FHA Loans and Servicing Violations

Posted by kevin on April 11, 2014 under Foreclosure Blog | Comments are off for this article

Almost every client that has come in my door for the last five years has told horror stories about their treatment at the hands of servicers. I believe they are telling me the truth because servicers jerk me around almost as unmercilessly as they do borrowers. The prospective client believes that they have solid grounds for suing the servicer.

There may be some situations involving servicer improprieties in a Chapter 13 which rise to the level of a cause of action or sanctions. However, in NJ state courts, the borrower generally cannot go after the servicer unless a temporary modification was granted. Why? Because the courts have decided that the MHA program is a contract between the servicers and the government. So, borrowers, not being a part of the deal, lack standing to assert that the servicer is not following the rules. When the borrower is granted a temporary modification, however, many courts have found that there is an implied contractual relationship between the servicer and lender on the one side and the borrower on the other side. This gives the borrower standing to sue or raise defenses in a foreclosure.

What about FHA loans? Our argument is that they are an exception to the no standing argument. Why? Because when you an FHA loan, the borrower has to pay, at closing, a fairly hefty fee for MIP insurance. In addition, there is an insurance component built into each monthly payment for a good many years of the loan. Our position is that those payments gives the borrower standing to allege servicer issues.

For example, the FHA HAMP guidelines state that unemployed borrowers are eligible for a special forbearance. However, many times the servicer never offers this program, but goes right to foreclosure. Our position is that this is a violation of FHA guidelines. The servicer should offer a special forbearance before filing any foreclosure. If not, then the foreclosure case should be subject to dismissal for failure of the lender to fulfill a condition precedent.

I cannot say that I have found any case law supporting this position in New Jersey. However, the argument is compelling. I am waiting for the right borrower to test this theory.