United States District Court, S.D. Ohio, Eastern Division
JOHN C. BEACH, et al., Plaintiffs,
SECRETARY OF HOUSING AND URBAN DEVELOPMENT, et al., Defendants.
OPINION AND ORDER
ELIZABETH A. PRESTON DEAVERS UNITED STATES MAGISTRATE JUDGE.
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. Ocwen asserts a
cross-claim against Defendant Lang for indemnification.
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),  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.
The Fair Housing Administration's Single Family Insured
Loan Program and Partial Claim Payment Program
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 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.”
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).
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.) 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).
“[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.)
Servicing of Mortgage Loans
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”).) 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.)
Primary and Secondary Mortgages
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.
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).
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 ¶ 5. Ocwen calculated and certified to
HUD that the amount needed to cure the default was ...