WASHINGTON (9/8/08)—A Massachusetts trial court ruling this year highlights the fact that unfair mortgage terms and origination practices can jeopardize a lender’s ability to foreclose on a property whose owner is in default. Chris Johnson, vice president of State Governmental Affairs for the Credit Union National Association (CUNA), has advised credit unions that in the case Commonwealth of Massachusetts v. Fremont Investment & Loan
, the court limited a lender's exercise of all of its specific rights under its mortgage agreements with its borrowers. The Massachusetts attorney general obtained a preliminary injunction against Fremont, a subprime lender that originated thousands of mortgages in Massachusetts and whose lending practices were considered by the attorney general to have contributed significantly to the foreclosure crisis in that state. Johnson notes the court's order prohibits Fremont from initiating or advancing foreclosures on loans that are "presumptively unfair." Under the terms of the injunction, Fremont must provide the attorney general's office with at least a 30-day notice of all foreclosures it intends to initiate for the loans that Fremont owns and services. In turn, the AG has an opportunity to object to the foreclosure going forward. If Fremont has issued a loan that is considered "presumptively unfair," and the borrower occupies the property as his or her principal dwelling, the attorney general has 45 days to object to the foreclosure. Under the terms of the injunction, a loan is "presumptively unfair" if it has all of the following characteristics:
* The loan is an adjustable-rate mortgage with an introductory period of three years or less; * The loan has an introductory or "teaser" interest rate that is at least three percent lower than the fully-indexed rate (the relevant index at the time of origination plus the interest margin specified in the mortgage note); * The borrower has a debt-to-income ratio (the ratio between the borrower's monthly debt payments, including the monthly mortgage payment, and the borrower's monthly income) that would have exceeded 50% if Fremont had measured the debt by the debt due under the fully-indexed rate, not by the debt due under the teaser rate; and * Fremont extended 100% financing, or the loan has a substantial prepayment penalty.
The lesson of the Fremont case, according to Johnson, "is that the lender's inequitable origination practices have now hamstrung its ability to foreclose on properties that secure mortgages that it owns." Johnson further noted that although Fremont ultimately is likely to be able to exercise its foreclosure rights, "it will generally not be able to do so until after it has incurred significant expenses, and lost considerable time, in complying with the terms of the injunction." Johnson believes that credit unions are highly unlikely to find themselves subject to legal actions and outcomes similar to those in the Fremont case. "Credit unions' prudent underwriting practices and equitable loan terms constitute a bulwark of protection when unfortunate events result in mortgage delinquencies and foreclosures," he said, but noted the case "demonstrates the need for continued vigilance in maintaining fair and reasonable lending terms and practices." For more analysis of the case, use the resource link below.