The United States Court of Appeals for the First Circuit recently held in Thompson v. JPMorgan Chase Bank, N.A., No. 18-1559, 2019 WL 493164 (1st Cir. Feb. 8, 2019), that a foreclosure in Massachusetts was void because the lender sent a misleading preforeclosure notice.
This case involved a “notice of default and right to cure” (breach letter) that JPMorgan Chase Bank (the lender) sent to the Thompsons (the borrowers) after the borrowers failed to make their mortgage payments. The court held that the letter was potentially deceptive in violation of Massachusetts law, and declared the foreclosure of the borrowers' home invalid.
If you live in Massachusetts, the Thompson decision could provide you with a defense to a foreclosure. Read on to learn more.
In the Thompson case, the borrowers took out a mortgage loan in 2006. The mortgage contract required the lender to send the borrowers a breach letter containing specific information, like how to cure the default, before accelerating the loan and going ahead with a foreclosure. (The acceleration clause in a mortgage permits the lender to demand that the entire balance of the loan be repaid after a default.)
Most standard Fannie Mae and Freddie Mac mortgage forms—those used in nearly every residential mortgage transaction in the United States—contain a breach letter requirement. The breach letter that the lender sent in this case complied with a particular paragraph in the standard mortgage (paragraph 22) in that the letter stated that the borrowers had the right to reinstate the loan after acceleration. The letter further stated that the borrowers could “avoid foreclosure by paying the total past-due amount before a foreclosure sale takes place.” However, another paragraph in the mortgage (paragraph 19) said that the reinstatement deadline was five days prior to the sale. The breach letter did not mention the five-day deadline.
The borrowers failed to cure the default, so the lender foreclosed on the property and conducted a foreclosure sale. (To get details about the foreclosure process in Massachusetts, see Massachusetts Foreclosure Laws and Procedures.)
The borrowers claimed that, while the letter complied with paragraph 22 of the mortgage, the letter did not comply with paragraph 19 because it didn’t say anything about the five-day deadline. Instead, the letter advised the borrowers that they could reinstate “before” the foreclosure sale, which implied that a reinstatement payment given fewer than five days before the sale would reinstate the loan.
Even though the borrowers in this case didn’t try to reinstate the loan, they contended that the breach letter was confusing and potentially deceptive. Therefore, they argued, the lender failed to comply with the notice requirements in their mortgage before foreclosing on their home.
The district court decided that the breach letter strictly complied with paragraph 22 by advising the borrowers about their post-acceleration reinstatement right. So, it granted the lender’s motion to dismiss.
On appeal, however, the United States Court of Appeals for the First Circuit Court disagreed with the district court. In support of its decision in favor of the borrowers, the Appeals Court speculated that a lender could potentially reject a reinstatement attempt, say, three days before a foreclosure sale—even though the breach letter advised the borrowers that they could reinstate any time before a foreclosure sale takes place. The Court determined that because the notice did not fully inform the borrowers about the five-day deadline to reinstate the loan, the breach letter was potentially deceptive.
The court ultimately found that the letter was not in strict compliance with the terms of the mortgage nor Massachusetts law and, accordingly, invalidated the foreclosure. (Massachusetts courts require a foreclosing lender to comply strictly with certain mortgage terms. See Pinti v. Emigrant Mortg. Co., 472 Mass. 226, 33 N.E.3d 1213, 1220–21 (2015)).
The Massachusetts Supreme Judicial Court might eventually hear this case and rule differently; but in the meantime, borrowers in Massachusetts may challenge a foreclosure based on a breach letter’s failure to properly inform them about the deadline to reinstate. (Most mortgages say the borrower may reinstate at any time prior to five days before the sale.)
Keep in mind that, in this case, the borrowers didn't even try to reinstate their loan. So, this decision reaffirms an important aspect of Massachusetts foreclosure law: an error in the process can potentially render a foreclosure unlawful—even if the error doesn't harm the borrower.
How closely courts in other states will scrutinize the reinstatement language in standard mortgages when assessing the validity of foreclosure proceedings is yet to be seen.
If you're facing a foreclosure in Massachusetts and your mortgage provides a reinstatement deadline, but the breach letter you received didn't inform you about it, you might have a defense to the foreclosure even if you didn't actually try to reinstate the loan. To get specific information relevant to your particular situation, consider talking to a lawyer.
It’s also a good idea to talk to a HUD-approved housing counselor, especially if you want to learn about different loss mitigation (foreclosure avoidance) options.
Effective date: February 8, 2019