Mortgage Insurance and the Federal Homeowners Protection Act: HAMP Modification Is Not Like Refinancing
March 28, 2017
A recent Third Circuit decision offers a cautionary tale for mortgage lenders who provide loan modifications subject to the Homeowners Protection Act. In Fried v. JP Morgan Chase & Co., No. 16-3069 (3d Cir. March 9, 2017), the court found that a lender could not extend the termination date for mortgage insurance premiums when it modified a residential mortgage.
One of the purposes of the 1997 Homeowners Protection Act, 12 U.S.C. § 4901 et seq., was to set national standards for mortgage insurance termination. On a fixed-rate loan, the Act mandates automatic termination of the mortgage insurance premiums once the loan-to-purchase ratio reaches 78%. The ratio is calculated based on the home’s “original value,” which the Act defines as “the lesser of the sales price of the property securing the mortgage, as reflected in the contract, or the appraised value at the time at which the subject residential mortgage transaction was consummated.” 12 U.S.C. § 4901(12).
Ginnine Fried bought a home and obtained a mortgage from Chase in 2007. Because she borrowed more than 80% of the home’s purchase price, the terms of the loan required her to maintain mortgage insurance until the principal balance dropped to 78% of the home’s value.
After the housing market crash of 2008, Congress passed the Emergency Economic Stabilization Act. Part of that legislation created the Home Affordable Mortgage Program (“HAMP”), giving lenders incentives to reduce mortgage balances. Pursuant to HAMP, Chase agreed to lower Fried’s principal balance by roughly $30,000. It also unilaterally extended the termination date for her mortgage insurance until 2026, ten years after the original termination date and twelve years after the date that would otherwise have resulted from reducing the loan principal.
HAMP does not require a new appraisal before a loan modification, but it does require the lender to obtain a less formal Broker’s Price Opinion (“BPO”) as part of the modification process. Chase obtained a BPO that reflected a drop of about $130,000 in the value of Fried’s home. Chase accordingly recalculated the loan-to-purchase ratio and the mortgage insurance termination date. Chase reasoned that because the market value of the home had dropped, it would take ten years longer for the loan’s remaining principal to drop to 78% of the home’s value. However, that would have required Fried to pay about $30,000 in additional mortgage insurance premiums – essentially negating the benefit of the modification.
The Third Circuit held that the Act does not permit such a recalculation of the mortgage insurance termination date. The court noted that one purpose of the Act was to set “a finish line” for insurance termination – a date certain that a borrower could work toward by paying down the mortgage. The Act does provide that when a loan is modified, the mortgage insurance termination date will be recalculated to reflect the modified terms. 12 U.S.C. § 4902(d). The modified terms of Fried’s mortgage, however, did not explicitly authorize Chase to extend the mortgage insurance termination date, and the court found the HAMP rule requiring a BPO was not an implicit part of the modification agreement. Further, the court expressed doubt that even an explicit agreement on the insurance termination issue could override the Act’s provisions and intent. The Third Circuit reasoned that under the Act, reducing a loan’s principal should move the “finish line” for mortgage insurance closer, not push it further away.
The court drew a sharp distinction, for insurance termination purposes, between refinancing and modification of a mortgage. Refinancing is an entirely new and independent transaction where the old loan is satisfied as a condition of the new one, often involving a different lender. In that circumstance, it is appropriate for the lender to calculate a mortgage insurance termination date based on the appraised value on the refinancing date. By contrast, a modification changes only those loan terms expressly altered in the contract; the amount of the principal may change, but the loan is still the same loan that was covered by the original documents. Therefore, the court concluded, Chase could not “move the finish line” for mortgage insurance termination as part of a loan modification, by substituting the BPO for the “original value” of Fried’s home reflected in the original loan documents.
On a collateral issue, the statute of limitations for claims by residential mortgagors, the Third Circuit noted with approval the district court’s conclusion that there was a fact issue of when Fried “knew or should have known” that Chase had unilaterally extended the mortgage insurance termination date. This implies that claims for violation of the Act are subject to a discovery rule governing the statute of limitations, which means there is a continuing potential for new claims by consumers who obtained residential mortgage modifications under HAMP.
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