©National Consumer Law Center 2013

Diane Thompson, of counsel, National Consumer Law Center

Daniel Lindsey, Supervisory Attorney, LAF

Jessica HiemenzNational Consumer Law Center

July 11, 2013This Webinar is provided by the National Consumer Law Center and the Legal Assistance Foundation (LAF) of Chicago with a grant from the Office of the Illinois Attorney General.

Representing Heirs & Divorcing

Spouses in Foreclosure

Moderator – Daniel P. Lindsey • Supervisory Attorney at LAF (formerly the Legal Assistance

Foundation of Metropolitan Chicago), which provides free civil legal services to low-income residents of Cook County, Illinois.

• He has practiced in the areas of housing and consumer law for 20 years. His work has focused on predatory lending, foreclosure defense, and broader issues of homeownership preservation.

• He has litigated in state and federal court and advocated for local, state, and federal laws and policies promoting fair lending and due process for homeowners.

• He has written articles, lectured, participated in task forces, panels, and workshops, consulted with private attorneys, policymakers, and media representatives, and testified before local, state, and federal legislative bodies.

Presenter – Diane E. Thompson• Has represented low-income homeowners since 1994.

• She is currently of counsel with the National Consumer Law

Center, where she is the co-author of the NCLC treatise Truth in

Lending and a contributing author to Cost of Credit.

• Among other publications, she wrote Foreclosing Modifications,

86 Wash. L. Rev. 755 (2011), and co-authored with Elizabeth

Renuart The Truth, the Whole Truth, and Nothing But the Truth:

Fulfilling the Promise of Truth In Lending, 25 Yale J. Reg. 181

(2008).

• From 1994 to 2007, Ms. Thompson represented individual low-

income homeowners in East St. Louis at Land of Lincoln Legal

Assistance Foundation. While there, Ms. Thompson served as

the Homeownership Specialist, providing assistance to

casehandlers representing homeowners in 65 counties in

downstate Illinois, and the Supervising Attorney of the Housing

and Consumer unit of the East St. Louis office.

©National Consumer Law Center 2012

D I AN E E . T H O M P S O N

J U LY 2 0 1 3

REPRESENTING HEIRS & DIVORCING SPOUSES IN

FORECLOSURE

PROBLEM

• Family member inherits house, or gets it in divorce litigation

• Family member probably needs a modification

• Servicer won’t talk to them

WHAT WE’LL TALK ABOUT

• Assumptions

• Should the client assume the mortgage?

• Can the client assume the mortgage?

• Special rules

• HAMP

• Freddie & Fannie

• FHA

• Practice tips for divorce and death

• Litigation theories

STARTING POINT:WHAT DOES THE CLIENT WANT?

• To assume or not assume?

• Assuming the mortgage will mean the client is personally liable on the note

• Not assuming the mortgage usually means losing the home

• This is a financial, legal, and emotional assessment that has to happen FIRST

WHAT’S AN ASSUMPTION?

• Subjects client to personal liability on the mortgage

• Gives clients all rights of mortgagor

• Does not relieve original homeowner of personal liability unless creditor agrees

• If on the mortgage (or subject to the mortgage), but not the note, and want to keep the house, you are probably talking about an assumption of the mortgage

WHAT TO DO?TO ASSUME OR NOT ASSUME

• Always start with what your client wants long-term

• Can they keep the house?

• Do they want to be personally liable on the note?

• Is their ownership interest subject to the mortgage?

• After-acquired

• Waiver of homestead

• Signed the mortgage

• If ownership interest is not subject to mortgage, what happens?

WHEN WOULDN’T YOU ADVISE THE CLIENT TO ASSUME?PRACTICALLY

• If client can’t pay the note, even after modification (particularly if the client isn’t judgment proof)

• If the client can’t pay on the note, and you don’t think you can get a modification

• If the client doesn’t want to keep the home

WHEN WOULDN’T YOU ADVISE THE CLIENT TO ASSUME?LEGALLY

• If the property is held in tenancy by the entireties, and your client didn’t sign the mortgage• 765 ILCS 1005/1c (deeds aren’t effective unless signed by both

tenants in a TBE)

• Maybe if it’s in TBE, and the client signed the mortgage, but not the debt

• If the property is held in joint tenancy, the other joint tenant is dead, and your client didn’t sign the mortgage• Harms v. Sprague, 105 Ill. 2d 215 (1984)

• Maniez v. Citibank, F.S.B., 404 Ill.App.3d 941 (Ill.App. 1 Dist. 2010)

• Maybe if your client had a homestead interest and there was no waiver of homestead• 735 ILCS 5/12-910 et seq.

QUESTIONS?

This stuff on assumptions, and when you can get away with not assuming a mortgage makes my head spin. Maybe it’s clearer to you? I hope so . . . .

STARTING POINT:THE CLIENT GETS TO DECIDE WHETHER OR

NOT TO ASSUME THE MORTGAGE

• Not the servicer; not the mortgagee

• Olson v. Etheride, 686 N.E.2d 563 (Ill. 1997) (contracting parties can modify who has primary responsibility for payment of a debt, without reference to the wishes of the creditor of that debt)

• Restatement 2nd of Contracts § 323 Comment a (“The assent of the obligor is not ordinarily necessary to make an assignment valid.”)

• See generally Restatement 3rd of Property (Mortgages), § §5.1, 5.2 (transfers with and without assumption of liability)

• Garn-St Germain protects the right to assume the mortgage in certain cases

HOW DO YOU GET AN ASSUMPTION?

• No necessary formal words

• Brosseau v. Lowy, 70 N.E. 901 (Ill. 1904)

• Restatement 3rd of Property, Mortgages, 5.1

• Caselaw is mostly about protecting new owner from presumption of assumption

• Making payments, seeking modification can show assumption

• Chicago Assets Co. v. Watrous, 262 Ill.App. 254 (1st Dist. 1931)

ASSUMPTIONS HELP MORTGAGEES

• Absent a release, the mortgagee can still sue the original mortgagor; assumption adds another party to go after on the debt

• Restatement 3rd of Property: Mortgages § 5.1

• Bay v. Williams, 1 N.E. 340 (Ill. 1884) (granting mortgagee right to sue to collect mortgage debt from grantor even though mortgagee was not a party to the assumption)

MORTGAGEES CAN RESTRICT ASSUMPTIONS, IF THE RESTRICTIONS ARE IN

THE CONTRACT

• Olson v. Etheride, 686 N.E.2d 563 (Ill. 1997)

• Restatement 2nd of Contracts § 323 Comment a (“The assent of the obligor is not ordinarily necessary to make an assignment valid.”)

DUE ON SALE CLAUSES

• Permit the mortgagee to cancel the mortgage contract if the property is transferred

• Don’t usually forbid assumptions, per se, but assumptions of residential mortgages seldom happen outside a transfer of ownership

• See Restatement 3rd of Property, §§ 5.1, 5.2

• No due-on-sale clause, no right to foreclose when property transferred

• Coffing v. Taylor, 16 Ill. 457 (1855)

EXAMPLE

“If all or any part of the Property or any interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by the Security Instrument.”

COURTS STRIKE DOWN DUE-ON-SALE CLAUSES

• In 1970s, homebuyers took over the seller’s existing mortgage rather than taking out a new mortgage at double-digit interest rates

• Banks tried to enforce “due-on-sale” clauses against these home buyers / loan assumers

• Courts across the country (but not in Illinois, that I can find) often held that due-on-sale clauses were unenforceable as a matter of state property law.

• E.g., Wellenkamp v. Bank of Am., 582 P.2d 970, 976-77 (Cal. 1978)

• Key: unreasonable restraint upon alienation of property

GARN-ST GERMAIN DEPOSITORY INSTITUTIONS ACT

• Garn-St. Germain Depository Institutions Act at 12 U.S.C. § 1701j-3 et seq (1982)

• Pre-empts state laws that formerly protected homeowners against bank’s oppressive use of due-on-sale clauses:

“Notwithstanding any provision of the constitution or laws

(including the judicial decisions) of any State to the contrary, a

lender may … enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.”

SILVER LINING: EXCEPTIONS TO GARN

• A due-on-sale clause cannot be enforced when an interest in real property is transferred:

� To a relative resulting from the borrower’s death

� To a spouse or child

� To a spouse pursuant to a divorce decree or separation agreement

� And others. See 12 USC § 1701j-3(d)

WHAT GARN MEANS

• You can’t use a due-on-sale clause to refuse to honor an assumption that is in one of the protected classes

• Fannie Mae Servicing Guide § 408 recognizes this legal reality, calling for “non-qualified” assumptions for widows, heirs, divorcees

BUT THE MORTGAGE HAS BEEN ACCELERATED!

• So???

• Loan mods are always offered to people after the mortgage has been accelerated

• Ask for basis of denial• No law forbidding assumptions

• Never seen investor guidelines that forbid assumptions

• Remember—an assumption helps the ultimate owner of the loan by giving them more recourse in the event of non-payment

QUESTIONS??

We’ll talk next about the specific loan modification and assumption rules for HAMP mods, GSE loans, and FHA loans.

OVERVIEW OF HAMP RULES

• HAMP limits when the servicer can insist on unobtainable signatures

• HAMP encourages servicers to work with homeowners who aren’t on the note to process assumptions and delay foreclosures

• HAMP unfortunately suggests that servicers may be able to deny assumptions, based on investor guidelines or state or federal law

HAMP RULES ON SIGNATURE

• Personal rep of estate can sign (8.9.1)

• Deceased borrowers don’t have to sign (5.7)

• Servicer can waive signature requirement for “mental incapacity, military deployment or contested divorce.” (5.7)

HAMP RULES FOR BORROWERS

• Borrower vs. non-borrower

• Probably means person on note versus person not on note

• “Borrower” may continue existing TPP or apply for new one (8.9.1)

HAMP RULES FOR ASSUMPTIONS

• Requires servicer to stay foreclosure for non-borrower while assumption process chugs forward (8.9.2)

• Surviving homeowner remains eligible for new TPP, even if gets booted out of existing TPP (8.9.3)

• 4(H) of Mod Agreement provides that transfers and assumptions as allowed by Garn are okay

• BUT suggests that “applicable law” or “investor guidelines” may forbid modification

FREDDIE MAC GUIDANCE

• Provides for simultaneous modifications and assumptions, after borrower’s death, by someone, “like a surviving spouse,” with an ownership interest in the property

• B65.12, B65.28 in the Single Family Seller Servicer Guide

• Points of concern:

• Can you get a HAMP mod or only a standard mod?

• What happens in divorce?

• Language not entirely clear that assumption can’t involve new credit screening

FANNIE MAE GUIDANCE

• References “exempt” transactions—basically the Garn-St Germain exceptions

• Requires communication with new owners in exempt transactions

• Loan mod requests for new owners in exempt transactions have to be evaluated as if they came from borrowers

• See Fannie Mae Lender Letter LL-2013-04, also the Fannie Mae, Transfers of Ownership, Questions and Answers

FHA RULES

• HUD has a general policy of free assumability

• With a credit review

• Unless the new owner is via “devise or descent”

• HUD Handbook 4330.1 Rev-5 Chapter 6

• Not quite clear where that leaves divorcees

QUESTIONS??

We’ll talk next about practical considerations in dealing with transfers of ownership in cases of divorce and death, and touch briefly on reverse mortgages, which present their own challenges.

DEALING WITH THIS IN DIVORCE

• Work with the family law attorneys

• Get disposition of debts in family law court:• Who is responsible for mortgage?

• Order assigning rights and responsibilities/ acknowledging assumption of mortgage by remaining spouse?

• Get disposition of title in family law court:• Quit claim deed to remaining spouse

• Consider consolidating the foreclosure into the divorce proceeding• In Re the Marriage of Schweihs, 222 Ill App 3d 887, 584 NE2d 472

(1st D 1991)

• In Re Marriage of Elliott, 265 Ill App 3d 912, 638 NE2d 1172 (1st D 1994)

DEALING WITH THIS IN DEATH

• Property passes automatically upon death to heirs

• True whether intestate succession or via a will

• Trick is getting the servicer to recognize

• Estate?

• Title company opinion?

DO YOU NEED TO OPEN AN ESTATE?

• How is the property held?

• Property held in joint tenancy, tenancy by the entireties, TODI, land trust, passes outside probate

• Is there a will?

• If so, it has to be filed, but still may not need to open an estate

• Title insurance is the key

• Talk to the title insurer—what will they require to issue a policy?

• Bond in lieu of probate?

• Affidavit of heirship? Coupled with quit claim deeds from other heirs? (See 755 ILCS 5/2-1 for the rules on intestate inheritance)

• Affidavit of joint tenancy?

QUESTIONS??

WHAT ABOUT REVERSE MORTGAGES?

• 12 U.S.C. §1701j-3(e)(2) exempts reverse mortgages from the Garn protections

• Other approaches:

• Reformation of the contract, Kerrigan v. Bank of Am., 2011 WL 3565121 (C.D. Cal. Aug. 12, 2011)

• Chapter 13 plan to pay off balance

• Purchase the property

• Lesser of contract balance or 95% of the FMV, 24 C.F.R. § 206.125(c)

QUESTIONS???

Michelle Weinberg has a good case—Jean Constantine Davis is the real expert here and the person to talk to.

HOW TO RAISE IN LITIGATION

• Bankruptcy

• UDAP

• Court’s equitable powers

• Breach of duty of good faith and fair dealing

• ECOA/ FHA

• FDCPA

BANKRUPTCY CASES

• Servicer required by bankruptcy court to engage with GSG-protected debtor in bankruptcy loss mitigation procedures, even though bankruptcy debtor was not on the note and mortgage. In Re Smith, 469 B.R. 198 (Bankr. S.D. N.Y. 2012).

• Non-borrowers that are protected under GSG must be allowed to de-accelerate the note. See In Re Jordan, 199 B.R. 68 (Bankr. S.D. Fla. 1996); In Re Curington, 300 B.R. 78 (M.D. Fla 2003); Citicorp Mortg. v. Lumpkin, 144 B.R. 240 (Bankr. D. Conn. 1992); In Re Alexander, 20 Fla. L. Weekly Fed. B 463 (Bankr. N.D. Fla. 2007); see also Johnson v. Home State Bank, 501 U.S. 78 (1991).

• Basic principle in bankruptcy that anyone who has an interest in the property should be allowed to cure the arrearages

DISCRIMINATION CLAIMS

• FHA and ECOA

• Protected class?

• Women?

• Age?

• Disparate impact vs. disparate treatment

• Getting data

• Al Hofeld is working on an FHA case on these issues now

MORE QUESTIONS??

Thanks for participating in this webinar, your questions, and your work. You can always reach me via email, and I’m interested in how these cases are playing out in the

courts.

Diane E. Thompson

National Consumer Law Center

dthompson@nclc.org

Save the Date!

• Sept. 9th - RESPA 101 - John Rao, NCLC

– Identifying and litigation RESPA issues related to

servicing problems, servicing transfers, QWRs,

tax/ insurance escrows, and FPI.

• Dec. 9th - Defending Reverse Mortgages –Tara Twomey, NCLC

– We will review the legal structure of reverse

mortgages and ways to defend their foreclosure,

including enforcing mandatory escrow

repayment schedules, 95% LTV payoffs, etc.