Cannot Sue for Lack of Standing and Receive Modification at the Same Time

[dropcap]S[/dropcap]uppose you are sued in a foreclosure action.  Let us say that you sue the investor in federal court to prevent the foreclosure because the investor cannot maintain the action in foreclosure because it could not prove that it had the authority to maintain the foreclosure action.  This was the situation in Matt v. HSBC Bank USA, N.A The U.S. Court of Appeals for the First Circuit dismissed as moot a borrower’s claims that HSBC as Trustee for the investor lacked authority to act under the terms of the mortgage.  Why? The reason; while the lawsuit was ongoing, the borrower reached a loan modification agreement with HSBC.

“Pursuant to the Loan Modification Agreement, Matt renegotiated the terms of her existing mortgage loan, and, as a result, her mortgage loan is current and she is no longer subject to any actual or threatened foreclosure proceedings. Consequently, we dismiss this appeal as moot.” The court was “blindsided” when it learned at oral argument that the parties had entered a loan modification agreement and that the loan had been brought current. Matt conceded that she had submitted her application for the modification to “SPS on behalf of HSBC” and had executed a loan modification agreement with SPS, permanently modifying the loan under the federal Home Affordable Modification Program (HAMP).

After an evidentiary hearing ordered by the appeals court, the district court found that SPS had acted on HSBC’s behalf in executing the loan modification agreement, and that Matt’s mortgage loan was no longer under threat of foreclosure. Nevertheless, Matt continued to pursue her claims against HSBC, now seeking declaratory rather than injunctive relief.  Although I am usually sympathetic to the borrower when dealing with lender and servicer, in this case the court was correct.  This is for two reasons.  First is that now that the borrower is current there is no longer a foreclosure action, there is no reason to continue on with lawsuits that are unnecessary.  Secondly, the borrower cannot have it both ways.  The borrower cannot claim that the servicer has no authority to maintain a foreclosure action while at the same time accepting the servicer’s authority to enter into a loan modification.  The lesson from this case is that if you are applying for a loan modification, you may lose any defense or claim that the same entity is not entitled to foreclose.


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