Selem v. Midcoast Mortgage Corp.

97-3057 (U.S. Dist. Ct. D. N.J. 1999) (Unpublished)
  • Opinion Date: July 16, 1999

MORTGAGES; LENDERS—Unless a special relationship between the parties is established, a mortgagor has no obligation to protect its mortgagee from its own actions, and vice versa.

A homeowner had a mortgage from Fannie Mae. A time came when it approached the servicing agent to refinance its loan in order to take advantage of lower interest rates. Because the loan was part of a mortgage-backed security pool, Fannie Mae was required to remove the loan from the pool in order to lower the interest rate. In reviewing the homeowner’s financial information, Fannie Mae instructed the servicer to offer the homeowner a “Special Forbearance Agreement” which would remove the loan from the pool. This agreement places a loan in a form of sanctioned default allowing Fannie Mae to remove the loan from the pool and consider it for interest rate modifications. The homeowner did not understand that its loan would be placed into default. It did not understand that the shortfall which would accumulate under the agreement would have to be repaid at some point, but it did understand that repayment terms would be arranged as part of the new mortgage. The Forbearance Agreement itself did not lower the interest rate on the loan. Instead, it provided that the lower payments would continue until Fannie Mae decided whether to grant a lower interest rate on the loan. The Agreement also did not indicate that the homeowner would default on its mortgage if it signed the Forbearance Agreement, but it did state that the servicer would not send any delinquent payment notices or pursue any foreclosure action while the Agreement was in effect. Before the loan rate was changed, Fannie Mae changed its policy and decided that it would no longer modify loans. Consequently, it refused to alter the terms of this particular loan. As a result, the servicer informed the homeowner that its monthly payment would be even higher than the one it had tried to reduce because of the need to recover the shortfall that had accumulated during the term of the Forbearance Agreement. Ultimately, the homeowner refused or was unable to make payments to cover the shortfall and foreclosure proceedings commenced. Eventually, the homeowner paid the mortgage and then sought to recover damages, punitive damages, and attorney’s fees for the negligence and breach of contract by the servicing agent, a successor servicing agent, and Fannie Mae. In defense to the claim of negligence, the servicer argued that it had no duty to the homeowner apart from the contractual duty imposed by the mortgage. The homeowner argued that by trying to help it to lower its monthly mortgage payments, the servicer assumed the duty to it. The Court agreed with the servicer and held that the servicer never had control over the homeowner or its actions concerning the mortgage, nor did the servicer in any way take custody of the homeowner in a way to deprive it of its normal opportunities for protection. According to the Court, all the evidence showed was that the homeowner approached the servicer to help in either staving off default or reducing the interest rate on the loan and part of the servicer’s response included the Forbearance Agreement. Further, in the servicer’s experience, all parties who were placed on special forbearance status were granted a loan modification. It could not have foreseen that Fannie Mae would change its policy. In addition, according to the Court, parties on opposite sides of a mortgage transaction are in an adversarial posture; the mortgagor has no obligation to protect the mortgagee from its own actions, and vice versa. Fannie Mae, however, was not able to raise the same defenses. While it, too, was in an adversarial position to the homeowner and would not generally be held to have a duty to the homeowner, its actions were held to be different from those of the servicer. Fannie Mae instituted a special forbearance status scheme by which a party seeking modification was placed into default; Fannie Mae was responsible for deciding to freeze all loan modifications; and, Fannie Mae was responsible for failing to accommodate the plight of those on special forbearance status who were denied loan modifications. Consequently, on the evidence before the Court, summary judgment in favor of Fannie Mae was denied.