A federal appeals court recently decided that a plaintiff could not assert a claim against the issuer of a reverse mortgage for breach of regulations issued by the U.S. Department of Housing and Urban Development (HUD), when those regulations were not expressly incorporated into the parties’ written agreement. In a case of first impression, the Fifth Circuit Court of Appeals, in Johnson v. World Alliance Financial Corporation, affirmed the district court’s grant of summary judgment on the plaintiff’s claims for breach of contract and fraudulent inducement, which were based on the HUD regulations.
The plaintiff’s late husband had entered into a reverse mortgage agreement, or home equity conversion mortgage (HECM), with one of two defendants, and the mortgage was subsequently assigned to the other defendant in the case. The loan was secured by the plaintiff’s home. When the HECM was originated, there were two liens on the property—a traditional mortgage and a $50,000 owelty lien, which had previously been awarded to the ex-wife of the plaintiff’s husband.
The traditional mortgage was paid by the HECM issuer at closing, and the owelty lien was to be paid when the property eventually was sold. However, after closing, the ex-wife foreclosed on the property, believing (incorrectly) that the HECM had triggered a default provision in her lien. The assignee of the HECM sued the ex-wife in state court, challenging her right to foreclose. The case eventually settled, at which time title to the property went back to the plaintiff.
Subsequently, the plaintiff sued the defendants, bringing claims of breach of contract and fraudulent concealment. She mainly argued that the foreclosure could have been avoided if the HECM issuer had not issued an HECM in violation of HUD guidelines. She cited a HUD Mortgagee Letter stating that it is the mortgagee's responsibility to "ensure that the first [private lender] and second [HUD] mortgages are the first and second liens of record, and that other liens do not intervene between the first and second mortgage."
The district court had granted summary judgment in the defendants’ favor because HUD regulations were not expressly incorporated into the parties’ agreement, and thus could not form the basis of the plaintiff’s claims; and because under the express note and deeds of trust terms, it was the plaintiff’s burden to maintain lien priority.
On appeal, the plaintiff again argued that the defendants had violated HUD regulations by failing to establish and maintain the priority of the HECM lien, and that those regulations formed part of the HECM agreement. The Court of Appeals rejected that argument, affirming the district court and explicitly holding that "HUD regulations govern the relationship between the reverse-mortgage lender and HUD as insurer of the loan. HUD regulations do not give the borrower a private cause of action unless the regulations are expressly incorporated into the lender-borrower agreement." Because defendants had not breached the parties’ agreements (and rather it was the ex-wife whose wrongful foreclosure made her the wrongdoer in this situation), defendants could not be liable for breach of contract or fraudulent inducement.
This case provides federal appellate level support for mortgagees facing claims that they have violated HUD regulations when those regulations are not expressly incorporated into the written agreements between the mortgagee and mortgagor.
