This Is What Bad Faith Looks Like

Silas Barnaby

A New York judge ruled in Federal National Mortgage Assoc. v. Singer, 2015 NY Slip Op. 51038(U) (July 15, 2015 Sup. Ct., New York County) (Moulton, J.) (unpublished opinion), that two lenders will forfeit more $100,000 in interest payments on two mortgages because they did not act in good faith in negotiating a mortgage modification, as required by New York law. There is a lot of choice language in the opinion, but it is useful to read the judge’s summary of what the borrowers went through in trying to get the modification.

The judge disagreed with the lenders’ “positive assessment of the negotiations” as it was “belied” by the facts:

Fannie Mae delayed filing of Action No. 1 (filed on June 14, 2011) 17 and 1/2 months after the date of default. Counsel then delayed filing the RJI [Request for Judicial Intervention] for another three months after the answer was filed. The first settlement conference, scheduled on March 14, 2012, had to be rescheduled to May 2, 2012 due to Fannie Mae’s non-appearance, a one and one-half month delay. It took Fannie Mae and its counsel another five and 1/2 months to provide an explanation for why the two mortgages could not be merged or consolidated, and only after wasting time at two conferences in June and July attended by attorneys without knowledge of the case or settlement authority and only after my court attorney probed for answers. Thereafter, the Singers submitted the requested documentation for a loan modification of the 400-Mtge., despite confusing and conflicting requests by the Rosicki firm, by August 3, 2012. When that application became “stale,” the court directed the Singers to update the information and, finally, after another two-month delay, Seterus offered the Singers a trial modification plan on or about October 11, 2012. When the Singers received the permanent loan modification papers from Seterus in January 2013, they objected to the payment of $63,632.21 in accrued interest and the $5,605.23 accrued interest. It took many months for Seterus to admit its mistake on the escrow deficiency, and only after much prodding by the court for status updates. Seterus did not offer the Singers a new loan modification agreement until the very end of October 2013 — a whopping nine-month delay. Finally, it took Fannie Mae’s counsel another five months to reject the Singers’ January 1, 2014 counteroffer to pay $18,000 of the accrued interest.

Accordingly, the court holds that Fannie Mae and/or its counsel have acted in bad faith and have unreasonably delayed a resolution of this foreclosure action. As a result, interest should be tolled on the note and mortgage in the amount over and above 2% annually, for the period from September 30, 2011 (one month after Singers’ filing of their answer in Action No. 1) through the date of this Decision and Order. (10-11, footnotes omitted)

It is hard to really get how crazy the modification process can be in the abstract, so sitting with facts like these is a useful exercise. And this seems like the right result on these facts.

I have blogged before about the Kafkaesque struggles that borrowers face. Some deny that lenders behave this badly in general but the cases and the large scale settlements “belie” this too. What will it take to give borrowers a consistent and reasonable experience with mortgage modifications?

Casting Light on the Shadow Docket

New York Attorney General Schneiderman’s lawsuit against various HSBC entities, New York v. HSBC Bank USA et al., No. 2013-1660 (May 31, 2013), alleges that HSBC entities have sent hundreds or thousands of NY households into legal limbo because they did not comply with procedural requirements applicable to foreclosure.  The complaint outlines these procedural requirements as follows (warning:  technical details to follow):

13. At lease 90 days prior to filing a foreclosure action, the lender must send a homeowner a notice that (i) states the homeowner is at risk of losing the home, (ii) sets forth the amount owed and (iii) provides a list of approved housing counseling agencies that may provide free or low-cost counseling.  [RPAPL section 1304(1).]  The intent of RPAPL, section 1304(1) is to prevent the necessity of a foreclosure action the first place.

easy installment loans

14. It the matter is not resolved within 90 days, the lender may file a foreclosure action.  [RPAPL section 1304(1).]

15. In order to help homeowners avoid losing their home whenever possible, New York State law, CPLR section 3408(a), provides for the court to schedule a mandatory settlement conference for the homeowner and lender.

16. The express purpose of the settlement conference is “to determin[e] whether the parties can reach a mutually agreeable resolution to help the [homeowner] avoid losing his or her home, and evaluat[e] the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to, and for whatever other purposes the court deems appropriate.” [CPLR section 3408(a).]

17. The lender or its counsel must appear a the mandatory settlement conference. If counsel appears, the lawyer must have authority to dispose of the case. CPLR section 3408(c) (emphasis added). The parties are required to negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, that will enable the homeowner to stay in his or her home on more affordable terms.

18. Recognizing that the success of a settlement conference will be enhanced if it is heldf as soon as possible before the arrears, interest, fees and penalties owed by the homeowner mount, CPLR section 3408(a) mandates that the court must hold a settlement conference within sixty days after the date that the lender files proof of service.

19.  However, proof of service is filed with the County Clerk and not the Uniform Court System, which is responsible for scheduling the mandatory settlement conference.  Because the Unified Court System is not aware that a foreclosure action has been commenced until a Request for Judicial Intervention (“RJI”) has been filed, New York Court rules regarding residential foreclosures and mandatory settlement conferences, 22 NYCR section 202.12-a(b)(1), expressly require that the lender file an RJI with the proof of service.

20. Filing the RJI with the proof of service furthers the New York State policy of preventing the loss of homes to foreclosures in two important respects.

21. First, without filing the RJI with the proof of service, the Unified Court System cannot comply with its legal obligation to hold the mandatory settlement conference within sixty days after the date when proof of service is filed.

22. Second, the court sends the RJI, or the homeowner’s name, address and telephone number to an approved housing agency “for the purpose of that agency making the homeowner aware of housing counseling and foreclosure prevention services and options available to them . . .” CPLR section 3408(d). The obvious intent of this requirement is to provide homeowners with the tools and resources that can help them avoid losing their homes. (3-5)

These cases are what is now known as the “shadow docket” because they are in a litigation limbo. it seems that HSBC will have a hard time arguing with the AG’s identification of hundreds of such cases in the four of NY’s 62 counties that it investigated. But it is unclear whether courts will be willing to impose the penalties requested by the AG, including “waiving all accrued interest charges, fees and penalties that accrued, or will accrue, beginning 60 days after the filing of proof of service on the homeowner.” (11) While the failure to hold the settlement conference most certainly has harmed some homeowners, it has also most certainly not harmed others who were not in the position to pay anything at all on a mortgage after losing a job or facing some other serious crisis. There may be a disconnect between the wrong exposed and the remedy requested.

NY Appellate Court Rules Modification Not Enforceable in Foreclosure

The Appellate Division ruled in Wells Fargo Bank, N.A. v. Meyers, 2013 Slip Op. 03085 (2d Dep’t), that a failure to negotiate a loan modification in good faith, which is required under NY foreclosure law, does not support the unilateral imposition of a mortgage modification.

The uncontested facts in this case read like one of the well-publicized Alice-in-Wonderland tales of homeowners trying to negotiate a modification with a Red-Queen-like loan servicer:

  • Wells Fargo alleges that it is the holder of the note and mortgage but later says that Freddie Mac is
  • Wells Fargo tells the homeowners to default in order to get into the loan modification program and then forecloses, although the Wells Fargo representative states that they “had no idea” why the foreclosure had been initiated. (4)
  • Wells Fargo repeatedly loses documents sent by the homeowners
  • Wells Fargo changes the terms of its modification offer because of a “miscalculation” (4)

The Court upholds the finding that Wells Fargo did not negotiate in good faith.  One can only imagine how homeowners feel dealing with such a bureaucratic counter-party:  is it grossly incompetent or slyly malevolent?

The Appellate Division notes that the statute at issue provides, “Both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible” (8, quoting CPLR 3408[f]).  This provision contains no remedies, however, for the failure to do so.  The Court then identifies a variety of sanctions that have been employed against mortgagees/servicers pursuant to this statute.  These include

  • barring them from “collecting interest, legal fee, and expenses” (10)
  • imposing exemplary damages
  • staying the foreclosure
  • imposing a monetary sanction

The Court also noted that it determined in another case that cancelling the mortgage and note was too severe a sanction, one that was not authorized by law.  The Court found that the remedy in this case, imposing a modification, was also inappropriate.  The court stated that to do so would be to rewrite a contract that had voluntarily been entered into in violation of the Contracts Clause of the United States Constitution.  The court also states that such a unilateral action “is without any source for its authority” and appears inconsistent with CPLR 3408 itself. (12) It is is unclear to me whether the Court is reading the Contracts Clause properly, but I agree that the trial court’s remedy seems extreme on these facts.


(Hat tip Wilson Freyermuth)