Mortgagee Of An FHA Mortgage Must Comply With Hud’s Servicing Requirements Prior To The Initiation Of A Foreclosure When Those Requirements Are Incorporated Into The Mortgage Agreement

In Pfeifer v. Countrywide Home Loans, Inc., A133071 (Cal. App. Ct. Dec. 12, 2012) the borrowers sought to enjoin a non-judicial foreclosure. They contended, among other things, that because their mortgage loan was insured by the FHA, and the deed of trust securing the property was expressly subject to the servicing requirements of HUD, the mortgagee’s failure to a conduct a face-to-face meeting prior to instituting a non-judicial foreclosure violated HUD’s servicing requirements. The lower court sustained the mortgagee’s demurrer finding that the HUD regulations permitted no private right of action and did not designate the borrowers as third-party beneficiaries of the agreement between the mortgagee and FHA. The Appellate Court reversed. Relying on several cases from other jurisdictions, notably _Mathews v. PHH Mortgage Corp._, 724 S.E.2d 196 (2012), as well as the policies underlying HUD servicing requirements, it ruled that the requirements were conditions precedent incorporated into the borrowers’ deed of trust. The appellate court rejected the mortgagee’s assertion that the duties under the regulations ran to HUD rather than to the borrowers. The issue was not the enforcement of a mortgagee’s duties toward HUD, but whether a foreclosure can be brought if the mortgagee fails to comply with the servicing requirements. Because the trust deed expressly required compliance with HUD regulations prior to accelerating or foreclosing the loan, the borrowers could enforce compliance with the regulations as conditions precedent to the nonjudicial foreclosure action. The court also confirmed the long standing rule that the failure to comply with the HUD’s servicing requirements did not give rise to a claim for damages by the borrower. The mortgagee’s failure may only be used by borrowers defensively in seeking equitable relief.

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