Under the Home Affordable Modification Program (“HAMP”), an underwater homeowner may request that a lender modify his or her home mortgage. Typically, a request is made after the homeowner has missed payments and needs the modification to eliminate negative equity, reduce monthly payments (and interest in some cases), and bring the mortgage current. If the homeowner meets certain eligibility requirements, the lender will offer a trial period plan that requires the homeowner to make three modified payments. After the trial period plan payments are made on time, the homeowner is supposed to receive a permanent loan modification agreement.
Unfortunately, lenders do not interpret the HAMP rules the same as the rest of the world. Many lenders and mortgage servicers are denying home loan modification after the trial plan period is successfully completed by the homeowner. The lenders categorically state that even though homeowners are enticed into paying the trial period plan payments, there is no contractual obligation to permanently modify loans. They point out that even if a lender promises to modify a loan (in writing), the lender never signs a contract and is not legally obligated. Lenders have also argued that HAMP laws do not provide a homeowner with a private right to sue the lender for failure to provide a loan modification. Consequently, even if a lender did something wrong, the homeowner cannot do anything about it.
Some courts are now allowing lawsuits against lenders and/or servicers for breach of contract when homeowners are denied loan modifications after successfully completing trial plan periods. In the recent case of Topchain v JPMorgan Chase, No. 13-2128 (8th Cir. 2014), the Eighth Circuit Court of Appeals held that a homeowner has a private right to sue a mortgage lender when it fails to properly process a modification. Other courts have likewise ruled that homeowners can sue under HAMP when lenders refuse loan modifications for eligible borrowers. See Wigod v Wells Fargo Bank, N.A. 673 F.3d 547 (7th Cir. 2012); Corvello v. Wells Fargo Bank, N.A., 728 F.3d 878 (9th Cir. 2013); Young v. Wells Fargo Bank N.A., 717 F.3d 224 (1st Cir 2013).
Naturally, lawsuits are expensive and time-consuming. In many cases Chapter 13 bankruptcy is a cost-effective alternative when a homeowner is unfairly denied a loan modification. A bankruptcy debtor may litigate a HAMP lawsuit in federal court while under the protection of the bankruptcy laws prohibiting foreclosure. Chapter 13 bankruptcy may also allow the debtor to “catch-up” missed payments or “strip-off” wholly unsecured junior mortgages.