The Home Affordable Modification Program (“HAMP”) “seems to have created more litigation than it has happy homeowners,” or so the Ninth Circuit recently acknowledged in Corvello v. Wells Fargo Bank, N.A. HAMP was created as an administrative program in late 2008 in response to the nationwide housing collapse and recession. The initial goal of HAMP was to aid “3 to 4 million at-risk homeowners—both those who are in default and those who are at imminent risk of default—by reducing monthly payments to sustainable levels.” Despite its lofty goals, in its first five years the program has only managed to help 1.2 million out of the 3 or 4 million homeowners it was intended to help and has generated a blitz of litigation aimed at mortgage servicers. The basis of this litigation arises out of mortgage servicing companies’ apparent lack of cooperation in completing mortgage modifications or, worse, their intentional subversion of the program itself.
Whereas companies that service mortgages owned by government-sponsored entities (“GSEs”) Fannie Mae and Freddie Mac are required to participate in HAMP, non-GSE mortgage servicers—such as Wells Fargo—are provided with an economic incentive to complete permanent modifications. Much of the legal controversy surrounding HAMP is directed at these participating non-GSE mortgage servicers. The most common and successful lawsuits against these participating servicers are breach of contract claims arising out of banks’ refusals to modify homeowners’ mortgages after the homeowners have satisfied the terms of an often-ambiguous agreement known as a Trial Period Plan (“TPP”). Under a typical TPP, the homeowner agrees to provide documentation on his income and make three or four monthly payments that are presumably below his original mortgage payment. If the homeowner has provided correct documentation, is eligible for HAMP, and has made the payments in full and on time, the mortgage servicer is then expected to offer a mortgage modification based on Treasury Guidelines.
Disputes arise when mortgage servicers refuse to make this modification offer, prompting homeowners to file a wide array of claims ranging from violations of HAMP guidelines to unfair and deceptive trade practices. Although in most cases homeowners fail to get beyond the pleading stage, the plaintiffs’ bar has persisted in crafting new arguments based on state contract law. These arguments have gained some traction with the Seventh Circuit’s ruling in Wigod v. Wells Fargo Bank, N.A. and the more recent Ninth Circuit ruling in Corvello v. Wells Fargo Bank, N.A. Although Wigod makes a compelling case for some homeowners, Corvello fails to articulate the basis for its conclusions; it instead attempts to piggy-back its conclusions onto Wigod under slightly, yet materially different circumstances. The subtle distinctions in the facts of these cases highlight the inherent problems with the HAMP program—chiefly, the difficulty of enforcing HAMP guidelines against mortgage servicers—and also provide a basis for improving such an ambitious program.
This Recent Development proceeds in three parts. Part I explains the origins and mechanics of HAMP, as well as some of the recent litigation trends arising out of the program. Part II proceeds by examining both Wigod and Corvello, noting the subtle yet important distinctions between the two circuit court cases and, in particular, the shortcomings of Corvello. Lastly, Part III assesses the inherent problems with the HAMP program and the TPP process as demonstrated by these two cases and recommends a few changes that would give more clout and less controversy to a government program created to help—and not “HAMPer”—homeowners.
I. The Home Affordable Modification Program
To understand the problems HAMP faces, it is first necessary to understand the origins of the program, how the program works among its participants, the causes of its failures, and the effects of its failures on those meant to benefit from it. The story of HAMP begins with the 2008 financial crisis and the ensuing housing collapse.
A. HAMP, Servicer Participation Agreements, & Trial Period Plans
On October 3, 2008, Congress passed the Emergency Economic Stabilization Act, allocating $700 billion to the Treasury for the purpose of stabilizing the economy. One of the Treasury’s principal functions under the Act is to “preserve homeownership.” In order to accomplish this broad goal, Congress created the Troubled Asset Relief Program (“TARP”), which charged the Secretary of the Treasury with “implement[ing] a plan that seeks to maximize assistance for homeowners and . . . encourage the servicers of the underlying mortgages . . . to take advantage of . . . available programs to minimize foreclosures.”
TARP gave the Secretary of the Treasury wide discretion to use this immense amount of funding to prevent the foreseeable ill effects of mass foreclosures on the American housing market. In February 2009, Secretary of the Treasury Timothy Geithner partitioned $50 billion worth of TARP funds specifically for HAMP in order to incentivize mortgage lenders to modify mortgages with more favorable interest rates, thus avoiding a large number of foreclosures. Under HAMP, mortgage servicers not automatically participating in the program can cash in on these incentives by volunteering to participate. In order to participate, these non-GSE servicers begin by signing a Servicer Participation Agreement (“SPA”).
Under the terms of a typical SPA, participating mortgage servicers agree to perform the services aimed at completing mortgage modifications and those described in other supplemental directives issued by the Treasury. For example, Supplemental Directive 09-01 (“Directive”) obligates all participating servicers “to consider all eligible mortgage loans unless prohibited by the rules of the applicable [pooling and servicing agreements] and/or other investor servicing agreements.” In an effort to encourage as many mortgage modifications among ailing homeowners as possible, these SPAs require participating servicers “to use reasonable efforts to remove any prohibitions and obtain waivers or approvals from all necessary parties . . . .” In exchange for each successful permanent modification, the servicers receive a $1,000 payment along with other incentives based on the SPA.
From start to finish, modifying a mortgage under HAMP consists of numerous, simultaneous multi-step processes that are often ill-defined and convoluted. Some involve just the servicers, while others involve both the servicers and the homeowners. In the first multi-step process, in order to determine each homeowner’s eligibility for a modification, the Treasury directs servicers to follow a three-step process outlined roughly in Supplemental Directive 09-01.
The first step requires the servicer to verify that the borrower meets certain threshold requirements. A few of these requirements include verifying that the loan originated on or before January 1, 2009; it was secured by the borrower’s primary residence; the mortgage payments were more than 31% of the borrower’s monthly income; and for a one-unit home, the current unpaid principal balance was no greater than $729,750. Once these requirements are met, the servicer can move on to the second step.
The second step requires that the servicer calculate the terms of the modification using a situation-dependent four-step process aimed at refinancing a borrower’s monthly mortgage payment to a target ratio of that homeowner’s income; this method is often called the “waterfall” method because of the number of permutations involved.
The last step requires the servicer to apply a Net Present Value (“NPV”) test to assess whether the value of the modified mortgage would be greater to the servicer than the return on the mortgage if unmodified. The NPV test is “essentially an accounting calculation to determine whether it is more profitable to modify the loan or allow the loan to go into foreclosure.” If the NPV test proves that the value of the modified loan is higher than the servicer’s expected return after foreclosure, the servicer “MUST offer the modification.”
As this multi-step process is playing out, the completion of a different multi-step process involving the homeowner and the servicer is required for a modification to occur. This process is what is known as the Trial Period Plan (“TPP”). By the terms of the Treasury Directive in place at the onset of HAMP in 2009, a servicer could use “recent verbal financial information” from the homeowner to prepare and offer this TPP. Providing this TPP and outlining its terms encompasses the first step in the two-step TPP process. At this first step, the servicer is supposed to instruct the homeowner to execute and return the offered TPP, along with any income verification documents, a hardship affidavit, and the first payment per the terms of the plan, to the servicer. The TPP is to last for three or four months, whereby the homeowner is to pay a reduced monthly amount calculated by the aforementioned “waterfall” method, and the servicer is required to service the loan in the same manner as it would under the original terms of the loan. In some circumstances, the TPP is considered a valid contract offer to modify homeowners’ mortgages contingent upon the completion of the plan.
In the meantime, the servicer determines if the homeowner meets all the relevant criteria to remain eligible for a HAMP modification. If the servicer finds that the homeowner is not eligible after the homeowner executes the TPP, then the servicer is required, per Treasury guidelines, to communicate that information to the homeowner in writing and to consider other alternatives to foreclosure. Yet, if the servicer determines that the homeowner is eligible and the servicer has received funds for the first month’s payment, it should then sign and return an executed copy of the TPP to the homeowner.
If the homeowner has complied with the terms and conditions of the TPP at the end of the period, has made all required payments, and has provided truthful information that qualifies that homeowner for a HAMP modification, “the loan modification will become effective on the first day of the month following the trial period as specified in the Trial Period Plan.” Thus, for a typical TPP, if all of the homeowner’s qualifications are met and they have paid on time, the servicer is required to offer a permanent modification to the homeowner as if the TPP were a valid contract. This requirement creates the basic controversy over TPPs by raising questions over whether they are considered valid contracts in each individual circumstance and whether non-GSE participating mortgage servicers can be liable for failing to perform mortgage modifications at the end of these periods.
B. Litigation Trends Arising Out of HAMP
Considering the complicated steps that make up the modification process, servicers’ apparent lack of motivation to cooperate in the program, and the lack of enforcement mechanisms, it is no surprise that HAMP has failed to deliver significant results for homeowners. HAMP has also driven plaintiffs’ attorneys to target mortgage servicers that fail to modify or renegotiate mortgage loans and instead commence foreclosure to the detriment of the homeowner. Since 2009, several waves of litigation have produced numerous legal theories from which plaintiff homeowners have filed complaints against their mortgage servicers. However, many of these claims have not passed the pleading stage of litigation.
The first wave of litigation attempted to enforce the HAMP guidelines against mortgage servicers as a private right of action. During this stage, borrowers typically pled “violation of HAMP guidelines” as a cause of action, attaching these guidelines embodied in certain Treasury directives to their complaints. Other claims even alleged constitutional violations of the Due Process Clause for failing to comply with HAMP. However, “courts around the country” have consistently rejected these theories by dismissing complaints and holding “unambiguously that there is no private right of action under HAMP.” The United States District Court for the District of Minnesota bluntly concluded that “the regulations at issue . . . did not intend to create a property interest in loan modifications for mortgages in default.” Thus, the first wave of litigation generally subsided with poor results for plaintiff-homeowners.
The second wave of litigation arose when homeowners attempted to enforce HAMP against mortgage servicers as third-party beneficiaries to the SPAs between servicers and the Treasury Department. This theory is rooted in contract law and seeks to enforce HAMP’s requirements on participating mortgage servicers. Yet, much like the first wave of litigation, the majority of courts have continually rejected this theory by holding that homeowners are merely incidental beneficiaries of SPAs and therefore have no rights emanating from them. Although homeowners have failed to show a private right of action based on the regulations or as third-party beneficiaries, they have gained some traction arguing breach of contract claims arising out of the TPP agreements made directly with servicers.
The third wave of HAMP litigation aimed at enforcing TPPs as contracts has been the most successful for homeowners thus far. This present wave of litigation moves away from attempting to enforce HAMP guidelines on mortgage servicers and focuses on state common law rights emanating from the direct transactions between servicer and mortgagor. Some of these claims have alleged negligence or violations of state consumer fraud statutes with mixed results. Yet the most successful and thoroughly analyzed claim has arisen out of a homeowner’s breach of contract claim where the mortgage servicer refuses to modify a mortgage after the homeowner complies with all the requirements of a TPP. Despite the continual challenges to claims of this sort, several circuits have allowed plaintiffs much leeway in pleading these claims.
II. The Successes and Failures of Breach of Contract Claims Arising out of Trial Period Plans
When handed down in March 2012 Wigod v. Wells Fargo became the first federal circuit court decision to address whether a plaintiff-homeowner could bring a common law breach of contract claim against a mortgage servicing company based on the failure of the servicer to honor the terms of a TPP. Notwithstanding the generally negative treatment these claims have received in federal and state courts, Wigod has opened the door for other courts to interpret these TPPs as valid contracts. However, every homeowner’s experience with a TPP and her respective mortgage servicer is different. Therefore, Wigod cannot and should not apply to every instance where a mortgage servicer fails to offer a permanent mortgage modification. Instead, Wigod should only apply in the situation in which an offer and acceptance have created a valid contract under the terms of individual state common law.
A. Wigod v. Wells Fargo: The Seventh Circuit Opens the Door Ever so Slightly
- Factual and Procedural History
Lori Wigod obtained a home mortgage loan in the amount of $728,500 in 2007 from Wachovia Mortgage, which later became Wells Fargo. In April 2009, Wigod applied by written request for a HAMP modification of her loan after she began to experience financial difficulties. Wells Fargo required her to provide documentary proof of her financial information before the TPP could begin. After Wigod provided this information and Wells Fargo determined that she was eligible for HAMP, Wells Fargo sent her a TPP in mid-May 2009.
Per Wells Fargo’s requirements, Wigod executed two copies of the TPP Agreement on May 28, 2009, returned them to Wells Fargo with additional documents, and made the first payment of the four required. Wells Fargo then executed the TPP Agreement and sent a copy to Wigod on June 4, 2009, along with a congratulatory letter approving her for a trial modification. Thus, Wells Fargo communicated to Wigod that she qualified for HAMP and, as long as she was in compliance with the terms of the TPP, she would receive a permanent Loan Modification Agreement at the conclusion of the trial period. From July 1 until November 1, 2009, Wigod made, and Wells Fargo accepted, her remaining three payments. However, after the TPP expired with Wigod fulfilling all the terms of the agreement, Wells Fargo refused to modify her mortgage terms and threatened her with foreclosure if she failed to pay the outstanding balance of her loan. Wells Fargo maintained that its reason for refusing the modification was that the post-modification monthly loan amount was not consistent with investor guidelines and that Treasury guidelines allowed servicers to verify all government and investor criteria before granting a modification.
After Wigod’s suit was dismissed at the district court level, she appealed on all counts to the Seventh Circuit, which addressed two issues. The first issue was whether Wigod stated viable claims under Illinois law, including the breach of contract claim. The second issue addressed Wells Fargo’s assertion that the particular state law claims alleged by Wigod were preempted or barred by federal law. Ultimately, the Seventh Circuit held that federal law did not preempt the claim and proceeded to address the viability of Wigod’s state common law claims.
In analyzing the breach of contract claim, the court’s decision focused on an analysis of the language of the TPP. The Seventh Circuit interpreted the language of the TPP using Illinois contract law, which requires the fulfillment of six separate elements: “(1) offer and acceptance, (2) consideration, (3) definite and certain terms, (4) performance by the plaintiff of all required conditions, (5) breach, and (6) damages.” The language of this particular TPP stated, “I understand that after I sign and return two copies of this Plan to the Lender, the Lender will send me a signed copy of this Plan if I qualify for the [permanent modification] Offer or will send me written notice that I do not qualify for the Offer.” The TPP further stated, “If I am in compliance with this Loan Trial Period and my representations in Section 1 continue to be true in all material respects, then the Lender will provide me with a [permanent] Loan Modification Agreement.”
According to the Seventh Circuit, this language formed a contingent contract if Wells Fargo returned a signed copy of the TPP to Wigod acknowledging her qualifications for a modification. Wells Fargo’s performance on the contract—that is, making a permanent modification offer—was contingent on whether Wigod fulfilled two conditions precedent. Those conditions were that she continue to comply with the payment plan and that her financial representations remain accurate.
Wells Fargo challenged the existence of a valid contract on the bases that there was no valid offer, that the agreement lacked consideration, and that there were no certain and definite terms. However, Wells Fargo conceded the other three elements of a contract claim. Judge David Frank Hamilton, writing the opinion for the court, rejected Wells Fargo’s interpretations of the TPP. He acknowledged, “[A] reasonable person in Wigod’s position would read the TPP as a definite offer to provide a permanent modification that she could accept so long as she satisfied the conditions. This is so notwithstanding the qualifying language in section 2 of the TPP.”
The court offered two basic rationales for this ruling. First, it rejected Wells Fargo’s ability to condition the offer on Wigod’s continued eligibility once it sent her a signed copy of the TPP acknowledging that she qualified for a HAMP modification. Second, the court rejected Wells Fargo’s reading of Section 2 of the TPP as requiring that Wells Fargo actually send Wigod a Modification Agreement in the mail for the actual offer to have been made. Under this reading, Wells Fargo could “simply refuse to send the Modification Agreement for any reason whatsoever—interest rates went up, the economy soured, it just didn’t like Wigod—and there would still be no breach.” This reading of Section 2 turned an “otherwise straightforward offer into an illusion.” Thus, based on these two rationales, the court ruled that if Wells Fargo executed the TPP and Wigod met all other conditions—which she did—Wells Fargo was contractually obligated to offer her a permanent modification, which would come into effect once Wigod agreed to it.
In addition to the question of whether the bank made a valid offer to Wigod, Wells Fargo also argued that there was a lack of consideration and a lack of definite and certain terms that are required under Illinois law to create a contract. With regard to adequate consideration, the court reasoned that Wigod sustained sufficient detriments by agreeing to “open new escrow accounts, undergo credit counseling (if asked), and to provide and vouch for the truth of her financial information.” Secondly, the court rejected Wells Fargo’s assertion that certain terms required for a valid contract of this nature—such as the interest rate, the principle balance, the loan duration, and the total monthly payment—were not adequately established by the terms of the TPP. Challenging this view, the court ruled that HAMP guidelines provided a sufficient standard for Wells Fargo to set the terms of the permanent modification.
Wigod’s simple recognition that TPPs could potentially create valid contracts between homeowners and mortgage servicers—as long as the servicer returned an executed copy of the TPP—was a giant step for plaintiff-homeowners in this wave of litigation. By the time the Seventh Circuit delivered this decision, two other plaintiffs from California were appealing similar claims against Wells Fargo in the Ninth Circuit. Yet, the Ninth Circuit’s interpretation of the Wigod decision would go a step too far.
B. Corvello v. Wells Fargo: The Ninth Circuit Erroneously Extends Wigod
Federal courts are split when it comes to determining whether a servicer has to countersign and return a TPP to the homeowner for a valid contract to exist. Whereas a close reading of Wigod suggests that this is in fact a requirement, Corvello eschews this logic and erroneously extends this wave of litigation into unchartered waters.
Like the plaintiff in Wigod, Phillip Corvello and Karen and Jeffrey Lucia (“the Lucias”) filed suit against Wells Fargo after the bank failed to offer them a permanent mortgage modification, subsequent to their alleged fulfillment of the terms of the TPP they had received and signed from Wells Fargo. The only factual difference between their claims is that Corvello’s dealings with Wells Fargo were via written documentation, whereas the Lucias’ communications were conducted orally over the phone with the bank. Notwithstanding this difference, their factual situations are substantially similar to each other and somewhat similar—but not identical—to that of Lori Wigod. These minor differences between the cases of the Lucias and Corvello and Wigod’s case are where the logical breakdown in this decision becomes relevant.
Following the facts of Corvello’s TPP process provides insight into both his exchange with Wells Fargo and the wide-scale inconsistencies of how mortgage servicers implement TPPs. Corvello alleged in his complaint that he provided all of his financial information via a worksheet in June of 2009. Subsequently, the bank sent him a TPP stating that if his representations were accurate and if he complied with the terms of the trial plan by making the requisite payments, he would receive a modification offer. The TPP further stated that the bank would inform him whether he qualified for the modification agreement, as the Treasury Directive required, by either sending a copy of the plan signed by the bank confirming qualification for the modification or a notice that the borrower did not qualify.
In addition to this language, paragraph 2F of the TPP gave notice to Corvello of the obligations that he and the bank were required to fulfill before a permanent modification could take effect:
If prior to the Modification Effective Date, (i) the Lender does not provide me a fully executed copy of this Plan and the Modification Agreement; (ii) I have not made the Trial Period payments required under Section 2 of this Plan; or (iii) the Lender determines that my representations in Section 1 are no longer true and correct, the Loan Documents will not be modified and this Plan will terminate.
Corvello alleged in his complaint that he complied with the terms of the TPP and made all three of his payments within the time constraints of the Plan, as did Wigod. However, in contrast to the facts of Wigod, Corvello received neither any notification of his eligibility status for a modification as required by the language of the TPP, nor a signed copy of the Modification Agreement after satisfying all the terms of the TPP. He also never received an executed copy of the TPP from Wells Fargo as Wigod did. In his complaint Corvello sought enforcement of the permanent modification he claimed was due to him after complying with all the material requirements as well as damages for the payments he made to Wells Fargo.
In response to these complaints, Wells Fargo filed a motion to dismiss for failure to state a claim, which the district court granted. The district court came to the conclusion that the TPP language found in Paragraph 2G required that the plaintiffs receive a “fully executed copy of a Modification Agreement” to have any claim for breach of contract.
On appeal, the Ninth Circuit took up the issue of whether Corvello could state a valid cause of action for breach of contract, as did the Seventh Circuit in Wigod. The court characterized the Seventh Circuit’s holding in Wigod thusly: “[B]anks [are] required to offer permanent modifications to borrowers who [have] completed their obligations under the TPPs, unless the banks timely notif[y] those borrowers that they did not qualify for a HAMP modification.” In doing so, the court challenged two of Wells Fargo’s arguments claiming that no valid contract existed based on the language of the TPP and the transactions between the homeowners and mortgage servicer. Thereby, the Corvello court misinterpreted the logic applied in Wigod.
Wells Fargo first argued that the language of Paragraph 2G of the TPP required a signed Modification Agreement for a valid contract to exist. The court rejected this argument in the same way that the Wigod court did. Specifically, the Corvello court claimed that the way the arrangement was set up allowed Wells Fargo “to avoid [its] obligations to borrowers merely by choosing not to send a signed Modification Agreement, even though the borrowers made both accurate representations and the required payments.” In characterizing the arrangement this way, the court assumed that the situation was materially similar to that in Wigod. It continued this reasoning by determining that Paragraph 2G does not allow the bank to avoid a clear obligation to send the plaintiffs a signed Modification Agreement once they have met their end of the bargain.
Wells Fargo’s second argument rested on the fact that Wigod was materially distinguishable from the facts of this case. It argued that the bank actually sent Wigod a signed copy of the TPP approving her HAMP eligibility and that, based on the language in Paragraph 2F of the TPP, a signed writing was required for the TPP to continue and further obligate Wells Fargo to modify the plaintiffs’ mortgages upon completion of the contractual terms. However, the court dismissed this argument by asserting that the Wigod decision did not turn on that specific fact, but rather on the fact that Wells Fargo failed to tell Wigod that she did not qualify for a modification. By coming to this conclusion, the Ninth Circuit borrowed language from Wigod indicating that “[u]nder the terms of the TPP Agreement, then, that moment [when Wells Fargo received the borrower’s TPP] was Wells Fargo’s opportunity to determine whether [the borrower] qualified. If [the borrower] did not, it could have and should have denied [the borrower] a modification on that basis.” In addition, the court noted that Treasury Directive 09-01 also established this obligation and that Wells Fargo’s failure to fulfill the obligation would not deprive the plaintiffs the benefits of their TPP agreement.
By rejecting these two arguments, the Ninth Circuit extended the Wigod reasoning further by focusing on the requirement that the bank notify the homeowner of his HAMP eligibility and acknowledging that an agreement is in place even before the bank executes the TPP. More succinctly, Corvello stands for the proposition that—regardless of whether the bank actually executes the TPP—if the bank fails to notify the homeowners of their HAMP eligibility per the Treasury Directive guidelines, it is required to offer them a permanent modification upon the homeowners’ fulfillment of the TPP terms.
By determining that Wigod was a persuasive and indistinguishable precedent, the Corvello court failed to understand the reasoning behind the Wigod decision. This is most evident where the Corvello court attempted to paraphrase the ruling in Wigod as requiring that Wells Fargo notify the homeowner of his HAMP eligibility, or else face the obligation of offering a permanent modification upon the homeowner’s fulfillment of the TPP terms. By interpreting Wigod this way, the Corvello court assumed that a contract was already in place as soon as the homeowner received the TPP. However, this is an erroneous assumption. In fact, the Wigod court only recognized the existence of an offer upon Wells Fargo’s execution of the TPP and an acknowledgement that the homeowner qualified under HAMP guidelines.
Corvello’s misunderstanding of Wigod does not end there. The Corvello court also misinterpreted the Wigod decision by asserting that the reason the Seventh Circuit rejected Wells Fargo’s position concerning the language in Paragraph 2G was “because it made the existence of any obligation conditional solely on action of the bank, and conflicted with . . . the bank’s promise to send the borrower a Modification Agreement if the borrower complied with the obligations under the TPP . . . .” Although the Wigod court made this acknowledgement, it did so on the facts of that particular case. Considering that Corvello never received an executed TPP from Wells Fargo, this argument does not carry the same weight as it did in Wigod.
In Wigod, the “qualifying language” of Paragraph 2G in the TPP turned the executed offer and acceptance “into an illusion” because Wells Fargo could get out of the contractual obligations by simply refusing to provide a permanent modification upon Wigod’s fulfillment of the contract terms. In the same vein, the Corvello court implied that Wells Fargo could get out of its apparent contract by simply failing to notify the homeowner of her HAMP eligibility. However, based on the language of the TPP and the clear reasoning in Wigod, Wells Fargo does not assent to the contract—and does not officially make an offer—until it sends an executed copy of the TPP acknowledging the homeowner’s qualification for HAMP. The fact that the TPP remained unexecuted is the pivotal distinction in Wigod and Corvello and is the source of Corvello’s shortsightedness.
Even though the Corvello court dismissed this argument, Wells Fargo correctly argued that this situation was materially different from Wigod because the bank never sent back an executed copy of the TPP to Corvello informing him that he was approved for modification. Corvello claims that “Wigod’s holding, however, does not turn on that fact, but instead on the bank’s failure to tell the borrowers that they did not qualify.” This is wrong on two counts. First, in Wigod, Wells Fargo signed the TPP and sent it back to Wigod telling her that she qualified for the modification but later failed to offer the modification per the TPP executed by both parties. The Wigod court found that there was a valid breach of contract claim because Wells Fargo executed the TPP and created a valid offer, which promised a modification assuming Wigod had fulfilled all her obligations—which she did. This was not the case in Corvello.
Corvello’s second failure is that Wigod was not premised on the fact that the bank was obligated to inform Wigod of her HAMP eligibility based on the Treasury guidelines. To assume that the decision was based on this fact is akin to allowing an individual to bring a private right of action against a servicer for failure to follow the guidelines. As noted before, most courts have dismissed these types of claims as an invalid right of action under HAMP. Rather, up until Wells Fargo returned an executed version of the TPP to Wigod congratulating her on her HAMP eligibility, Wells Fargo had not extended her an offer and thus no contract existed.
Ultimately, Wigod is premised on the fact that Wells Fargo sent an executed version of the TPP to the homeowner that constituted a valid contract. Several other courts have reinforced that requirement for a valid offer to arise out of a standard TPP. As for the plaintiffs in Corvello, this requirement was not met, and in almost every other jurisdiction their claim for breach of contract would not survive. Although the factual differences between these two cases are miniscule, their existence points out both the inconsistency in which mortgage servicers proceed with TPPs and also the narrow set of circumstances required for homeowners to enforce a valid contract against uncooperative servicers.
The factual differences between Wigod and Corvello illustrate the disorganized and unpredictable fashion of the TPP process. Even though Wigod, Corvello, and the Lucias began the home mortgage application process with the same servicer within months of each other, their experiences differed. The content of their respective TPPs was also materially different. These differences point out some of the weaknesses and failures of the HAMP program and offer insight on how to improve the program and reduce litigation. With HAMP extended through the end of 2015, plaintiffs will likely continue to churn out litigation as they are denied permanent modifications and forced into foreclosure. In the meantime, Wigod and Corvello will serve as two—albeit limited—benchmarks in the push for greater servicer accountability and improvements to HAMP.
A. The Inherent Problems of HAMP and the TPP Process
HAMP’s failures certainly have not gone unnoticed in the public eye. Of the three to four million homeowners it was intended to help, only 1.2 million have received a permanent modification. While that number may not imply a complete failure of the program, it does not represent a complete picture of the situation. Of those 1.3 million homeowners who received a permanent modification after completing a TPP, more than 300,000 eventually defaulted. Even more telling is the fact that the Congressional Budget Office has estimated that over half of those mortgages permanently modified were owned by Fannie Mae and Freddie Mac and were therefore mandated to participate in the program. This shortfall is unfortunate because HAMP will only make a difference in the housing market if participating mortgage servicers, such as Wells Fargo, are encouraged to facilitate the modification process.
However, there is little indication that mortgage servicers have facilitated the process even with the incentive programs in place. In May 2011 the U.S. Government Accountability Office (“GAO”) published results from a survey it conducted through the National Foreclosure Mitigation Counseling Program. In the survey, housing counselors cited the most frequent reasons for homeowners to contact them. Among the most common reasons were that servicers had lost HAMP application documentation, that the homeowner felt that he or she had been wrongfully denied a HAMP modification, and that the homeowner was having difficulty contacting the servicer. Not surprisingly, wrongful rejection and communication problems were evident in Wigod and Corvello.
These were not the only glaring results of the survey. Of the nearly 400 counselors surveyed, 76% claimed that borrowers’ overall experience with the HAMP program from the time they first inquired about it to the time of a decision was “negative” or “very negative.” Other important concerns recorded among the housing counselors were long waiting periods during the trial modification process and denials resulting from miscalculating the borrower’s income. The vast majority of counselors surveyed responded that a decision on a trial modification took four months or longer and that the main reason for this delay is that servicers continued to request updated financial information from the borrower. These problems are most likely an indication that servicers were not prepared to handle the modification program from the outset, were not incentivized enough by the Treasury to hire and train personnel to do so, or both. While these faults may be attributed to the Treasury, another disappointing revelation is that servicers purposefully delayed HAMP modifications and rewarded their employees for forcing homeowners into foreclosures and racking up delinquent and penalty payments, which were ultimately more profitable for these servicers than cooperating with the program.
In light of all the negative publicity and the bevy of complaints, the Treasury made some efforts to ramp up its response through the HOPE Hotline and to offer some form of appeals process through the HAMP Solution Center (HSC). However, these efforts have been largely ineffective. As of February 2011, only 32% of the approximately 21,000 complaints escalated to the HSC had ended in a permanent modification. The GAO survey of housing counselors provided first-hand information that the agents at the Solution Center provided little help either because they had little authority or failed to communicate adequately with the counselors. This is an indicator of both a poorly planned program and a failure to train personnel adequately.
The National Consumer Law Center has also raised a myriad of issues with this complaint and appeals process. First, homeowners who are not represented by an attorney cannot access the HSC. Even when the homeowners are represented, their attorneys are sometimes denied access unless they work for a nonprofit. Second, when an HSC representative determines that a servicer has violated the Treasury rules, the “HSC will close the case if the servicer refuses to change its position.” Furthermore, one study found that while the HSC was helpful in getting the servicer to provide a denial notice, it was never helpful in moving a homeowner from a trial modification to a permanent modification. Again, these facts are indicators of an ill-planned program with little clout to either incentivize or pressure servicers to cooperate with the program and ultimately make a difference in the number of permanent modifications.
In addition to failed communication, inadequate appeals processes, and the program’s lack of influence, it is apparent that the Treasury’s guidelines created some of the problems for servicers and homeowners as well. Volatile changes, loose rules, and inconsistencies in HAMP guidelines and standard TPP documents provided by the Treasury Department tend to contribute to modification delays, poor communication between servicers and homeowners, and general confusion amongst participating servicers.
Many of these changes and inconsistencies are noticeable in Wigod and Corvello. For instance, at the time of Wigod’s modification request, the Treasury’s original guidelines were in place. These guidelines allowed servicers to “choose whether (A) to offer Wigod a trial modification based on unverified oral representations, or (B) to require her to provide documentary proof of her financial information before commencing the trial plan.” For both Wigod and Corvello, Wells Fargo chose option B. However, when dealing with the Lucias, Wells Fargo chose option A, in spite of the fact that all three homeowners began the process nearly simultaneously. These inconsistencies are evidence of a disorganized and dysfunctional program.
Also problematic is the miniscule portion of TARP funds used to administer the program. As of February of 2013, the Treasury had spent only about $4.7 billion of the $29 billion that was originally allocated for HAMP over the life of the program. One reason for this is that the HAMP funds that are meant to incentivize servicers are paid out only for completed modifications and disbursed over a five-year period. Another explanation for the lack of spending may be political. HAMP’s unpopularity in Congress stems from its costly and inefficient use of TARP funds and its clear ineffectiveness in creating permanent modifications. Although these are valid explanations for the government’s failure to implement these programs to their fullest potential, they are not worthy excuses.
B. How to Improve the Program: Using Allocated Money to Create More Carrots & More Sticks for Servicer Participation and Oversight
By the fifth year after the HAMP program was initiated, the Treasury had spent only a small fraction of the money committed to it. Thus far, servicers have little incentive to follow through with modifications because they are not as profitable to them as they are to homeowners, lenders, or investors. While the participation of non-GSE servicers is incentivized through certain carrots in the form of compensation for each permanent modification, these incentives are not large enough to encourage acceptable servicer compliance throughout the process. Furthermore, these incentivized carrots lack any corresponding sticks in the form of increased oversight and enforcement by both the Treasury and homeowners, such as Wigod and Corvello.
Allocating HAMP funds in order to bolster the incentive program for non-GSE servicers is an excellent place for the Treasury Department to start improving servicer participation and the program as a whole. The most obvious way is to increase the payments to servicers who complete a permanent modification, which may make modifications profitable for servicers and allow them to hire personnel to oversee the massive amounts of administrative work. Another idea is a restructured incentive program aimed at awarding payments to servicers for each particular checkpoint in the service of the modified loan. This would incentivize servicers to spend more time seeking out the homeowners who have the highest chance of continued success with a permanent modification. The Treasury could also allocate funds for improved HAMP training programs for servicer personnel and even bonuses for servicers that meet substantial compliance goals. These carrots are a necessary first step in garnering servicer compliance and cooperation with homeowners, thus limiting litigation and leading to eventual program success.
However, the aspect that is truly lacking from HAMP is adequate enforcement of the TPP process and repercussions against servicers who fail to comply with Treasury guidelines. In the GAO survey housing counselors were asked to rank three actions that the Treasury could take to improve the HAMP program and increase successful modifications. The most common answer was that the Treasury should enforce sanctions on servicers that did not comply with the HAMP guidelines. Even after HAMP had been in existence for almost a year and a half, the Treasury still had not adequately stated the consequences of a servicer’s noncompliance with HAMP guidelines. Instead, the only repercussion for failing to adhere to the guidelines is the occasional withholding of promised financial incentives, as homeowners have had minimal success enforcing these guidelines through litigation.
One way to improve oversight and enforce servicer noncompliance is by “providing an avenue for homeowners to timely address their grievances” without time-consuming and costly litigation. Although the Treasury has created the HOPE Hotline and HAMP Support Center, these support programs have proven largely ineffective and inaccessible to unrepresented homeowners. The Treasury could improve this process by providing more funding for a more expansive support system with qualified employees who have the authority to move modifications along, forestall servicers from initiating foreclosures, and force servicers to comply with the terms of the respective TPP. This would prevent servicers from denying homeowners a permanent modification based on frivolous or unsubstantiated bases, such as “investor guidelines,” as was the case in Wigod. Having such an authoritative appeals process could also force servicers to become more transparent and timely with their communications regarding modification eligibility and the foreclosure process. This lack of communication was an obvious problem in Corvello.
Thus, Corvello and Wigod are reminders of not only the inherent technical problems with the program itself, but also the hardships placed on homeowners struggling to enforce mortgage servicer compliance with the program. These suggested enforcement sticks must accompany the inventive carrots in order to make the HAMP program and the TPP process work as they were intended.
Wigod and Corvello provide examples of the inconsistencies and inefficiencies of the HAMP program and the problem of servicer noncompliance. They also serve as a narrative of the struggles of homeowners following the financial crisis of 2008. Although HAMP was meant as a program to rescue homeowners from the perils of the housing crisis, it has arguably left many homeowners in a worse position than if the bank had foreclosed on them in the first place, as they have accrued costs in the form of late fees, prolonged foreclosures, harmed credit scores, and the costs of protracted litigation. The waves of unsuccessful litigation to spin out of HAMP, and in particular the TPP process, are significant. The fact that a relatively small number of jurisdictions have recognized a valid breach of contract claim where servicers have failed to meet their end of the bargain in a TPP agreement is a signal that homeowners have a small chance of enforcing servicer cooperation in the TPP process. This lack of enforcement is a significant weakness in the overall effectiveness of HAMP.
What makes this chance of enforcement so small is the precise set of circumstances that must occur for a valid contract to exist by which homeowners can use the courts to enforce servicer cooperation via a common law breach of contract claim. This narrow avenue is evident in Wigod and confirmed by the erroneous holding in Corvello. In order for HAMP to move beyond these shortcomings and limit the amount of litigation, the Treasury must make numerous systemic changes and provide a more effective internal resolution process for homeowners to air their grievances in a timely and efficient manner, rather than airing out “HAMP’s Dirty Laundry” in the courts. This effort will not only require more carrots for mortgage servicers to buy into HAMP, but also more sticks for servicers who fail to adequately comply with HAMP guidelines.
Clay S. Hester**
* © 2014 Clay S. Hester
** I would like to thank my fellow Volume 93 Board Members who were so dedicated in turning this Recent Development into a finely tuned finished product. I would also like to thank my parents and siblings for listening to my long-winded and whimsical pontifications. I would have no inspiration without your patience or guidance.