Court rules against mortgage lender in loan modification suit

Recently, a court of appeals recently issued a landmark court ruling against a mortgage lender, finding that it did not keep its promise to negotiate a mortgage modification with a homeowner before issuing a foreclosure and selling the home at auction. The widely publicized case brought to light on some of the most underhanded tactics employed by lenders in dealing with homeowners, and may lead to the challenge and reversal of thousands of foreclosures in Georgia and throughout the country.

According to the lawsuit, a California woman took out an $845,000 adjustable rate mortgage with Option One Mortgage Corporation, which later assigned the loan to U.S. Bank. Two years later, the interest on the mortgage increased significantly, and the homeowner was no longer able to make her payments.

When the lender filed a notice of default on the home, the homeowner filed for Chapter 13 bankruptcy, which creates an automatic stay on foreclosure proceedings and allows a homeowner to keep their home. The lender fought back, filing a motion to lift the bankruptcy stay in order to see the foreclosure through. Then, the lender contacted the homeowner through her bankruptcy attorney and asked if she would be willing to “explore loss mitigation possibilities”. Seeking a loan modification, the homeowner contacted the lender, who responded that a modification was only possible if she would lift the stay imposed by the Chapter 13 bankruptcy filing.

The homeowner agreed, cancelling her bankruptcy filing altogether, in anticipation of what she believed to be a guaranteed loan modification. However, the lender took advantage of the homeowner’s lack of protection and foreclosed on her house, selling it at auction only a month after the stay was lifted.

After she lost her home, the homeowner filed suit against U.S. Bank. While the trial court found for the lender, an appeals court reversed, finding that the bank had not kept its promise to negotiate a loan modification with the homeowner, and that the subsequent foreclosure was improper and unfair.

Source: Forbes, “Judge Rules Against Bank In Mortgage Modification Suit“, Shah Gilani, 10 February 2011