Many of these customers were allegedly told that they could refinance their loans after the initial fixed period expired, but have been unable to do so because of the struggling housing market. According to the Court’s finding of fact, those borrowers who obtained 100% financing for their homes faced particular challenges because any reduction in their home’s value would make it almost impossible for the borrower to refinance the loan. In many cases, according to the Court, the terms of the loan also included prepayment penalties that effectively prevented the borrower from refinancing the loan during the initial period. In such cases, the borrower often was given only a short window after that initial period expired in which to refinance before mortgage payments went up.
Prior to filing its complaint, the Attorney General had negotiated a Term Sheet letter agreement with Fremont under which the Attorney General had 90 days to review and object to any foreclosures. If there were such an objection, Fremont agreed to negotiate in good faith with the Attorney General to resolve any conflict. Pursuant to these terms, Fremont sent the Attorney General 119 loans for review. The Attorney General objected to the foreclosure of all 119 loans. Fremont also sent the Attorney General an additional 74 loans for review under an expedited 45 day process. Unlike the first 119 loans, none of the 74 additional loans involved owner-occupied homes and Fremont claimed that it was unable to contact the borrowers about their defaults. The Attorney General objected to only one of the additional 74 foreclosures, although the Court does not explain in its opinion why the Attorney General did not object to that one foreclosure. Nevertheless, these numbers reveal that the Attorney General objected to all of the proposed foreclosures, except for 73 of the 74 foreclosures where the home was not owner-occupied and Fremont had been unable to contact the owner.
Following these objections, Fremont opted to exercise its right to terminate the Term Sheet. The Attorney General then sought to enjoin any foreclosures without its approval. Alternatively, the Attorney General asked the Court to implement a procedure requiring the Attorney General’s approval to foreclose on any “presumptively unfair loans,” which the Court later defined as any loan that included all of the following four characteristics: (1) an adjustable rate with an introductory period of three years or less; (2) a “teaser” rate that is at least three percent lower than the fully indexed rate; (3) a borrower debt-to-income ratio that would exceed 50 percent had Fremont taken into account the debt payments due under the fully indexed rate instead of just the introductory rate; and (4) either 100 percent financing or prepayment penalties.
The Court agreed to the second request. Although the Court acknowledged that the Attorney General had not alleged or sought to prove that the loans at issue were “high cost mortgage loans” governed by the Predatory Home Loan Practices Act, the Court ruled that “the loans at issue in this case fall within the penumbra of the concept of unfairness reflected in the Act.” Accordingly, the Court granted an injunction requiring that Fremont obtain the Attorney General’s approval before foreclosing on any loans that were “presumptively unfair,” as described above.
Under the terms of the injunction, Fremont must give the Attorney General 30 days notice of any foreclosure involving a mortgage that is not presumptively unfair (because it does not possess each of the four characteristics listed above), or is not the borrower’s principal dwelling, or is vacant or uninhabitable. If, however, the loan possesses each of the four characteristics described above, is secured by the borrower’s principal dwelling and is not vacant or uninhabitable, then Fremont must give the Attorney General 45 days written notice before initiating a foreclosure proceeding. If the Attorney General objects to the proposed foreclosure during that period, the Attorney General and Fremont have 15 days to attempt to resolve their differences. If those differences are not resolved, Fremont cannot proceed with the foreclosure proceeding without the Court’s approval.
The Court, however, was careful to emphasize that nothing in the decision should be read as releasing the borrowers from their debt. Instead, it said that “[t]he spirit of this decision is simply that Fremont, having helped borrowers get into this mess, now must take reasonable steps to help them get out of it.”
A full copy of the Fremont opinion is available here.
We will continue to monitor developments in this case and keep you posted at www.InsureReinsure.com.