Fine, you have a contract. But if the rest of society finds your conduct with respect to that contract to be unconscionable and deplorable, why should we enforce it for you?
Because it was a legal contract. Call me an asshole or flog me in public, but I have the legal right to the money from that contract.
Change the law tomorrow or ten minutes from now to prevent a predator like me from ensnaring innocents in the future. But as of today, I have a right to collect!
Do I understand your argument correctly: You can obligate society to enforce your contract, even though that society feels your contract was arrived at inequitably, because contracts are enforceable? Does this not seem rather circular to you? It does to me.
From the opinion,
“Upon the Court’s own motion, it is ordered that the Adjustable Rate Note in the amount of $ 292,500.00 […] shall be and the same is hereby cancelled, voided, avoided, nullified, set aside and is of no further force and effect.”
Do each of these words have a legal meaning? or is the judge just being really, really, clear?
What was inequitable about the contract? One party of sound mind pledged something as collateral for a loan of XXXX to another party of sound mind.
If we start saying that these things are inequitable because it turned out that the first party made a bad investment (and by logic so did the second) so the first party gets a windfall at the expense of the second party…you wanna talk about a credit crunch! What bank will lend money in the future under these terms?
In my IANAL opinion it is just in case some swinging dick lawyer argues on appeal that one of the words didn’t really mean entirely gone, just partially, or they whip out a case from 1824 to say that it means something that it didn’t. Then you’ve got a bunch more words to back it up and survive scrutiny.
I’m not entirely unsympathetic to that view; I think I raised that point myself above. I do think it’s good to point out that contract law is a social tool, not an individual one. When we deign to use the power of the state to back up private agreements, we’re certainly permitted to inquire whether doing so has a net benefit to society (including, importantly, both parties to the contract: the bank and the borrower, and the repeated-game effects of our decisions, in this case, how capital markets will respond to such decisions). That two people have voluntarily reached an agreement is only the beginning of the account as to why you, jtgain, and me and the rest of society should get in the business of being the aggrieved party’s muscle.
For instance, it turns out that the bank here accepted federal bailout money, as MichaelQReilly points out. Should this fact really have no influence on the standards of negotiating we impose on the rescued bank with its own delinquent accounts. It is not clear to me what the answer to that question is, other than it is certainly not cut-and-dried.
Those quotes indicate that it isn’t a matter of whether or not to modify the terms of the original mortgage contract, but rather a matter of slapping down the bank for attempting to outright cheat their debtors and extract far more than they were owed. Debt cancellation is a reasonable penalty for that sort of criminality – for one thing, it has the advantage of neatly scaling the punishment to the crime (since attempts at fakery are limited to the same rough order of magnitude as the actual debt, for obvious reasons of preserving surface plausibility).
They are redundant. The opinion is for show. It will certainly be reversed on appeal (if it gets to a decision; the parties might now settle between themselves). There’s just no legal principle that says the court can take your rights away for refusing to agree to a settlement. That’s what courts are for – to try cases that the parties won’t settle. The appeals court will send it back with instructions to treat it like a normal case: hold a trial to figure out precisely how much unpaid debt the bank can prove, award that, and deny the rest.
In essence, the judge is telling this and other lenders that he’s going to make it as difficult for them as he can if they don’t settle readily, and even if he’s reversed, they’re in for a rough ride and a lot of litigation costs. And it will probably be effective; plenty of lawyers representing lenders will counsel that it may be worth leaving a few dollars on the table in settlement negotiations rather than antagonize the judge, particularly if that lender is likely to be appearing before him multiple times.
Interesting responses, from both sides of the question.
I’ll start by agreeing that equity trumps law. That’s been true of mortgage law in the common law tradition for centuries. OTOH, equity isn’t a free-wheeling exercise. It’s governed by maxims, of which the most important in this context is that equity abhors a forfeiture. Historically, the reason mortgages are in equity is that it afforded relief to the borrower, i.e., the ability to redeem title by paying off the loan even though the contractual right to do so had lapsed. So, when people speak of foreclosing a mortgage, that’s not correct. What’s being foreclosed is the equity of redemption.
All that’s history, however, and equitable mortgage law has long since (in all American jurisdictions) been supplanted by statutory law designed to achieve the same end (preventing forfeitures) by standards which are clearly defined and predictable. And here, IMHO, is where Justice Spinner’s reasoning falls down. If the borrowers have a defense under New York law, well and good. If not, lender wins, even if it’s being stupid and stubborn. Notable by its absence is the citation by Justice Spinner of a single case in which being stubborn and stupid has been deemed adequate grounds to deny enforcement of a mortgage if the borrower was unable to cure defaults. It’s a remarkably well researched and well written opinion. If Justice Spinner couldn’t find such a case, and I’m not aware of one, I conclude none exists.
I take MichaelQReilly’s point that mandatory mediation must mean something. Plainly, it slows down the process. But, I think that’s all it does. By definition, mediation is voluntary. If the lender refuses to see the “win-win” scenario, we go back to hammers and tongs. Which isn’t to say the lender wins. But it does mean the action is decided on the merits. In any event, forfeiting the loan and mortgage was a remedy entirely 180 degrees contrary to equity.
IANAL, but I thought that was a basic function of a civilized society. If you and I have an agreement, and that agreement is breached, we don’t settle our differences with guns or swords, we go to the proper authorities.
If we take any other route (i.e. "That is a valid legal contract, but we aren’t going to enforce it because we don’t like you.) then what assurance does anyone have in the future to the legality of his own contract? Whether that is a pledge of money, labor, or property, if I can’t count on my legal contract being enforced, then we will go back to having Nicky, Vinny, and Guido bashing some heads with baseball bats.
You are putting the cart before the horse. A contract with terms abhorrent to society (because they are illegal, unconscionable, etc.) is not a valid contract. For instance, you and I can’t create a contract to share the proceeds of our bank robbery 50/50.
This isn’t really what’s going on in this foreclosure case, but you can’t assume that just because two people agreed on something that it is automatically a valid contract and is entitled to enforcement by the courts.
[Disclaimer: I’m an attorney in Florida whose practice is the representation of banks in foreclosure litigation. My firm gets about 1,500 new referrals a month, but I speak based on my experience with Florida law only…I’m not familiar with what’s required in N.Y.]
All over Florida, there are Administrative Orders Requiring mediation in owner occupied foreclosure cases. Much to our chagrin, mediation is not voluntary (and, in fact, it is always within a Florida judge’s power to order a contested case to mediation). Settlement is voluntary, but mediation is not.
Mediation does more than slow down the process (although it does that, too). The Federal Government has a program called HAMP (Home Affordability Modification Program), which allows a person to qualify for a mortgage modification. Lots of lenders* have contractually pledged with the government to review interested borrowers for HAMP.
But, HAMP has guidelines that limit qualification. It must be owner occupied property, the mortgage to income ratio must be 31% (i.e. if your mortgage isn’t at least a third of your gross income, you earn too much to qualify), and you must agree to let the Lender escrow for taxes and insurance (i.e. include that in your mortgage payment).
I did a mediation today. The challenge with these is, first, weeding out the huge number of “other” cases from ones that need mediating (I refer to all of the investors/flippers/slum lords who are not in danger of losing their home).
Then, we require an accurate statement of the person’s gross income and expenses. As with today, this is difficult - foreclosure is usually accompanied by other issues or problems in a person’s life, and they are often reluctant to admit to their other financial decisions (I refer to the woman who had 14 maxed out credit cards, drove a Porshe 911, had signed for her (ex) boyfriend’s other Porshe, and also was financing an ATV; or the guy who didn’t want to confess that his wife had left him - and therefore wasn’t contributing to household income - and who reported $700 in “personal loans” among his monthly expenses, even though they didn’t show up on his credit report or in any written form).
If the income ratio qualifies, and the property appraises within the guidelines (it’s another ratio which I can’t recall at the moment), they borrower will get a three month trial modification. If successful, and if their financials are still accurate after 3 months (i.e. they didn’t lose their job), then they get a permanent modification and no more foreclosure.
The loan servicers who are reviewing for HAMP are getting incentives from the government, but this is different from TARP money. The TARP money that went to banks was intended to offset the loss they were taking as a result of depreciated assets (which do include mortgages, although the TARP money wasn’t allocated to the securitized Trusts), in order to keep them lending. We could, of course, argue about the propriety of giving stupid Banks money to let them continue to be stupid, but that’s completely a different debate.
Oh, and as to the O.P., the judge is wrong, and will be overturned on appeal. At worst, he should had denied the summary judgment (the bank was not going to seek a trial; we avoid them like the plague, since the volume of work is so high) with prejudice, and forced them to file an entirely new lawsuit, when they got their shit together. Invalidating the mortgage was asinine, but judges are often huge egomaniacs.
*Technically, in this market, the normal process is for loans to be sold. Many went to Fannie Mae, but others have been pooled and securitized, and are owned by a collection of bond holders in a Trust, and are represented in court by a bank acting as a Trustee; the “mortgage company” who you deal with is the loan servicer, who is an agent hired by the Trustee to collect the payments and otherwise service the loan.
Thanks, Atomicktom, for a very informative post. FWIW, thinking this over today, I concluded that, if Justice Spinner insisted on fashioning a remedy, he should have done something like what you suggest, i.e., dismiss the action (or adjourn it without date) but not invalidate the mortgage. I think the reason he didn’t was that he wanted a resolution and felt leaving the borrower in limbo wasn’t an acceptable outcome. Also, obviously, he wanted to “send a message” to the lending community. BTW, when I say mediation by definition is voluntary, I mean agreeing to a resolution is voluntary. Plainly, also by definition, mandatory mediation means the lender (and borrower) must submit to the process.
If you have the time, I’d appreciate any insights on how mediation goes in Florida when the borrower doesn’t fit the HAMP guidelines (as allegedly was the case here). If the borrower makes what the judge feels is a reasonable proposal (but not a cure) and the lender insists on foreclosure, what happens?
I too pondered this last night… what about holding the bank to the Forbearance Agreement (the one they notified Defendant of after it had already defaulted). This would maintain the mortgage AND punish the bank for their specific wrongdoing. Basically they’d be equitably estopped from denying the continuing validity of the Forbearance Agreement.
Better or just as overturnable? Discuss.
Clients of mine often have their own loss mitigation programs, as well (which they’ll review you for if you don’t qualify for HAMP), and these may include different guidelines (such as not being limited to household income - if your Uncle is going to send in some money to help pay the mortgage, they’ll factor that in). One client, for example, offers a stipulated payment plan, but it’s on a more temporary basis than HAMP, and is designed for a reinstatement.
Actually (and I just clarified this today) HAMP is not a permanent modification, either. It’s a renewed payment plan (I think the interest rate drops to 2%), but after 5 years it goes up a “point” (i.e. percent), then goes up 1% each year thereafter until it gets to where the note would have been if not modified [I equivocate because I’m the lawyer, so I don’t run the numbers or deal with the technical aspects of the program, although it makes it easier to make the legal argument when you kind of “get” what your client is doing].
There’s an important point in that. Many people are indignant that their loan isn’t being restructured to the value of their property, which has invariably dropped. But the owners of these loans bought a debt on the secondary market, which just so happens to be guaranteed by a piece of property. Sure, the piece of property isn’t worth the debt it secures, but that’s true of my car, too, and I’m not entitled to a new car loan, either, just because my Saturn dropped in value as soon as I took it off the lot.
It might be weird to think of debt as a thing of commerce, but the law on it literally goes back centuries. When you get a mortgage, you sign a promissory note, too. That note is an I.O.U., which (by it’s terms) is freely transferable, and is payable on demand if you default (under Florida’s law, the person who can enforce that debt can also foreclose the mortgage securing it; people rarely have the money to pay back the Note, so the foreclosure is the best way to recoup the investment). The practice goes back centuries (Florida’s Supreme Court adopted the common law of negotiable instruments in the 1840’s, for example).
If the borrower doesn’t qualify for another loan modification program, the time may have simply come for the borrower to consider that he can’t afford to own his own home. I say this both as a Bank lawyer and as a guy who rents his apartment.
Even during “normal” times, from loan default to eviction was 7 months. Now it’s a year or more, easy. In Miami-Dade County, if the court rules today that the bank is entitled to a foreclosure, the property will be sold July 28th (I was there today)…and that is at the end of the foreclosure case, which probably took a year to complete. The bank didn’t refer the defaulted loan to the attorney for the first 3 months, either.
About 6 of the foreclosures I finished today had been on hold from October of 2008 to June of 2009 for workout review. Nobody showed up at the hearing to defend, but if somebody shows up next summer and tells the judge they are “trying to modify”, they’re likely to get a reset sale…maybe this time next year.
My point is that nobody is being evicted quickly in this foreclosure mess, and borrowers losing their home in foreclosure haven’t had a house payment in about a year. While I hear, and appreciate, the sad stories (and feel especially bad for tenants who are getting evicted even though they’ve been paying the landlord on time), nobody has the sheriff knocking on their door with an eviction notice unless they are holding on until the bitter end.
As to your question, even the most ornery judges have to admit that they can’t order a forbearance agreement or settlement. For one thing, there’s language in a standard mortgage (and by standard I mean Fannie Mae approved, because every conventional Lender wants to have a loan that Fannie Mae might buy) which says that forbearance for a period of time doesn’t waive the right to accelerate, and acceptance of part payments or late payments doesn’t mean you get a new due date. (The mortgage does provide for a right to reinstatement, though, and the law does allow a party to redeem the judgment (i.e. the value of the mortgage, plus the accumulated costs and fees) right up until the foreclosure sale. Sure, it sounds like a longshot, but you might be surprised of how much money somebody can free up when they liquidate other investments.)
More basically, the court can’t re-write a contract (for all of the reasons mentioned upthread - contracts are unreliable as a means of commerce if they are not enforceable. That’s the reason that even minors can’t avoid a contract for “necessities” - why would people sell food to a kid if he could claim ignorance and suddenly not owe it?.) There was a push to give bankruptcy judges the power to rewrite mortgage contracts, but the legislature declined.
Personally, I think it’s unconstitutional. The Contract Clause appears in the United States Constitution, Article I, section 10, clause 1. It states:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."
The Court doesn’t get to make a business decision (and would you want them to? If I owed you $100, and showed up at your door and said, “Here’s $60”, do you really want the Court to force you to accept it?). The power the judges do have, and which they tend to assert, is the power to force a bank official to look the borrower in the eye - face to face - and tell them they won’t modify the loan. It’s a huge waste on time and money, since so many more modifications can get processed when our corporate reps get to contact borrowers on the phone, but that’s judicial wisdom, for you (in Vegas, I’ve been told, ALL foreclosure mediations have to be done face to face. Considering one of our clients operates out of Oregon and another Texas, this is just dumb).
Interesting. Thanks. And I agree the judge can’t force a modification. much less forfeit the debt because the lender is being stubborn.
whoa whoa whoa. hold the horses. now who is putting the cart before the draft animals, here?
no lender forced any buyer/borrower to purchase a piece of property at the price the buyer/borrower offered to the seller of the house.
you’ve got a tough road to hoe if you want to claim that a mortgage contract is unconscionable because the bank agreed to lend out too much when compared to the borrower’s ability to repay. if anything (and this is TIC) it’s almost as if the borrowers fleeced the lenders in some ways.
i’m not absolving the money lenders here of responsibility. they were reckless and careless in handing out money like farmers dumping grain at the feeding trough. but let’s not forget, there were a bunch of “homeowners” who massively overpaid and put themselves way in over their heads - lining up for the feed, so to speak.
If we all agree that cancelling the mortgage was not a proper sanction of the bank, what would be? I find it hard to believe that with all of decietful tactics the bank pulled with these people and the court that they would just get a do-over and admonished not to pull that stunt again.
row, not road. just noticed my booboo :o