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Noncompliance with HAMP Guidelines as an Affirmative Foreclosure Defense?

By Adam Levitin

To date, homeowners have not met with any real success in bringing suits alleging private rights of action under HAMP or, for that matter, alleging that denial of HAMP modifications is an a violation of their 5th Amendment due process rights. But it's one thing to bring an a suit offensively; it's another to raise an argument as a defense. (This is old hat to our lawyer readers, but I recognize that it isn't intuitive to non-lawyers that there are different standards regarding whether an argument can be raised offensively or defensively, with generally more lenient standards regarding defenses). 

Which brings me to the Indiana Court of Appeals' ruling in Lacy-McKinney v. Taylor, Bean & Whitaker Mortg. Corp., 937 N.E.2d 853, which was graciously brought to my attention by a Credit Slips reader. (I'm not able to reply individually to every email, but I do read them.)  The Indiana Court of Appeals held (citing a number of precedent rulings) that a compliance with servicing guidelines is a condition precedent to a foreclosure that can be raised as an affirmative defense.   

This raises an interesting question:  can a servicer's failure to comply with HAMP guidelines provide an affirmative defense to foreclosure?  

I have trouble seeing any principle that would distinguish HAMP guidelines (or GSE guidelines) from FHA guidelines. That is to say, if one accepts the principle that a failure for a servicer to follow servicing guidelines should be an affirmative defense, it really oughtn't matter whose guidelines those are, so long as the servicer is contractually bound to follow them.  Given that the homeowner is a third-party beneficiary with a much, much stronger interest in ensuring compliance with the servicing guidelines than any government agency or GSE, there is a logic to allowing a foreclosure defense of non-compliance with servicing guidelines.

Thoughts on this?  On HAMP litigation generally? Comments are open. 

Full post as published by Credit Slips on December 30, 2010 (boomark / email).