Notwithstanding FHA’s Limitations On Loan Modifications And The Fact That The Loan Was Not Eligible For HAMP, A New York Court Held That Statutory Good Faith Standard In Mortgage Foreclosure Settlement Negotiations Means Compliance With HAMP Regulations

The New York Legislature enacted CPLR § 3408 in 2008, which applies to certain residential foreclosure actions in the State of New York, with the express legislative intent to help the defendant avoid losing his or her home. CPLR § 3408 requires, among other things, that mandatory settlement conferences be held for the purposes of determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home. To that end CPLR 3408 requires that both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible. The issue in Flagstar Bank, FSB v. Walker, 8230/11 (N.Y. Sup. Ct. May 31, 2012), was, what does the term good faith mean? The court determined that the HAMP mechanism is the appropriate marker for good faith negotiation under New York law because it will enable the plaintiffs to abide by both state and federal regulations. It noted that the Treasury Department introduced the HAMP program to make qualified mortgage loans affordable to borrowers who are in default or who are in imminent danger of default. The HAMP guidelines are the most clearly designed to abide by both New York State’s public policy to avoid defendants losing their homes. It rejected the mortgagee’s argument that HAMP had no place in determining good faith under the New York law. It argued that the mortgage was insured by the FHA and the FHA rules restrict and bind its ability to modify the loan. The court disagreed concluding that FHA, as the insurer, had an obligation to engage in loss mitigation and had to act in a manner reasonably expected to generate the smallest financial loss to HUD. Using the HAMP guidelines, it said, will serve those ends because the property is significantly underwater. The court also recognized that in order to be eligible for a HAMP modification the loan must have been originated prior to January 1, 2009, and the note which was made after that date was not technically eligible for HAMP. Regardless, the court stated, whether or not the loan qualifies for HAMP or not, the most appropriate benchmark for good faith are the HAMP guidelines.

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