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Beach v. Secretary of Housing And Urban Development

United States District Court, S.D. Ohio, Eastern Division

March 30, 2018

JOHN C. BEACH, et al., Plaintiffs,
v.
SECRETARY OF HOUSING AND URBAN DEVELOPMENT, et al., Defendants.

          OPINION AND ORDER

          ELIZABETH A. PRESTON DEAVERS UNITED STATES MAGISTRATE JUDGE.

         Plaintiffs, John C. Beach and Chelsea J. Beach, seek to quiet title to real property located in Zanesville, Ohio, which was previously owned by Defendant, Stacy A. Lang, and as against which Defendant, the United States Secretary of Housing and Urban Development (“HUD”), holds the subordinate mortgage. Plaintiffs allege that, in purchasing the property, they relied on the pay-off amount quoted by Defendant Ocwen Loan Servicing, LLC (“Ocwen”), which amount did not include the subordinate mortgage. That mortgage was therefore not paid and has not been released. Plaintiffs also seek damages from Defendant Lang for breach of the general warranty deed and indemnification and contribution for damages and costs caused by that breach.[1] Ocwen asserts a cross-claim against Defendant Lang for indemnification.

         With the consent of the parties pursuant to 28 U.S.C. § 636(c) (ECF No. 12), this matter is before the Court for consideration of HUD's Motion for Judgment on the Pleadings, or, in the Alternative, Motion for Summary Judgment (ECF No. 18), Plaintiffs' Combined Opposition and Motion for Summary Judgment (ECF No. 22), [2] HUD's Reply in Support of its Motion (ECF No. 29), HUD's Opposition to Plaintiffs' Motion (ECF No. 32), and Plaintiffs' Reply in Support of Their Motion (ECF No. 41). For the reasons that follow, HUD's Motion (ECF No. 18) is GRANTED and Plaintiffs' Motion (ECF No. 22) is DENIED.

         I.

         A. The Fair Housing Administration's Single Family Insured Loan Program and Partial Claim Payment Program

         Relevant to this action is the following federal housing program:

Congress created the Federal Housing Administration's (“FHA”) Single Family Insured Loan program “to meet the housing needs” of low-to-moderate income borrowers. 12 U.S.C. § 1708(a)(7). To entice mortgagee banks to make loans to such borrowers, the FHA Insured Mortgage Program (“Program”) provides insurance to cover losses incurred by them in the event of borrower default and subsequent foreclosure. A mortgagee bank that experiences a loss because of foreclosure can be made whole by proceeds paid out from an insurance claim filed with the Secretary of Housing and Urban Development (“HUD”). Id. §§ 1709(a); see id. §§ 1710(a) (1), 1715u(b). Only “approved” mortgagees may originate or hold HUD-FHA mortgages. Id. § 1709(b)(1).

Sinclair v. Donovan, Nos. 1:11-CV-00010, 1:11-CV-00079, 2011 WL 5326093, at *3 (S.D. Ohio Nov. 4, 2011); see also excerpt from FHA Single Family Housing Policy Handbook 4000.1 (Effective Dated: 03/14/2016; Last Revised: 12/30/2016) (ECF No. 18-2 at PAGEID # 225) (addressing mortgage requirements for participation “in the origination, underwriting, closing, endorsement, servicing, purchasing, holding, or selling of” FHA-insured mortgages).

         When a FHA-insured mortgage loan goes into default, mortgagees must “engage in loss mitigation actions for the purpose of providing an alternative to foreclosure[.]” 12 U.S.C. § 1715u(a). “[L]oss mitigation provisions are intended to benefit the Government as provider of the insurance.” Sinclair, 2011 WL 5326093, at *3. However, FHA-eligible borrowers “are the ultimate beneficiaries of a status quo in which FHA-approved lenders are confident in the federal government's ability to operate a viable and sustainable program” even if such benefits “do not confer a legally protected procedural due process interest[.]” Id. (emphasis in original); cf. Administration of Insured Home Mortgages Handbook 4330.1 (ECF No. 18-3 at Section 7-1, PAGEID # 295) (“The purpose of all collection efforts is to bring a delinquent mortgage current in as short a time as possible, to avoid foreclosures to the extent possible, and to minimize losses.” (emphasis added)).

         Loss mitigation may include, but is not limited to, special forbearance, loan modification, preforeclosure sale, support for borrower housing counseling, subordinate lien resolution, borrower incentives, and deeds in lieu of foreclosure. 12 U.S.C. § 1715u(a). “Mortgagees must consider the comparative effects of their elective servicing actions, and must take those appropriate actions which can reasonably be expected to generate the smallest financial loss to the Department.” 24 C.F.R. § 203.501. Mortgagees must determine which form of loss mitigation best fits a borrower's specific situation (a requirement known as HUD's “Loss Mitigation Option Priority Waterfall”). Excerpt from FHA Single Family Housing Policy Handbook 4000.1 (Effective Dated: 03/14/2016; Last Revised: 12/30/2016) (ECF No. 18-2 at PAGEID # 229).

         One form of loss mitigation permits HUD to “establish a program for payment of a partial claim to a mortgagee that agrees to apply the claim amount to payment of a mortgage on a 1-to 4-family residence that is in default or facts imminent default[.]” 12 U.S.C. § 1715u(b)(1); see also 24 C.F.R. § 203.371(a) (“Notwithstanding the conveyance, sale or assignment requirements for payment of a claim elsewhere in this part, HUD will pay partial FHA insurance benefits to mortgagees after a period of forbearance, the maximum length of which HUD will prescribe[.]”), (b) (setting forth the conditions that must be met for payment of a partial claim). “A Partial Claim is FHA's reimbursement of a Mortgagee advancement of funds on behalf of the Borrower in an amount necessary to assist in reinstating the Delinquent Mortgage under the FHA-HAMP Option.” FHA Single Family Housing Policy Handbook Glossary (ECF No. 18-4 at PAGEID # 321.)[3] A partial claim may be made in connection with a modification of the FHA-insured mortgage, resulting in reinstatement of the original mortgage on terms more favorable to the borrower. 12 U.S.C. § 1715u(b)(2); see also excerpt from FHA Single Family Housing Policy Handbook 4000.1 (ECF No. 18-2 at PAGEID # 230). A second mortgage on the subject property in HUD's favor secures the partial claim, i.e., the advancement of the funds. 12 U.S.C. § 1715u(b)(2).

         The “[m]ortgagee must use documents that conform to all applicable federal and state laws.” Excerpt from FHA Single Family Housing Policy Handbook 4000.1 (ECF No. 18-2 at PAGEID # 231 (noting, however, that HUD requires no “specific format” for loan modification and partial claim documents)). The borrower “must execute a mortgage in favor of HUD with terms and conditions acceptable to HUD for the amount of the partial claim[.]” 24 C.F.R. § 203.371(c). Once the loan modification and partial claim payment are completed, “[t]he [m]ortgagee must, if required by state or federal law, record the Loan Modification documents to preserve the first-lien status of the modified FHA-insured [m]ortgage.” Excerpt from FHA Single Family Housing Policy Handbook 4000.1 (ECF No. 18-2 at PAGEID # 232). Thereafter, the mortgagee submits a claim, supported by documentation, to HUD for payment. (Id. at PAGEID # 233-241.)

         B. Servicing of Mortgage Loans

         Mortgage loans may be either self-serviced or maintained by a mortgage loan servicer. Affidavit of Jessica Fields, ¶ 3 (Exhibit E, ECF No. 22-2 (“Fields Affidavit”).)[4] A mortgage loan servicer, who is retained by the mortgage loan holder or lender, usually performs the following: accepts or applies payments made by borrowers; pays taxes and insurance from borrower escrow accounts; and issues payoff statements when the borrower either refinances or sells the property that is secured by the mortgage loan. Id. at ¶ 3. FHA defines a “Servicer” as “an FHA-approved Mortgagee performing servicing actions on FHA-insured Mortgages on its behalf or on behalf of or at the direction of another FHA-approved Mortgagee.” FHA Single Family Housing Policy Handbook Glossary (ECF No. 18-4 at PAGEID # 326.)

         C. Primary and Secondary Mortgages

         On December 21, 2011, Defendant Stacy Lang purchased real property located at 7715 Hopewell National Road, Zanesville, Ohio (“the Subject Property”). Open-End Mortgage (Exhibit A, ECF No. 22-1). In connection with that purchase, Defendant Lang executed and delivered a $119, 937.00 Open-End Mortgage to Mortgage Electronic Registration Systems, Inc. (“MERS”) as nominee for Residential Finance Corporation (“Primary Mortgage”). Id. The Primary Mortgage was recorded with the Muskingum County Recorder's office in Volume 2493, Pages 778-88. Id. The Primary Mortgage was an FHA-insured mortgage and was endorsed by HUD under the National Housing Act, 12 U.S.C. § 1709(b), (i). Id.; Declaration of Matt B. Martin at ¶ 3 (ECF No. 18-1 (“Martin Declaration”)). HUD's endorsement means that, in the event Defendant Lang defaulted on her obligations, HUD would reimburse the lender the total value of the mortgage. Martin Declaration at ¶ 3.

         On September 11, 2013, MERS, as nominee for Residential Finance Corporation, assigned the Primary Mortgage to Ocwen via an Assignment of Mortgage, recorded with the Muskingum County Recorder's office in Volume 2493, Page 270. Assignment of Mortgage (Exhibit B, ECF No. 22-1, PAGEID # 382).

         Defendant Lang ultimately defaulted on the Primary Mortgage. Martin Declaration at ¶ 4. Because the Primary Mortgage was FHA-insured, Ocwen determined that Defendant Lang was eligible for loss mitigation under the partial claim program whereby HUD would cure the default on the Primary Loan and secure that payment with a subordinate mortgage and note. Id. at ΒΆ 5. Ocwen calculated and certified to HUD that the amount needed to cure the default was ...


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