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McGahey v. Federal National Mortgage Association

United States District Court, D. Maine

July 17, 2017

WALTER McGAHEY, Plaintiff,
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION, et al., Defendants.

          ORDER ON RECOMMENDED DECISION ON DEFENDANT'S MOTION TO DISMISS AND PLAINTIFF'S MOTION TO AMEND

          JON D. LEVY U.S. DISTRICT JUDGE

         Walter McGahey's Amended Complaint against Federal National Mortgage Association (“Fannie Mae”) and PHH Mortgage Corporation (“PHH”) alleges violations of the Maine Unfair Trade Practices Act, 5 M.R.S.A. § 205-A et seq. (2017), and the Real Estate Settlement Procedures Act, 12 U.S.C.A. § 2605 et seq. (2017), as well as claims for fraud and for misrepresentation in violation of Maine's Consumer Credit Code, 9-A M.R.S.A. § 9-401 (2017). ECF No. 16. Defendants moved to dismiss all claims against them. ECF No. 19 at 6. McGahey subsequently moved for leave to amend his Complaint a second time. ECF No. 23. The United States Magistrate Judge recommended that the Motion to Dismiss be granted and the Motion for Leave to Amend be denied, ECF No. 30 at 37, and McGahey objected, ECF No. 31; ECF No. 32. I have carefully reviewed and considered the Magistrate Judge's recommended decision and the parties' briefs, and have made a de novo determination of the matters objected to, in accordance with 28 U.S.C.A. § 636(b)(1) (2017). For the reasons discussed below, I conclude that the Defendants' Motion to Dismiss should be denied, and the Plaintiff's Motion for Leave to Amend should be granted.

         I. FACTUAL BACKGROUND

         I accept-and repeat-the Magistrate Judge's recitation of the facts relevant to the pending motions, which is based on the factual allegations in the First Amended Complaint and the documents appended thereto and referenced by the parties.

         At all relevant times, Fannie Mae owned, and PHH serviced, McGahey's mortgage loan on property located at 42 McKenney Road in Saco, Maine (the “Property”). Fannie Mae retained PHH to service the loan under Fannie Mae's direction, control, and authority. PHH is required to follow Fannie Mae regulations and guidelines, particularly the Fannie Mae Servicing Guide, including the Fannie Mae Single Family Servicing Guides (the “Fannie Mae Guidelines”). PHH was and is required to participate in the Home Affordable Modification Program (“HAMP”) for Fannie Mae loans.[1]

         McGahey owns the Property by virtue of a deed from his parents, George L. McGahey and Helen I. McGahey, dated April 20, 2006, and recorded in the York County Registry of Deeds on April 27, 2006, at Book 14818, Page 53. McGahey bought the home from his parents and moved in so that they could live in the home for the remainder of their lives.

         On May 22, 2006, McGahey executed and delivered to TD Banknorth, N.A. (“TD Bank”) a promissory note in the original principal amount of $170, 000 (the “Note”). The Note provided for repayment at a fixed annual interest rate of 7.868 percent. To secure repayment of the Note, McGahey executed and delivered to Mortgage Electronic Registration Systems, Inc., as nominee for TD Bank, its successors and assigns, a mortgage in the amount of $170, 000 (the “Mortgage”), which was recorded on June 7, 2006, in the York County Registry of Deeds at Book 14860, Page 847.

         A. 2010 Loan Modification

         In 2009, due to medical issues and job loss, McGahey fell behind on payments on the Note and applied for loss mitigation. At that time, his monthly income was $3, 387.67, and his monthly payment for principal, interest, taxes, and insurance was less than $1, 500. In or about July 2009, PHH offered McGahey a HAMP modification contingent on his successful completion of a Trial Payment Plan (“TPP”) and income verification. The TPP required McGahey to make payments in the amount of $1, 031.79 on August 5, September 1, and October 1, 2009. McGahey timely signed and returned the TPP and timely made the required payments. He successfully completed the HAMP TPP.

         On or about December 21, 2009, PHH delivered a loan modification agreement to McGahey, which he signed in early 2010 (the “2010 Loan Modification”). The 2010 Loan Modification, which called for a monthly principal, interest, and escrow payment of $1, 456.49, was not provided pursuant to HAMP. Pursuant to that modification, the principal and interest portion of McGahey's monthly payment dropped from $1, 231.80 to $1, 175.80. At the time, McGahey's income was $979.33 monthly due to a recent job loss. The 2010 Modification Agreement required an initial contribution of $1, 987.07. Believing that this was the only way to save his home, McGahey signed and returned the agreement and provided the contribution payment.

         B. 2013 Loan Modifications

         With the help of his parents, and by selling his car, McGahey made the monthly payments until December 2011, after which it was too difficult to come up with the unaffordable amount. In June 2012, PHH delivered a notice of intention to foreclose to McGahey. Shortly thereafter, McGahey retained counsel to help him apply for a more affordable loan modification to prevent the foreclosure. On August 31, 2012, he submitted a complete loss mitigation application to PHH requesting to be reviewed for a HAMP modification. He explained that he had experienced a change in circumstances since 2009-10 in that he was receiving Social Security Disability (“SSD”) income rather than wages and was unable to make the modified monthly payment. As of August 12, 2012, the estimated fair market value of the Property was between $180, 000 and $200, 000. McGahey's income, as submitted to PHH, together with his father's contribution, totaled about $3, 819 per month when adding a multiplier of 1.25 as required by Fannie Mae for non-taxed income.

         On September 25, 2012, PHH sent McGahey a letter stating that it was unable to offer a HAMP modification but providing no reason for the denial. PHH knew or should have known that McGahey was eligible to be evaluated for, if not offered, a HAMP modification as it possessed the original non-HAMP modification and McGahey's complete loss mitigation packet. PHH was required to evaluate McGahey's loan first for a HAMP modification and, if he was found ineligible, then for a Fannie Mae standard mortgage loan modification.

         On September 25, 2012, McGahey met all of the criteria to be eligible for a HAMP modification pursuant to the Fannie Mae Guidelines. Even though McGahey was evaluated for a HAMP modification in 2009-10 and was not offered one after he completed the HAMP TPP due to his change in income, he could still request and be provided reconsideration for a HAMP modification at a future time if he had a change in circumstances. McGahey had neither failed a HAMP TPP nor received a HAMP permanent modification and lost good standing per the Fannie Mae Guidelines. Pursuant to those guidelines, PHH was obligated to evaluate McGahey's application for a HAMP modification.

         Had PHH evaluated McGahey's application properly, it would have found him eligible for a HAMP modification and would have had to offer him a HAMP trial plan. McGahey would have been able to afford and pay the HAMP trial payments. For purposes of a Fannie Mae HAMP, a loan can be modified by capitalizing arrears, reducing the interest rate to a floor of 2 percent, extending the term to 40 years, and/or forbearing principal to reach the target ratio of 31 percent of the borrower's gross monthly income. As of September 25, 2012, a HAMP modification would have provided a monthly principal, interest, and escrow payment of about $1, 183.89, a new capitalized principal balance of about $182, 500, and an initial modified interest rate of 2 percent. McGahey would have been able to sustain that monthly payment.

         Apart from its September 25, 2012, letter, PHH provided no other written response regarding evaluation or eligibility for any other loss mitigation program besides HAMP from August 31, 2012, through January 1, 2013.

         In a letter dated September 28, 2012, PHH, through counsel, stated that it would continue with the foreclosure on the loan. McGahey paid his counsel more than $1, 000 to prevent the foreclosure and eventually appear in the foreclosure action, including participating in the foreclosure diversion program. Through counsel, McGahey appealed the HAMP denial on October 2, 2012. On October 4, 2012, through counsel, he requested that PHH escalate his appeal of the HAMP denial and cease further foreclosure activity on the loan. PHH did not respond to either the appeal or the request to escalate the appeal and cease foreclosure efforts, and did not reevaluate McGahey's application for a HAMP modification or review his loan for other loss mitigation options.

         McGahey, in collaboration with his counsel, sought assistance from York County Community Action (“YCCA”) regarding the denial of his application for a HAMP modification. A YCCA housing counselor contacted PHH with McGahey on October 26, 2012. PHH falsely stated that McGahey did not complete a HAMP in 2009 and, therefore, was not eligible for another HAMP modification offer. PHH represented that it was going to seek an exception through Fannie Mae for another modification. On November 2, 2012, McGahey, through counsel, emailed PHH to check on the status of his appeal but received no response.

         On or about November 4, 2012, PHH filed a complaint for foreclosure against McGahey in the Maine District Court in Biddeford, Maine. PHH and Fannie Mae charged McGahey's account for their attorney's fees related to the foreclosure action. McGahey answered the complaint and requested to be placed in the Maine Foreclosure Diversion Program. In a November 7, 2012, call between the YCCA housing counselor and PHH, PHH again falsely stated that McGahey did not qualify for a HAMP modification and informed the housing counselor that the denial would stand. In a letter dated December 3, 2012, PHH misrepresented that McGahey “for some reason” was not eligible for a HAMP modification, but it provided no reason. PHH offered McGahey a non-HAMP TPP with a monthly payment of $1, 633.47 beginning on January 1, 2013.

         In an effort to continue to try to save his home with an affordable monthly payment, McGahey submitted another complete loss mitigation application for a HAMP modification to both PHH and Fannie Mae on December 4, 2012. PHH acknowledged receipt of the application in a letter dated January 31, 2013. In the application, McGahey reported a change in income, which, combining his SSD payments and his father's contribution of retirement income plus food stamps and accounting for a 1.25 multiplier for non-taxed income, totaled $4, 012.75. McGahey was eligible at that time for a HAMP modification. PHH knew or should have known that he was eligible to be at least evaluated for, if not offered, a HAMP modification at that time as it possessed the original non-HAMP modification and McGahey's complete loss mitigation packet.

         PHH delivered McGahey a notice dated February 13, 2013, offering a TPP in the amount of $1, 501.68 per month beginning March 1, 2013. In a second letter dated February 13, 2013, PHH offered McGahey a TPP with a monthly payment of $1, 625.19. Neither letter indicated that the TPP offers were provided pursuant to HAMP. Based on PHH's repeated misrepresentations that he was ineligible for a HAMP modification, McGahey forewent taking steps at that time to pursue a HAMP modification, such as furthering an appeal, submitting another HAMP application, sending a demand letter, or pursuing litigation, and he accepted the first February 13, 2013, offer of a monthly payment of $1, 501.68 and made a timely first TPP payment.[2] McGahey was led to believe that if he did not take the modification offered, he would lose his home because he was not eligible for a better modification offer: HAMP.

         By letter dated February 18, 2013, PHH offered McGahey yet another TPP with monthly payments of $1, 591.63 beginning April 1, 2013. He continued to send timely payments per the prior offer of a monthly payment of $1, 501.68 and completed that TPP. By letter dated June 5, 2013, PHH offered McGahey a permanent loan modification with a monthly principal, interest, and escrow payment of $1, 630.73 beginning June 1, 2013 (the “2013 Loan Modification”). The interest rate remained 6.67 percent, and the term of the loan was extended to 40 years. A total of $28, 678 in escrow advances, attorney fees and costs, recoverable advances, and interest was added to the modified loan balance, creating a new capitalized principal balance of $198, 216.01.

         The 6.67 percent interest rate was a higher rate than McGahey would have had pursuant to a HAMP offer. McGahey was not offered a permanent HAMP modification in June 2013. Although PHH again knew or should have known that McGahey was eligible to be evaluated for, if not offered, a HAMP modification at that time, it failed to evaluate him for such a modification as required by the Fannie Mae Guidelines. Had PHH evaluated McGahey's application properly, it would have found him eligible for a HAMP modification and would have had to offer him a HAMP trial plan. Based on PHH's repeated misrepresentations that he was ineligible for a better HAMP modification, McGahey again forewent taking steps to pursue the HAMP option, believing that if he did not take the modification offered, he would lose his home. He signed and returned the 2013 Loan Modification agreement to PHH, which signed and returned it to him on July 16, 2013.

         McGahey made at least 20 payments pursuant to the 2013 Loan Modification (as later revised). A portion of those payments went to cover (i) attorney's fees incurred by PHH and Fannie Mae in the 2012 foreclosure action, (ii) higher interest (6.67 percent) than would have been charged pursuant to a HAMP loan modification, (iii) interest on that interest accruing from September 25, 2012, through June 1, 2013, and (iv) “recoverable advance” fees, as well as interest on those fees accruing during that period. McGahey would not have had to pay these costs if PHH had properly managed his loan, including following Fannie Mae Guidelines and accurately evaluating his eligibility for a HAMP modification.

         On August 27, 2013, PHH called McGahey, stating that the permanent loan modification was not effective because it was signed in the wrong place and that it would send a new modification agreement for him to sign. On August 28, 2013, McGahey's counsel delivered a letter to PHH, characterized as a Qualified Written Request pursuant to RESPA, requesting information regarding McGahey's loan, including any modifications made to it. The letter stated:

In order to determine the amount due and owing on my client's account, I need all information about the costs, accounting, escrow procedures, and application of payments in connection with this loan. Due to the complicated nature of mortgage account servicing, accounts frequently contain errors in the form [of] misapplied payments, excess fees, or unwarranted/unauthorized charges. I have reason to believe that this account may contain such errors.

ECF No. 16-23 at 1. The letter made 10 demands for documents or information.

         PHH responded by letter dated September 10, 2013, but did not provide information regarding the 2010 Loan Modification. PHH disputed that the August 28, 2013, letter was a Qualified Written Request in that it failed to identify an actual error in McGahey's account. However, it provided copies of McGahey's Mortgage, Note, HUD-1 Settlement Statement, Truth in Lending (“TIL”) disclosures, Assignment Notice, Payment History, and a key to interpret the Payment History, and provided the contact information of a PHH employee.

         In September 2013, PHH asked McGahey to execute a revised modification agreement with similar terms with a monthly payment of $1, 625.22 and capitalization of $27, 756.55 in attorney fees, recoverable advances, advanced escrow, and interest (the “Revised 2013 Loan Modification”). This was not a HAMP modification. Again, based on PHH's misrepresentations regarding his HAMP eligibility, McGahey timely signed and returned the Revised 2013 Loan Modification agreement. Again, PHH knew or should have known McGahey was eligible to at least be evaluated for, if not offered, a HAMP modification at that time.

         Again, a portion of the payments made pursuant to the Revised 2013 Loan Modification agreement went to cover (i) attorney's fees incurred by PHH and Fannie Mae in the 2012 foreclosure action, (ii) higher interest (6.67 percent) than would have been charged pursuant to a HAMP loan modification, (iii) interest on that interest accruing from September 25, 2012, through June 1, 2013, and (iv) “recoverable advance” fees, as well as interest on those fees accruing during that period. McGahey would not have had to pay these costs if PHH had properly managed his loan, including following Fannie Mae Guidelines and accurately evaluating his eligibility for a HAMP modification.

         C. 2015 Loan Modification

         McGahey struggled for over two years to make the monthly payments on the 2013 TPP and loan modifications. He had bought another used car but had to sell it to help make the payments. PHH knew or should have known that $1, 625.22 was an unaffordable payment amount based on McGahey's submitted financial information.

         In May 2015, McGahey reconnected with the YCCA housing counselor and submitted another complete loss mitigation application, again seeking a HAMP modification. During the process of working with the housing counselor in 2015, McGahey had to travel approximately 45 miles round-trip at least two times from Saco to Sanford, paying gas and mileage expenses. Again, McGahey had changed circumstances in that he could not maintain the modification payments and had unexpected housing expenses, as outlined in his hardship letter submitted to PHH.

         By letter dated June 4, 2015, PHH falsely stated that McGahey did not qualify for a HAMP modification because he did not “successfully complete a previous HAMP offer.” ECF No. 16 at ¶ 125. In June 2015, PHH offered McGahey a non-HAMP TPP with three monthly payments of $1, 339.98 beginning July 1, 2015. Again, PHH knew or should have known McGahey was eligible to be evaluated for, if not offered, a HAMP at that time. Had PHH evaluated his application properly pursuant to Fannie Mae Guidelines, it would have found him eligible for a HAMP modification and would have had to offer him a HAMP trial plan. McGahey would have been able to afford and pay the HAMP trial payments. Again, PHH knew or should have known the modification payment offered was unaffordable based on McGahey's submitted financial information. Based on PHH's repeated misrepresentations that he was ineligible for a better HAMP modification, McGahey again forewent taking steps to pursue the HAMP option, believing that if he did not take the modification offered, he would lose his home.

         As of June 1, 2015, McGahey was eligible for a HAMP modification with a monthly payment of about $1, 177.70 based on his SSD income of $1, 374 and a $1, 665 per month contribution from his father. Pursuant to Fannie Mae Guidelines, PHH was required to evaluate McGahey for a HAMP modification and communicate its decision to him.

         On June 12, 2015, McGahey delivered a letter to PHH characterized as a Notice of Error in which he sought to appeal PHH's wrongful denial of a HAMP modification and obtain proper review for such a modification. He submitted a similar complaint on June ...


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