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The HAMP Lawsuits – Borrowers Suing for Permanent Modifications

I maintain that the killer set of lawsuits with respect to the banks over the mortgage fraud scandal concern investors trying to make them repurchase their toxic waste. This probably doesn’t do much for homeowners, unless the settlement involves turning the loans into modified “equitable mortgages” or otherwise performing loans that enable people to stay in their homes. There’s evidence that the investors could prefer this, and that the banks would offer it as a counter-option to having to eat all the garbage assets.

It’s impossible to know whether that would be done on a mass scale, however, and in time to save a lot of homeowners. So it’s important to keep track of the other lawsuits streaming through the system, including a class action suit consolidated from other complaints alleging violations with Bank of America’s compliance with the HAMP program.

In a little-noticed decision earlier this month, a federal judicial panel rolled together several class action lawsuits (PDF) from U.S. district courts across the country and assigned them to a federal judge in Massachusetts, who will decide whether to dismiss the suits, or allow them to proceed.

The decisions she makes could affect more than 100,000 homeowners, and further highlights questions about the performance of the government’s Making Home Affordable program, also called HAMP.

I’ve documented how the servicers like BofA have failed to comply with clear directives in HAMP in a variety of ways. They fail to identify the reasons for denying a permanent modification, they deny borrowers who made all the trial payments and qualified under the HAMP guidelines, they lost documents or asked for additional documents not under the contractual obligations, they advised borrowers to miss a payment to qualify for HAMP when that was not the rule, and more. In this class-action case, borrowers allege that they agreed to a binding contract with the trial modification which guaranteed them a permanent modification if they followed the prescribed steps. They seek the permanent modifications that would allow them to stay in the home.

Bank of America, predictably, argues that the trial modification does not constitute a binding agreement.

I think the class-action case would be on stronger ground if they focused on other violations of HAMP, like failing to identify a reason for kicking out a borrower, or telling borrowers to miss a payment and go delinquent to qualify, when that is not the case. However, these basic grounds – that the trial mod constitutes a binding agreement – have popped up in lawsuits against a number of servicers, with the BofA case likely to be the first to go through the trial process. If it’s successful, hundreds of thousands of borrowers would be able to receive a permanent modification if they followed all the steps in the trial modification, like making the payments on time.

It’s just another of the many interlocking legal battles aimed at the big banks and their servicer divisions.

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David Dayen

David Dayen