Superior Court Judge Says: HAMP Has NO TEETH

A California Superior Court Judge has ruled that President Obama’s Home Affordable Modification Plan, widely known as HAMP, has “no teeth”.

The case involved Ana Rosa Morales and Aurora Loan Services, and attorney Ms. Zshonette Reed, of the law firm Lorden Reed, was representing Ms. Morales who had retained her to help her obtain a loan modification from her mortgage servicer, Aurora.  Reed had helped Ms. Morales prepare her documents for submission to Aurora under the HAMP program, and determined that Morales did qualify for a loan modification under the published HAMP rules and guidelines.

Reed submitted the paperwork and documentation to the mortgage servicer who told her that Morales was under review for a HAMP modification… and then without denying the request for a loan modification, they simply proceeded to initiate foreclosure proceedings on Ms. Morales’ property, something they are not to do according to the documents that describe the obligations of the lender or servicer under HAMP.

The Honorable Richard E. Spann listened to Reed as she read from the HAMP guidelines.  According to the court transcript:

Attorney Reed:

“They are required to consider all eligible loans under the program guidelines, unless prohibited by rules of the applicable PSA and/or other investor servicing agreements.  Participating services are required to use reasonable efforts to remove any prohibitions and obtain waivers or approval from all necessary parties.”

So one of the duties that’s imposed upon a servicer is to review the modifications pursuant to the guidelines, and these are the guidelines.

“Additional duties of a participating servicer, which is, any foreclosure action will” – an imperative — “will be temporarily suspended during the trial period or while the borrowers are under consideration for a foreclosure prevention option.”

So again, we have a duty, as long as this case was under review, which we were repeatedly told that it was, they had a duty to postpone that foreclosure sale.

In addition, if we look at Page 5, under the section “required modification and optional modification,” it says: “A standard NPV test” — that’s net present value test — “will be required on each loan that is in imminent default or is at least 60 days delinquent under the delinquency calculations.”

So additionally, they have to perform a certain test as a part of their review before they can foreclose on the property.  That was never done in this case.  My preliminary NPV test indicates that these particular plaintiffs would have passed and would have qualified for a modification.

The bank also has to perform what’s called a waterfall.  And I believe the waterfall is noted on Page 6 and 7 of Exhibit A.  Down at the bottom, it says: “standard waterfall process.”  And it talks about in reviewing it, you look at the gross monthly income first.  And then you calculate the DTI, and you capitalize arrearages.  And then you try to target a front-end DTI of 31 percent.  And then to achieve that target payment, you reduce the interest rate down to a floor of 2 percent.  If that doesn’t do it, you move on to step 5, which is extending the terms for 40 years.  And then Step 6, if you still can’t get your target payment, then they are required to — they are not required to, but they may consider a principal reduction.

So we see several steps that this bank had to perform, as a participating servicer, that they did not perform.  Had they performed as they are required by contract, my clients would have gotten a loan modification.

The guidelines provide that anybody who qualifies, this initial qualifications and passes NPV test and can afford the modified payment after it’s been modified, the target 31 percent DTI payment must be modified.

And that’s what I am arguing here, your Honor.

Judge Spann replied: “I understand.”

Reed was in court that day requesting a temporary injunction, or TRO.  She felt confident that she had presented enough evidence for the court to grant a preliminary hearing at which Aurora would have to present their argument for foreclosing on Ms. Morales’ home while she was under consideration for a modification under HAMP.

Judge Spann asked the attorney for Aurora, Michael Kelly, if he had anything to say.  He said:

“I only can say that I don’t know if they have offered enough proof to show, first of all, how they failed in the performance of the duty.  And in that, I would say their showing is not sufficient to provide us with grounds for a TRO.”

Boy, this guy’s no Clarence Darrow, I’ll say that for him.

Ms. Reed replied that yes, the duty was to postpone the sale.  “That’s what they failed to do,” she told the court.  She also directed the court’s attention to the date, April 30, 2009, when Aurora signed the contract with the Federal Government  to participate in HAMP.  According the transaction report from the Troubled Asset Relief Program (TARP), the U.S. Treasury has pledged $798 million to Aurora Loan Services in exchange for their help modifying or refinancing mortgages.  The $798 million was referred to as “incentives,” so perhaps it’s just not enough.  I say let’s double it.

According to Bruce Dorpalen, ACORN’s director of housing counseling: “If Aurora continued on their current pace, it would be six and a half years to complete their portfolio.”

Well now, that’s certainly cause for merriment, wouldn’t you say.  I would have guessed that it would have taken at least seven years.  See that, one shouldn’t jump to conclusions.  Maybe the servicers are doing their best after all.  Live and learn.

Judge Spann, however, wasn’t interested in any of that, he was only interested in whether Aurora was actually required to do all those things that he clearly didn’t understand the precise nature of, or whether they were, as opposed to requirements, perhaps mere suggestions.  Ideas.  Things they could do if they wanted to.

In response to hearing everything presented thus far, Judge Spann said:

“I understand your position.  Basically, we differ on how we look at what the whole act is.  And this is not the first time this has come up in this court.  Basically, we do not find the duty on behalf of the banks, quite frankly.”

“This is something the government has put together that does not appear to have in our review that have that many teeth in it.  It’s ‘may’.  They may do these things, but they don’t have to.  And looking at everything as favorably as I can for your client, I just do not find a sufficient basis.”

Before I conclude anything about this surrealistic excursion into a world in which the contract you sign with the federal government in order to receive $798 million in “incentives” is considered by the courts to be toothless, I just wanted to point out how easy it is to be a lawyer representing mortgage servicers is really easy.  I’m quite sure I could do it actually.  And I’ve never attended law school, nor do I know anything about mortgages.  Pretty much the only training I’d even need would be someone to tell me when to stand up and when to sit down.  The rest I could pick up on a re-run of Boston Legal.

Okay, let’s wrap this up… there’s no point spending another minute on it.  The HAMP program is much like the United States Army.  It’s voluntary… until you volunteer.  After that, pretty much everything is madatory.

Under HAMP’s rules, lenders and servicers participating in the program are required to perform an NPV analysis, which stands for Net Present Value, which is another way of talking about the time value of money.  What’s the cost to modify a given loan, as opposed to not foreclosing on it, and when the cost if lower to modify, they’re supposed to… not voluntarily, but because that’s what the contract says.

The NPV formula is also, according to the HAMP guidelines, to be disclosed and transparent… the two things it’s never been close to being, and which, I’ve been told by a very credible source who didn’t want to be identified because she didn’t want to “piss off Treasury,” is a clear violation of administrative law.  ‘

The fact is, when it comes to Obama’s housing plan, there’s no adult supervision and no one is responsible for anything.  Even the contract itself… according to Judge Spann, has no bite.

Are servicers permitted to initiate foreclosure proceedings while a given borrower’s application for a loan modification under HAMP is being reviewed?  Absolutely not.  And you don’t even need a 5th grade education or speak English to figure that out.  But do they care?  Not one bit.  What should we do about it… sue?  Sue who?  The servicers?  Ms. Morales v. Bank of America?  You’re kidding, right?

So, thank God there are attorneys like Ms. Zshonette Reed, of the law firm Lorden Reed in Chatsworth, California.  Attorneys that will fight for the rights of people who would otherwise have no voice.  I asked Ms. Reed whether losing this one has lessened the wind in her sails and she replied:

“No, each time I lose I only become more resolute.  I have to help these people… look around… how can anyone not care.  What I can’t believe is that more attorneys and non-attorneys aren’t lining up to help solve our national economic catastrophe, by helping people remain in their homes.  It’s not a choice for me… I have to do it… Actually, she sounds very much like me.

Bravo Ms. Reed.  Yes, you lost… but did you really have any alternative but to try?  What would you have done… told Ms. Morales that you couldn’t help her so get packing?

People… you’re either part of the solution, or your part of the problem.  And if you’re still sitting on the sidelines of this issue at this point… I’m sorry, that’s a problem.

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