Court OKs Suits Over Denied Mortgage Modifications

Homeowners who enter into trial agreements to modify their mortgages under the federal Home Affordable Modification Program (HAMP) and comply with the terms can sue for breach of contract if a modification is denied and might even have a consumer fraud claim, a New Jersey appeals court has held in a precedential decision of first impression.

“While there are no reported New Jersey cases addressing the contractual status of a [Trial Period Plan] Agreement, case law suggests that an agreement that purports to bind a debtor to make payments while leaving the mortgage company free to give her nothing in return might violate the New Jersey Consumer Fraud Act,” Judge Susan Reisner, joined by Ellen Koblitz and Michael Haas, said in the Jan. 23 ruling in Arias v. Elite Mortgage Group Inc.

Joshua Denbeaux of Denbeaux & Denbeaux in Westwood, N.J., whose chief area of practice is mortgage foreclosure defense but who was not involved in Arias, said he saw the decision as the Appellate Division “announcing to the world that the servicing industry is not going to be permitted in New Jersey to breach contracts and make false inducement promises to New Jersey homeowners without the court stepping in and protecting its citizens.”

Joseph Chang, who heads a Paterson, N.J., firm and represents the plaintiffs in Arias, said the decision “has removed a significant hurdle for homeowners seeking to sue banks in the New Jersey state courts.”

Previously, courts were dismissing claims by borrowers with valid mortgage modification claims on the theory that HAMP preempts state law contractual and other claims, but the decision has put that rationale to rest, Chang said.