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Foreclosure case tests FHA lender’s duty

ANNAPOLIS – An attorney for a former homeowner pressed Maryland’s top court Monday for the chance to undo the foreclosure sale of her Gaithersburg house.

The lender, GMAC, failed to have the required loan modification discussions with Sonja D. Bates last year in “a frenzy” to take possession of and sell the residence, attorney Vicki King Taitano told the Court of Appeals.

GMAC countered that it gave Bates ample opportunity to apply for a modification and challenge the pending sale, but she “sat on her rights.”

Now, with the sale complete, it is too late for Bates to raise her objection, said Eric A. Frechtel, an attorney for GMAC.

Frechtel and the purchaser at the sale, represented by Robert H. Hillman of Magazine & Hillman PC in Rockville, want the high court to uphold a judge’s ruling that rejected Bates’ challenge.

Pre-mediation requirement

The sale in this case occurred before July 1, when Maryland’s law calling for mediation before a foreclosure sale went into effect.

Bates argues that loan modification discussions are required by regulations, referenced in her deed of trust, promulgated by the U.S. Department of Housing and Urban Development and its Federal Housing Administration.

At issue is whether a lender’s alleged failure to engage in loan modification talks, on an FHA-insured loan, constituted such a significant “procedural irregularity” in the foreclosure process that a borrower can challenge a sale after it has occurred.

During Monday’s session, the Court of Appeals’ judges seemed divided.

Chief Judge Robert M. Bell and Judge Sally D. Adkins appeared to side with Bates if, as she maintained, GMAC did not engage in required loan modification discussions.

Otherwise, Bell asked Frechtel, “What is the incentive for a lender to comply” with the provisions?

Adkins added that it would be “pretty harsh” if a sale can be ratified without the discussion, and that lenders should regard the interest of borrowers as “paramount” during rough economic times.

But Judges Lynne A. Battaglia and Clayton Greene Jr. said Bates might have waited too long to challenge the sale, which she objected to in court only after it had occurred.

“Why shouldn’t someone in your client’s position be required to bring this up pre-sale rather than post-sale?” Battaglia asked Taitano, of the Legal Aid Bureau in Riverdale.

Taitano responded that Bates, who was not represented by counsel before the sale, relied on the lender’s representations that modification discussions would occur.

“A reasonable homeowner would believe there is no foreclosure sale imminent” if discussions are pending, Taitano said. “She was led to believe that things were going to be O.K.”

Frechtel, though, said GMAC warned Bates that foreclosure was imminent if she did not come forward and discuss modification and other options, such as selling her home, with the lender.

“As a last resort, the lender went ahead with the sale,” said Frechtel, of Bradley Arant Boult Cummings LLP in Washington, D.C. “The borrower has the obligation to exercise her rights, not sit on them.”

Judge Joseph F. Murphy Jr., noting the litigants’ lack of agreement on the facts, suggested the case be sent back to Montgomery County Circuit Court for a determination of whether GMAC had, in fact, violated the HUD/FHA regulations.

Montgomery County Circuit Judge Mary Beth McCormick had rejected Bates’ challenge, saying the sale could be undone only if there were a “procedural irregularity” in the sale itself.

Taitano appealed to the Court of Special Appeals, but the Court of Appeals, on its own motion, decided to hear the case first.

In other matters across the country, GMAC has been accused of “robo-signing” foreclosure documents without adequate review or verification; however, that practice is not at issue in Bates’ case before the Court of Appeals.

Directed her to call

Bates bought her home in February 1999 with an FHA-insured loan of $148,773, according to papers filed with the high court.

FHA regulations require the lender to participate in “loss mitigation” on insured loans.

Bates received a letter from GMAC in November 2008 notifying her that she was in default. In January 2009, GMAC advised her that the case had been referred to counsel for foreclosure proceedings.

In those communications, the lender “initiated no affirmative steps to assist [her] with alternatives to foreclosure,” Bates stated in court papers.

GMAC responded that its letters directed Bates to contact its “loss mitigation representative immediately to discuss any questions or concerns you have regarding your options.”

The foreclosure sale occurred June 2, 2009.

Bates said she learned of the sale the next day when a representative of the purchaser, identified in court papers as 101 Geneva LLC, knocked on her door and told her the house had been sold.

Bates then obtained counsel and challenged the sale.

The high court did not indicate when it will decide the case, Bates v. Cohn, No. 28, September 2010 Term.