Many California real property owners have challenged lenders foreclosure proceedings based on state and federal laws enacted the past few years to help homeowners during the real estate collapse.. In most cases, the courts have found that the laws do not create new, enforceable rights, with a few exceptions. Mis-interpretation of requirements placed on lenders, through statutes and language of the deed of trust could be perilous, and interested parties should consult with an experienced Sacramento & Yolo real estate attorney. A recent decision out of Alameda County presents one such case, where the deed of trust required the lender to follow HUD servicing guidelines.
In Pfeifer v. Countrywide Homes, a mother and son obtained a $607,000 loan that was purchased by Countrywide. The mother was incompetent, and the son was her court appointed guardian ad litem. It was an FHA guaranteed loan. The standard FHA form Deed of Trust stated, in paragraph 9, which sets forth the “grounds for acceleration of debt.” It states:
“[l]ender may, except as limited by regulations issued by the Secretary, in the case of payment defaults, require immediate payment in full of all sums secured by this Security Instrument… that the “[l]ender shall, if permitted by applicable law … and with the prior approval of the Secretary, require immediate payment in full of all sums secured by this Security Instrument ….” In subdivision (d), under the heading of “Regulations of HUD Secretary,” the agreement reads as follows: “In many circumstances regulations issued by the Secretary will limit Lender’s rights, in the case of payment defaults, to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary.”
Countrywide began foreclosure proceedings; before the trustee’s sale, the borrowers filed this lawsuit. The homeowners claimed that the lenders began foreclosing without complying with HUD guidelines- specifically, there was no face-to-face interview with them, as required by the Code of Federal Regulations (24 CFR section 203.604 & 203.500).
The court noted that the purpose of the FHA insured loan program was to allow loans to low-income families that would otherwise not qualify. It does so by guaranteeing that the lenders will not lose any money if the property was foreclosed. There are two purposes for the regulations- one, to encourage lenders, but second, to prevent foreclosures of HUD mortgages so that the government did not have to pay out on the guaranty. The face-to-face interview is required because FHA borrowers tend to have a general lack of experience in financial management and limited access to information about resources to avoid foreclosure.
The power to foreclose is granted the trustee in a deed of trust by the language of the deed of trust, but that power “does not accrue until its conditions precedent have been fulfilled.” Here, the obligation to follow the HUD servicing rules, including the interview, are a condition that must be fulfilled before the power to foreclose accrues.
This decision provides clear guidance to servicers of FHA loans, as well as borrowers, as to what steps must be taken before the trustee may record a notice of sale. Unwary servicers may find their foreclosure proceedings blocked by the courts, as more wary homeowners learn the rules by which they must play.