Even though the Treasury Department isn’t sanctioning servicers for their failure to comply with HAMP guidelines, it looks like in some cases, the courts could. In a case in the Indiana Court of Appeals, a foreclosure case was reversed for essentially one reason:
I. Whether a mortgagee‘s compliance with federal mortgage servicing
responsibilities is a condition precedent that may be raised as an
affirmative defense to the foreclosure of an FHA-insured mortgage
In other words, because the servicer, in this case, Taylor, Bean & Whitaker Mortgage Corp., did not follow FHA guidelines when proceeding to foreclosure. Specifically, they did not allow for a partial mortgage payment, as allowed under HUD guidelines (which guide FHA mortgages), and the servicer did not have a face-to-face meeting with the borrower. The court ruled these are binding conditions that the servicer must comply with before instigating a foreclosure.
As Adam Levitin asks, what is the difference between FHA guidelines and HAMP guidelines?
I have trouble seeing any principle that would distinguish HAMP guidelines (or GSE guidelines) from FHA guidelines. That is to say, if one accepts the principle that a failure for a servicer to follow servicing guidelines should be an affirmative defense, it really oughtn’t matter whose guidelines those are, so long as the servicer is contractually bound to follow them. Given that the homeowner is a third-party beneficiary with a much, much stronger interest in ensuring compliance with the servicing guidelines than any government agency or GSE, there is a logic to allowing a foreclosure defense of non-compliance with servicing guidelines.
This precedent could open up a number of court cases across the country. Borrowers are currently in class-action suits against servicers on this very point, claiming that the servicers violated HAMP guidelines in a variety of ways. And there’s additional precedent on this going back to an Illinois case in 1983.
A smart lawyer will look at this and know exactly how to use it. This could open up another front in foreclosure fraud. Keep in mind that bad servicing, i.e. violation of guidelines and contracts and the like, can be used as a pretext for investors to put back the mortgage on the trust. In other words, if they feel abused by the servicer, they can terminate the mortgage-backed security. So this ruling has a resonance in both investor and homeowner lawsuits.