Mortgage modification suit leaves homeowners in limbo, part two

Earlier this week, we began a discussion of mortgage modifications and the often complicated roles of mortgage servicers and trustees in the mortgage process.

Because trustees represent the investors that back mortgage loans, they are often hesitant to allow mortgage modifications even when their contracts explicitly allow them to do so. The servicers are usually not willing to spare the resources to push the trustees for a modification, which leaves the homeowner with few options other than foreclosure. However, with a recent lawsuit filed by a mortgage servicer against a trustee, the process is being examined with much greater scrutiny.

The lawsuit began after a group of homeowners were informed that their requests for mortgage modifications were denied. Following the denial, mortgage servicer OneWest began to investigate why trustee HSBC had issued the denial. HSBC claimed that its investor contracts prohibited modifications. However, a closer look revealed that HSBC had conflicting contracts: some that permitted modifications, and some that did not allow them.

OneWest pushed HSBC to allow for the modifications, but HSBC refused to do so, fearing that investors would hold it liable for violating its contracts. In response, OneWest filed a lawsuit in June of last year, asking a federal judge to determine whether modifications should or should not be allowed under the HSBC contracts.

While the lawsuit is unprecedented for many reasons, it does not offer homeowners the protection that many were hoping for. As the case makes its way through the judicial system, OneWest has begun the foreclosure process for thousands of the homeowners potentially affected by the lawsuit. It is unclear at this point what the ultimate outcome will be.

Source: ProPublica, “Lawsuit Reveals How a Middleman is Blocking Mortgage Modifications for Homeowners“, Paul Kiel, 31 March 2011