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Ginnine Fried v. JP Morgan Chase & Co.

United States Court of Appeals, Third Circuit

March 9, 2017


          Argued January 18, 2017

         Appeal from the United States District Court for the District of New Jersey (D.C. Civil Action No. 2-15-cv-02512) District Judge: Honorable Madeline C. Arleo.

          Leonard A. Gail, Esquire Paul Berks, Esquire Massey & Gail, Jonathan S. Massey, Esquire, Massey & Gail, Counsel for Appellants.

          Robert M. Brochin, Esquire Morgan Lewis & Bockius, Allyson N. Ho, Esquire Morgan Lewis & Bockius, Judd E. Stone, Esquire Morgan Lewis & Bockius, Counsel for Amicus Appellants: American Bankers Association; Consumer Mortgage Coalition; Housing Policy Council; Independent Community Bankers of America; Mortgage Bankers Association, James E. Cecchi, Esquire Lindsey H. Taylor, Esquire Carella Byrne Cecchi Olstein Brody & Agnello, Antonio Vozzolo, Esquire, Counsel for Appellee.

          Before: AMBRO, VANASKIE, and SCIRICA, Circuit Judges


          AMBRO, Circuit Judge.

         Ginnine Fried bought a home in 2007 for $553, 330. It was near high tide in the real estate market, but she had to believe she was getting a bargain, as an appraisal estimated the home's value to be $570, 000. Fried borrowed $497, 950 at a fixed interest rate to make her purchase and mortgaged the home as collateral. Because the loan-to-purchase-price ratio ($497, 950 / $553, 330) was more than 80%, JPMorgan Chase Bank, N.A. ("Chase"), the servicer for Fried's mortgage (that is, the entity who performs the day-to-day tasks for the loan, including collecting payments), required her to obtain private mortgage insurance. Fried had to pay monthly premiums for that insurance until the ratio reached 78%; in other words, the principal of the mortgage loan needed to reduce to $431, 597, which was projected to happen just before March 2016.

         We now know that the housing market crashed in 2008, and the value of homes dropped dramatically. Fried, like many homeowners, had trouble making mortgage payments. Help came when Chase modified Fried's mortgage under a federal aid program by reducing the principal balance to $463, 737. The rub was that Chase extended Fried's mortgage insurance premiums an extra decade to 2026. Whether it could do this depends on how we interpret the Homeowners Protection Act ("Protection Act"), 12 U.S.C. § 4901 et seq. Does it permit a servicer to rely on an updated property value, estimated by a broker, to recalculate the length of a homeowner's mortgage insurance obligation following a modification or must the ending of that obligation remain tied to the initial purchase price of the home? We conclude the Protection Act requires the latter.

         I. BACKGROUND

         Mortgage insurance protects the owner or guarantor of mortgage debt-typically the Federal National Mortgage Association ("Fannie Mae") or Federal Home Loan Mortgage Corporation ("Freddie Mac")-from a borrower's risk of default. Traditional underwriting standards require homebuyers to pay at least 20% of a home's purchase price in cash-that is, they require the homebuyer to obtain 20% equity in the home at the time of purchase and finance 80% of the home's purchase price. If homebuyers cannot pay at least 20%, then they must purchase mortgage insurance. Once the balance due on a home loan falls below 80% of the home's purchase price, mortgage insurance is no longer necessary because "excessive [mortgage insurance] coverage does not benefit the homeowner . . . and provides little extra protection to a lender." S. Rep. No. 105-129, at 3 (1997).

         Before Congress took action by passing the Protection Act in 1997, many lenders would continue to collect mortgage insurance payments after a homeowner had gone below the 80% loan-to-value mark. H.R. Rep. No. 105-55, at 6 (1997). In the Act Congress set national standards for mortgage insurance termination. It requires mortgage servicers to (1) provide periodic notices to a borrower/mortgagor[1] regarding mortgage insurance obligations, (2) automatically terminate mortgage insurance on a statutorily defined schedule, and (3) grant a borrower's request to cancel her mortgage insurance once certain conditions are met. 12 U.S.C. §§ 4901-03.

         Under the Protection Act, mortgage servicers must automatically terminate mortgage insurance for a fixed-rate loan like Fried's on "the date on which the principal balance of the mortgage . . . is first scheduled to reach 78 percent of the original value of the property securing the loan." 12 U.S.C. § 4901(18)(A). The "original value" of a home is "the lesser of the sales price of the property securing the mortgage, as reflected in the contract, or the appraised value at the time at which the subject residential mortgage transaction was consummated." 12 U.S.C. § 4901(12). As noted, the purchase price of Fried's home was less than its appraised value, so her home's "original value" is $553, 330. Seventy-eight percent of that figure-the key value for mortgage insurance termination-is $431, 597.40. Under her loan's amortization schedule, Fried's unpaid principal balance was set to reach $431, 597.40 just before March 1, 2016, and therefore her mortgage insurance obligation would terminate on that date.

         When Fried ran into financial trouble following the financial crisis of 2008, she and Chase agreed on January 10, 2011, to modify her mortgage under the Home Affordable Mortgage Program ("HAMP"). The HAMP was enacted as part of the Emergency Economic Stabilization Act of 2008 in response to the financial and housing crisis of that time. See Spaulding v. Wells Fargo Bank, N.A., 714 F.3d 769, 772 (4th Cir. 2013). Under the HAMP, participating mortgage "servicers agreed to identify homeowners who were in default or would likely soon be in default on their mortgage payments, and to modify the loans of those eligible under the program. In exchange, servicers would receive a $1, 000 payment for each permanent modification, along with other incentives." Id. at 773 (quoting Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 556 (7th Cir. 2012)). Per the modification agreement she reached with Chase, the principal balance of Fried's loan was reduced to $463, 736.98.

         The Protection Act provides for the treatment of mortgage modifications in 12 U.S.C. § 4902(d):

If a mortgagor and mortgagee (or holder of the mortgage) agree to a modification of the terms or conditions of a loan pursuant to a residential mortgage transaction, the cancellation date, termination date, or final termination shall be recalculated to reflect the modified terms and conditions of such loan.

         Accordingly, Chase was required to update Fried's termination date to reflect the "modified terms and conditions" to which the parties "agree[d.]" Pursuant to the loan's modified amortization schedule (modified, that is, to account for the reduced principal), Fried's outstanding principal balance would reach 78% of her home's original value ($431, 597) in July 2014. Compl. ¶¶ 47, 50.

         After receiving the modification, Fried asked Chase when she would be relieved of her obligation to make monthly mortgage insurance payments. On August 31, 2012, Chase responded that her mortgage insurance obligation would automatically terminate on November 1, 2026. This date was ten years later than her mortgage insurance termination date before the modification and twelve years later than the recalculated date based on her decreased principal balance. Her monthly mortgage insurance premium is approximately $252.83, so a ten-year extension of those premiums would cost her an additional $30, 339.60. See Compl. ¶ 6.

         With this in mind, Fried wrote Chase to question the new termination date and ask how the bank reached its conclusion. It responded on October 10, 2012, and April 9, 2013, stating that November 1, 2026, is "when the loan will reach 78% based on the modified terms and conditions." Compl. ¶ 53. Seventy-eight percent of what exactly Chase did not say, so Fried wrote again.

         Chase's response on October 4, 2013, clarified how it arrived at the 2026 termination date. In order to participate in the HAMP program, it was required to obtain a Broker's Price Opinion ("BPO") estimating the value of Fried's home at the time of the modification. A BPO is a much less rigorous estimate of a property's market value than is an appraisal. See In re Thomas, 344 B.R. 386, 393 (Bankr. W.D. Pa. 2006) ("Full appraisals, not just the 'drive by' Broker's Price Opinion, are used . . . when the matter is contested."); see also In re Kasbee, 466 B.R. 719, 723 (Bankr. W.D. Pa. 2010) (bank "realized that the comparables utilized in the BPO were inadequate and that as a result it was obtaining a full appraisal to determine the true value").

         In any event, Chase explained that it had substituted its BPO of $420, 000 for the home's $553, 330 original value. Because the BPO was much smaller, Fried would not pay down her outstanding principal balance to 78% of the BPO (78% x $420, 000 = $327, 600) until November 1, 2026.

         It is worth pausing for a moment to understand the math behind Chase's purported extension of Fried's mortgage insurance obligation. Remember that the mortgage insurance obligation ends when Fried has paid down the principal balance owed on her mortgage to 78% of her home's original value. That is, she must pay down her mortgage balance to 78% of $ 553, 330, which is $431, 597.

         In this way, the Protection Act's mortgage insurance termination date sets a finish line that homeowners go toward by paying down their mortgage debts. Fried started with a mortgage debt of $497, 950 and would reach her finish line once the outstanding principal debt was $431, 597. Put differently, she would cross this threshold after making $66, 353 of payments toward her mortgage's principal balance, which, according to her initial amortization schedule, she would do in 2016. When her mortgage was modified, Fried leapt forward toward her goal: the modification decreased her outstanding principal balance to $463, 737, so she would reach the $431, 597 finish line sooner, in 2014, by making just $32, 140 in principal payments. But when Chase substituted the BPO for the original value of Fried's home, it moved the finish line. Seventy-eight percent of the $420, 000 BPO is $327, 600. According to her modified amortization schedule, Fried would not pay down her mortgage debt to Chase's new $327, 600 finish line-more than $136, 137 in mortgage principal payments away-until 2026.

         In April 2015, Fried filed a complaint on behalf of herself and similarly situated individuals. She asserted that by relying on the BPO to calculate her mortgage insurance termination date, rather than her home's original value, Chase violated the Protection Act. Chase filed a motion to dismiss, contending that its substitution of the BPO for the original value did not violate the Protection Act and that Fried's action was barred by the Act's two-year statute of limitations.[2]

         The District Court denied Chase's motion but certified its appeal to our Court, recognizing that whether Chase violated the Protection Act is a controlling question of law with substantial ground for difference of opinion that is likely to advance this case's resolution. See 28 U.S.C. § 1292(b); Katz v. Carte Blanche Corp., 496 F.2d 747, 754 (3d Cir. 1974) (en banc). We agreed to hear the appeal.

         II. ANALYSIS

         Chase contends that it was entitled to recalculate Fried's termination date by substituting the BPO it obtained at the time of the modification for her home's original value. It equivocates on whether it could do this only because of certain HAMP rules or whether the Protection Act would permit the substitution more generally. In either case Chase is wrong: the Protection Act required calculation of Fried's termination date on the basis of her home's original value, which under the Act is its purchase price.

         Whether Fried knew or should have known of Chase's violation of the Protection Act outside of the statute-of-limitations period is not clear on the face of her complaint, and thus the District Court was correct not to dismiss on this ground.

         A. The Homeowners Protection Act

         1. The Statute's Text

         Under the Protection Act a homeowner's obligation to pay mortgage insurance premiums ends on the "termination date if, on that date, the mortgagor is current on the payments required by the terms of the residential mortgage transaction[.]" 12 U.S.C. § 4902(b)(1). For ...

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