Minn Fed Ct Rules Against Borrowers in HAMP Challenge

The U.S. District Court for the District of Minnesota recently held that the HAMP program did not create a protected property interest for borrowers, because borrowers are not entitled to loan modifications.

As you may recall, the U.S. Treasury's Home Affordable Modification Program provides a series of guidelines for servicers to modify loans in default or likely to default in order to forestall foreclosures. Treasury guidelines outline eligible borrowers and provide incentives to mortgage servicers to reduce monthly payments to sustainable levels.

The Plaintiffs in this case purport to represent two classes of people. The first class consists of borrowers who were delinquent on their mortgage payments, applied for and were denied loan modification, but foreclosure proceedings had not yet been initiated by the lender. The second class of plaintiffs consists of borrowers whose property was sold in foreclosure proceedings after applying for and being denied loan modification, and whose statutory right of redemption period has not yet expired. Both putative classes allege a violation of their constitutional right to procedural due process because their mortgage loan servicers supposedly did not provide written notification of an adverse decision or an opportunity to appeal the denied request for loan modification.

The court denied the Plaintiff's motion for preliminary injunction. In so ruling, the Court considered whether there was a “substantial likelihood” that Plaintiffs would prevail on the merits of their claim by being able to show a deprivation of a protected liberty or property interest. The Court had four primary reasons for concluding that, “the regulations at issue here did not intend to create a property interest in loan modifications for mortgages in default.” First, the language of the HAMP guidelines did not “create an absolute duty on the part of the Secretary to consent to loan modifications.” Second, the loan modification program allows the servicer to make loan modification decisions based on profit calculations and therefore it is not a mandatory entitlement. Third, “the regulations promulgated by Treasury…clearly demonstrate that the Secretary allowed the exercise of some discretion…to the servicers,” and therefore lack the characteristics of a mandate. Fourth, the participation of loan servicers was made voluntary and the program was designed to allow servicers to make loan modification decisions based on their potential profits.

For those reasons, the court determined that the “Plaintiffs do not have a legitimate claim of entitlement to a loan modification.”