QUESTION
I
am the General Counsel of a mortgage lender with a large regional presence. We
rely primarily on Fannie’s and Freddie’s uniform documentation, whether we hold
loans or sell them to the GSEs. I am hearing that some lenders are actually questioning
the reliability of that documentation. I have not been able to find out much as
to what is going on. But I would like to know more. Can we still depend on the
reliability of GSE documentation?
ANSWER
In
my estimation, you may be picking up some vibes from a recent case that claimed
there is ambiguity in the GSEs’ mortgage contract with respect to the payment
of taxes. Many, if not most, mortgage lenders often
use uniform documentation drafted by the Federal National Mortgage Association
(Fannie) and the Federal Home Loan Mortgage Corporation (Freddie). They use
such documentation even if they do not currently plan to sell their loans to
Fannie or Freddie. The predicate is that it’s fair to assume the uniform
agreements have borne the test of time and many critical eyes - as well as
survived many a litigation challenge.
Yet questions do arise,
from time to time, and I think a case in the U.S. Court of Appeals for the 5th
Circuit may be at the core of your concern, since the Court recently found
ambiguities in the language of a uniform deed of trust. Although the document
was a Texas document, the paragraphs at issue appear in uniform documents for
other states. The case I cite is Wease v.
Ocwen Loan Servicing. [Wease v. Ocwen Loan Servicing, 2019 U.S. App. 5th
Cir. Feb. 13, 2019]
Here’s a brief
overview. I’ll the end with my observation.
Wease executed a home
equity note secured by a deed of trust. An addendum to the deed of trust, the Escrow Waiver Agreement, provided that
the lender would “elect[] not to collect monthly escrow deposits to pay real
estate taxes subject to the condition that “[a]ll real estate taxes are paid
when due, and evidence is furnished to Lender at that time.”
The agreement warned
the following:
“In the event Borrower fails to comply with [the] above condition[], Lender has the right and Borrower agrees to pay sufficient funds to establish a fully funded escrow account and to have the monthly payment adjusted to include a monthly escrow deposit. This action is an election not to collect escrows at this time and should not be deemed a waiver of Lender’s right to do so at some future date.”
Section 9 of the deed of trust provided that Wease’s “fail[ure] to perform the covenants and agreements contained in” the deed of trust permitted the lender to “do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument.”
Section 3 of the deed of trust provided: “If Borrower is obligated to pay Escrow Items directly, pursuant to a waiver, and Borrower fails to pay the amount due for an Escrow Item, Lender may exercise its rights under Section 9 and pay such amount….”
Keep the foregoing
sections in mind, as we proceed.
In April 2010, Ocwen,
the loan servicer, sent Wease a letter advising him that an examination of past
due property taxes had revealed that Wease was delinquent on his taxes for
2009. The letter asked Wease to pay the taxes within 30 days of the letter or
to forward proof of payment.
Wease did not pay the
2009 taxes until June 30, 2010.
On December 16, 2010,
without prior notice, Ocwen paid Wease’s 2010 property taxes.
Unaware of this, Wease
paid his 2010 taxes in January 2011.
Six months later,
Ocwen sent Wease a letter asserting that Wease had “a total shortage for coming
escrow period” of $4,740.64, which Ocwen would collect over 12 monthly payments
starting August 1, 2011.
Wease defaulted in
August 2011.
He attempted to cure
his default by sending partial payments in October and November, but Ocwen
rejected them and on January 3, 2012, sent notice of default and intent to
accelerate. Seeking documentation of his transaction history, Wease sent
several letters to a West Palm Beach, FL address, not the address Ocwen
had specified for sending “qualified written requests.”
In May 2012, Ocwen
sent a notice of acceleration.
Wease sued, alleging,
among other things, breach of contract and violations of the Real Estate
Settlement Procedures Act (RESPA). The district court granted summary judgment
for Ocwen.
The 5th
Circuit affirmed, except as to the
breach of contract claims.
Here is where we get into
the question of ambiguity in the contract, since the Court reversed as to the
breach of contract because the deed of trust was ambiguous. Ambiguity arose
because it could be read two ways:
(1) When Wease failed to pay his 2009 taxes timely, Ocwen acquired the right to pay Wease’s 2010 taxes, even though at the time Ocwen paid the 2010 taxes Wease had already paid his 2009 taxes and his 2010 taxes were not yet delinquent; and,
(2) Section 3’s use of the singular, backward-looking “amount due” and reference to the lender paying “such amount” indicated that the contract would have permitted Ocwen only to pay the past-due 2009 taxes, not to prepay his 2010 taxes. On the other hand, a strong reading of Section 3 would suggest that Ocwen might have the right to pay taxes preemptively without a triggering condition.
The ambiguity
precluded summary judgment, so the district court should have allowed Wease to
proceed to trial on his claim that Ocwen had breached the contract by paying
his 2010 taxes before they became delinquent.
The district court
also erred in concluding as a matter of law that Ocwen had provided
contractually adequate notice of its revocation of the Waiver Agreement. Ocwen
had acknowledged in oral argument that until June 2011 it had not provided
notice it would begin collecting taxes through an escrow account.
As for the RESPA
claim, however, the district court had properly ruled against Wease because
Wease had not sent his alleged qualified written requests to the exclusive
address specified by Ocwen. RESPA offers mortgage loan servicers the
opportunity to designate an address to which a request for information (RFI) or
notice of error (NOE) must be sent.
Here’s
my observation.
There should be some concern about the ambiguity
in the uniform documentation. And I would guess that the Court’s decision may have caught the attention of Fannie
and Freddie. Revising the uniform instrument is a process that may take quite
some time, considering that two agencies are involved and finding consensus on revisions
can be a challenge, not to mention the practical mechanics of implementing
changes to widely used forms.
But maybe it is not necessary to wait for Fannie
and Freddie to get around to making the needed changes to this particular
documentation. It seems to me that lenders who use the Texas uniform deed of trust
might seek to separately or jointly negotiate revisions that, upon approval by
Fannie and Freddie, could be implemented until the GSEs release a new form.
Jonathan Foxx, PhD, MBA
Managing Director
Lenders Compliance Group
