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Breach of Contract Lawsuit Sheds Light on Prolonged Moratoria

A class-action lawsuit filed against CitiMortgage Inc. in New Jersey indicates a legal glitch may be enough to prolong for many years to come foreclosure suspensions on loans that are or may become part of a class lawsuit elsewhere in the country.

New Jersey homeowners who qualified for a trial Home Affordable Modification Program agreement after April 13, 2009 and complied with its requirements have filed a class-action complaint alleging that they have been “improperly denied a permanent loan modification.”

This breach of contract dispute between CitiMortgage and New Jersey homeowners over whether a trial modification agreement overruns a mortgage contract is one of a growing list of suits with potential to establish a precedent that may cost dearly to mortgage lenders.

According to a source close to the case who requested to stay anonymous, this type of class action is the first filed in the state of New Jersey and one of numerous lawsuits filed across the country against megabanks in times when the courts are not that sympathetic to the lenders.

In January 2011 United States District Court for the Northern District of California Judge Joseph C. Spero ruled against Wells Fargo in its motion to dismiss a suit originally filed on April 19, 2010 alleging the bank falsely promised defaulted borrowers the opportunity for a modification after a trial period showing they could make regular monthly payments.

It can take one court ruling to prolong a final decision on pending foreclosures nationwide. Contract law is relatively simple and uniform in all states, the source said. “At least for the purposes of the CitiMortgage motion” a judge has to decide whether the trial period approval represents a contract, before ruling whether the denial of a permanent mod is a breach of contract. It is a step that requires careful and lengthy consideration.

“As a matter of contract law,” says mortgage law expert and president of LOGS Network, Gerald B. Alt, the lender/servicer does not owe a permanent HAMP modification offer to a borrower who is current after the three-month trial period. The original obligation is in effect and “that ignores the impact of legislative mandate that might require the lender to make a gratuitous offer in the absence of a default.

“Is it a breach of contract under HAMP?” Alt argues that if one ignores the relative bargaining power of the two parties to a mortgage, it is not easy to identify who has more power. But if the servicer agrees to provide a trial mod in exchange for certain considerations such as promise to pay the reduced terms, or demonstrate hardship, and the borrower agrees, it can be deemed a contract. “It might also, for a delinquent borrower, be construed as an offer to compromise the original mortgage obligation by replacing the old terms with new ones. That it is an amended contract is just as effective as if it were a new transaction.”

Most of the time there are certain motion phases that lead to a trial starting with “motion to dismiss,” the source said. None of the class-action lawsuits filed so far has really gone further than that first phase. And because these cases are so complex, on a few occasions courts are opting for temporary measures. For example, in a class-action lawsuit filed against Bank of America in California the judge required temporary suspensions of all foreclosure filings. “There’s a long way to go. Many years.”

Steven Horne, a mortgage law veteran and CEO of Wingspan Portfolio Advisors, agrees. “The California ruling may turn out to be the tip of a legal iceberg,” he said, because over the course of the last several years, courts have made a number of decisions that have favored borrowers over lenders and servicers. “With so many unprecedented cases being considered all over the country, it is not terribly surprising that decisions have been slow to come on several questions with far reaching impact.”

Horne is concerned that the same tide of public opinion against lenders seen in a significant number of cases involving robo-signing problems will affect disputes over the contractual obligation to convert a trial modification into a permanent one. “I will not be shocked” if the courts rule in favor of the consumer, Horne said. That would mean “getting into unexplored and murky waters” since the unintended consequences of such a decision may be “to further delay or reduce the number of borrowers receiving help.”

President and managing partner of Loan Solution Associates, Jonathan Hoffman also warns that while lenders are under intense pressure to collect debt without going into foreclosure, the public discourse has moved away from another problem. Due to bureaucratic and logistical limits of HAFA and HAMP, he says, “none of the federally regulated programs have realized optimum success and it is unlikely they will.”

Yet HAMP is not lawsuit target.

Filed by Berger & Montague PC of Philadelphia in the United States District Court for the District of New Jersey, the lawsuit against CitiMortgage names Juan Silva and Elizabeth Silva as the main plaintiffs along with “hundreds and perhaps thousands” of similarly situated individuals whose identities are not revealed because “the proposed class is so numerous” it is impracticable.

The lawsuit claims these borrowers were denied a permanent loan modification even though they made all payments as required by their trial period plan contract with Citi and complied with Treasury’s HAMP.

It alleges Citi violated the New Jersey Customer Fraud Act by engaging in an “unconscionable commercial practice“ of deceptive acts that lead borrowers to believe that the bank would offer them a permanent HAMP modification upon completing trial payments and was engaged in the “illegal collection of late fees and penalties.”