Modification Program (“HAMP”)

Federal Home Affordable Modification Program (“HAMP”) Was Their Only Hope

HAMP was a program created under President Obama’s Administration to help homeowners avoid foreclosure and to stabilize the nation's housing market.  Under HAMP, eligible homeowners could lower monthly mortgage payments and get into more stable loans at present-day interest rates.  12 U.S.C. §§ 5219, 1715z-23.  HAMP also provided a way out of a home loan that avoids foreclosure altogether for homeowners who were unable maintain their mortgage for the long term.  Making Home Affordable.  See (accessed Feb 16, 2016).  According to the Lawrences, participation in the HAMP program was the only way to avoid foreclosure.

Bank Denied HAMP Modification, Sites Texas Constitution

Wells, however, denied the HAMP application because the deed of trust for the home was secured with a Texas Cash Out Loan.  According to Wells, the terms of Texas Cash Out Loans, governed by Article XVI, Section 50(a)(6) of the Texas Constitution, may not be modified and are not eligible for HAMP modification.  Wells did, however, create a payment plan, but the Lawrences were not able to keep up with the payments and completely defaulted in June 2011.  

Foreclosure Looming on the Horizon

            Wells started foreclosure proceedings while trying to work with the Lawrences to avoid foreclosure by rescheduling the foreclosure sale four times.  In the meantime, the Lawrences applied several times for HAMP modification.  In a surprising turn of events at the 11th hour, Wells agreed that the mortgage was eligible for modification under the federal program, but that the couple would have to hurry because the foreclosure had been rescheduled for December 6.  The Lawrences applied on November 14, but their application remained incomplete until December 2.  Wells informed the couple that the bank was not able to fully review all of the application materials and that the December 6 foreclosure would go on as planned.  The Lawrences remained in the home until 2013 without making any further payments.     

The Lawrences Took Wells Fargo to Court

            The Lawrences sued Wells for fraud and fraudulent-inducement in state court, and Wells removed the dispute to federal court and moved for summary judgment before a district court via a Magistrate Judge’s review.  The Magistrate concluded that the Lawrences raised a genuine issue as to whether their eligibility for a HAMP modification had been misrepresented to them over the months leading up to the eventual approval of their application.   Accordingly, the Magistrate gave his recommendations to the district court.  However, the district court granted summary judgment to Wells, citing insufficient evidence to show damages for fraud and fraudulent-inducement.

The Lawrences have appealed to the Fifth Circuit Court of Appeals, asserting common-law fraud and fraudulent inducement.  Specifically, they argue that the district court ignored evidence of their out-of-pocket damages when communicating with Wells via mail; that the district court ignored evidence that the bank’s misrepresentations denied them the opportunity to sell their home to mitigate their damages, and lastly, that the arrears that accumulated on the mortgage are damages.  The Lawrences have taken the position that the bank lead them on and caused the missed payments, thus increasing the monthly payments under the repayment agreement.  Therefore, the big issue before the Fifth Circuit was whether Wells was liable for fraud or fraudulent-inducement from 2010 to 2011 when Wells denied HAMP applications, but then allowed the HAMP modification less than thirty days before the foreclosure sale. 

Definition of Fraud Under Texas Law

            Under Texas law, fraud occurs when a (1) material misrepresentation is made that is (2) false; (3) at the time the representation is made…[and]; (4) the speaker makes the representation with the intent that other party should act upon it; [that the] (5) the party acted in reliance on the representation; and (6) as a result, the party suffered an injury.  Italian Cowboy Partners, Ltd. V. Prudential Ins. Co. of Am., 341S.W.3d 323, 337 (Tex. 2011).

The Fifth Circuit Weighed In

          Here, the Fifth Circuit affirmed the district court’s findings.  First, the Court said the Lawrences did not offer evidence showing damages as a result of corresponding with Wells.  While postage and time spent filling out the applications may be damages, the couple did not offer receipts from the post office, or a log of their time away from work.  “Mere assertion of injury, unsupported by evidence, is insufficient to survive summary judgment.”  Likensv. Hartford Life & Accident Ins. Co., 688 F.3d 197, 202.

            Secondly, the Court said the Lawrences offered no evidence to demonstrate that they had planned to sell their home.  They did not demonstrate that they had hired a realtor, cleaned the home or made improvements in anticipation of selling, nor did they list their home for sale.  “Without some evidence that [the bank’s] misrepresentations denied them the chance to actually sell, claim[s] that they would have sold are “speculation” and that is not enough to oppose summary judgment.  Id. 

            Lastly, the Court explained that while the new payment agreement did increase the monthly payments, it did not alter the total obligation under the mortgage.  As a result, “the Lawrences may not claim the arrears as damages or injury, because those amounts were already owed under the original mortgage.”  In re Swift, 129 F.3d 792,799 (5th Cir. 1997). 

The Court of Appeals affirmed the district court’s judgment, holding that there is insufficient evidence to show that the Lawrences suffered damages because the claimed damages were either not true damages, were too speculative or were merely unsubstantiated assertions. 

Collecting and Preserving Evidence is Critical

Preserving and showing evidence is critical to winning in court.  Notice that the Fifth Circuit never actually commented as to whether it believed that Wells committed fraud or fraudulent inducement, or acted in a gray area.  Even though the Magistrate at the district court found the Lawrences to have raised a genuine issue, the buck stopped at the lack of solid evidence on appeal.   

This article is intended for educational and informational purposes only and does not substitute legal advice.  If you are in need of real estate or property legal counsel, please contact my office at (210) 223-4100.

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