Bar News - May 18, 2016
Real Property Law: Understanding the Maze of Mortgage Insurance
By: Timothy Chevalier
Mortgage insurance enables a borrower to buy a home with a low down payment, but it may not provide the “insurance” that the borrower expected.
Although borrowers pay for mortgage insurance, the lender selects the mortgage insurer and negotiates the terms of the insurance policy. Under some policies, the borrower becomes liable to the insurer once a claim is paid. For this reason, borrowers who wish to avoid bankruptcy after foreclosure need to understand that they may not be protected by the insurance for which they paid. They need to understand their potential liability and the steps they can take to limit it.
Who buys mortgage insurance? Individuals who purchase a home with less than a 20 percent down payment will typically be required to pay for mortgage insurance. Details regarding the mortgage insurance requirement can typically be found in the mortgage. For example, the standard New Hampshire FannieMae mortgage contains a section titled “Mortgage Insurance.” This section explains that “Mortgage Insurance reimburses Lender (or any entity that purchases the Note) for certain losses it may incur if Borrower does not repay the Loan as agreed. Borrower is not a party to the Mortgage Insurance.”
Under this mortgage, the lender has broad discretion to select the mortgage insurer, negotiate the terms, and even to self-insure at times. Ideally, a borrower will pay the mortgage on time until there is 20 percent equity in the property, at which point the insurance should be canceled.
When are claims filed? If there is a foreclosure before the insurance is canceled, the lender may file a claim for the deficiency with the mortgage insurance company to recover all or a portion of the balance due. This is often done without any notice to the borrower.
What is a borrower’s liability after a claim is paid? Borrowers often think their obligations under a note are satisfied once the mortgage insurer has paid the remaining balance. After all, the lender should not be paid twice for the same debt. Unfortunately, these claims are rarely that simple.
The borrower may not know that a mortgage insurance company has paid the foreclosure deficiency until they receive a demand letter from the insurer. The demand letter may show that the insurer paid an entity other than the original noteholder, because notes are frequently transferred. Further complicating matters, the noteholder may have changed servicers multiple times. In this context, a borrower can struggle to determine who has the right to be paid on any remaining debt.
A borrower may receive a demand letter many years after the foreclosure for a substantial deficiency, plus interest and fees. Some claims based on notes secured by mortgages of real estate have a 20-year statute of limitation, even if there has been a foreclosure. Cadle Co. v. Dejadon (NH 2006). Because of the uncertainty this creates, it is often in a borrower’s interest to settle the claim, if possible. Prior to engaging in payment negotiations, however, the borrower is well-advised to, among other things, verify the debt and obtain proof that the party seeking to collect the debt has the authority to do so. Ideally, the original note would be returned to the borrower once it is paid.
How does subrogation impact a borrower’s liability? A borrower may be liable to a mortgage insurer under the theory of subrogation. The equitable remedy of subrogation can arise by statute, contract, equitable principles or common law. Chase v. Ameriquest Mortg. Co. (NH 2007). The common law origins of subrogation can be traced back to the Magna Carta. Under subrogation, one with a secondary obligation to pay a debt has an equitable right to be reimbursed from the principal debtor for payments that were paid on behalf of the principal debtor. The one with the secondary obligation acquires the power to pursue the rights that the lender originally had against the borrower pursuant to the mortgage.
For some loans, the right of subrogation has a statutory basis, such as 12 USCS Section 1710. The Federal Housing Administration insures mortgages and has a statutory right of subrogation when it pays certain insurance benefits. The statute states that insurance benefits shall only be paid once all rights to the mortgage are assigned to the Secretary of Housing and Urban Development.
Some private mortgage insurers base their subrogation claim on the language of the insurance policy. The policy should be examined to see if it protection the borrower from subrogation claims or if the borrower is a third-party beneficiary. Borrowers who have the standard FannieMae mortgage referenced above are not a party to the insurance policy.
An insurer who asserts a subrogation claim against a borrower steps into the shoes of the lender. To the extent that the insurer seeks to collect fees, corporate advances, interest, and similar charges, the insurer needs to prove that the borrower is liable for those additional charges. It is therefore prudent for the borrower to save records that can be used to establish the amount owed near to the time of the foreclosure, such as acceleration letters, mortgage statements, information regarding the sales price at the foreclosure, and proof that an insurance claim was paid.
The borrower should also investigate whether he or she has any claims of good faith and fair dealing against the lender. In 2013, the Consumer Finance Protection Bureau issued more than $15 million in fines against the four largest private mortgage insurers for engaging in a sham reinsurance structure.
Borrowers should be skeptical of claims that the lender is entitled to recover twice on the deficiency. The private mortgage insurer, claiming a right of contractual subrogation, takes the position of the lender. But the mortgage required the lender to purchase mortgage insurance. Lender was paid by the private mortgage insurance. This begs the question of whether it is equitable, under the language of certain mortgages, for the lender to enter into an agreement with a mortgage insurer that leaves the borrower liable even after the deficiency has been paid by insurance. Such an agreement seems contrary to the purposes of subrogation.
Individuals facing a possible post-foreclosure deficiency may benefit from contacting the NH Foreclosure Relief Program (FRP) to develop a plan for addressing post-foreclosure collection actions. Borrowers can benefit by developing a plan early in the process to resolve any deficiency, even if they don’t currently have funds to pay the deficiency. FRP provides valuable resources to help navigate the process.
Timothy Chevalier practices at McCandless & Nicholson in Concord. His practice includes litigating on behalf of homeowners facing foreclosure. He also handles real estate and probate litigation and bankruptcy and is an attorney with the Foreclosure Relief Project.