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First Circuit Holds Homeowner Not Third-Party Beneficiary of Federal Mortgage Modification Program

The First Circuit Court of Appeals has held that a homeowner is not a third-party beneficiary of the federal Home Affordable Modification Program ("HAMP") and that the mortgagee had no contractual or other legal duty to the homeowner to negotiate a modified mortgage. The Court affirmed a district court judgment dismissing the homeowner's complaint seeking to stop a foreclosure.

In 2007, plaintiffs owned property in Massachusetts. They gave a promissory note secured by a mortgage to a lender. MERS held the mortgage. The lender assigned the note to the defendant. The defendant signed a Servicer Participation Agreement ("SPA") with FNMA to participate in HAMP. SPAs require loan servicers to offer loan modifications and foreclosure prevention services pursuant to HAMP guidelines. In 2006, the parties executed a loan modification agreement reducing the interest rate on the promissory note, extending the maturity date and capitalizing unpaid interest. In 2010, plaintiff submitted an application for another modification which defendant denied. In 2011, MERS assigned the 2007 mortgage to defendant, as modified by the 2009 agreement. A week later, defendant's law firm initiated foreclosure proceedings.

Defendant then pursued what the Court called "two contradictory courses of action." It evaluated plaintiffs for another loan modification under HAMP guidelines and determined they were eligible. However, defendant's law firm continued to pursue foreclosure. Plaintiffs filed suit in Massachusetts Superior Court seeking to enjoin the foreclosure. Defendant sent plaintiffs a loan modification offer and scheduled a foreclosure sale. It then "closed" the HAMP modification offer, apparently because plaintiffs could not afford the initial payment, and removed the lawsuit to federal district court based on diversity jurisdiction. The district court granted defendant's motion to dismiss.

On appeal, plaintiffs said the claims they were pressing were: breach of contract based on the implied warranty of good faith dealing, violation of the Massachusetts Consumer Credit Cost Disclosure Act ("MCCCDA"), rescission, negligence and promissory estoppel. The First Circuit held plaintiffs were not third-party beneficiaries of the SPA because it was a government contract, citing Restatement (Second) of Contracts, Section 313, comment a.

Based in part on this holding, the Court also said defendant had no express or implied obligation of good faith to negotiate a loan modification with plaintiffs. There is no explicit agreement in the mortgage to do so. Under Massachusetts law, the mortgagee's good faith obligation is only to use "reasonable efforts to sell the property for the highest value possible."

The First Circuit said MCCCDA, by definition, does not apply to a loan refinancing that only reduces the annual percentage rate with a corresponding change in the payment schedule as a result of the consumer's default or delinquency. It rejected plaintiffs' argument that defendant was a new lender because it was the assignee of the original lender.

The Court said plaintiff's had no negligence claim because defendant did not have a duty to modify their mortgage. It rejected the promissory estoppel argument for several reasons. The complaint alleged only the bare elements of promissory estoppel without setting forth facts that would plausibly support such a claim. Moreover, defendant made no promise to modify their loan. It made a modification proposal that plaintiffs apparently rejected. The First Circuit affirmed the dismissal of plaintiffs' complaint.

MacKenzie v. Flagstar Bank, FSB, No. 13-1236, 2013 WL 6840611 (1st Cir. Dec. 30, 2013)

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