January 18, 2017
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
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
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.
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.
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).
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 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.
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.
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.
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.
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.
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.
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.
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").
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.
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.
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.
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
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.
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.
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.
The Homeowners Protection Act
The Statute's Text
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 ...