No one who procures a mortgage loan ever wishes to fail to fulfill their financial obligation to the lending institution. However, it does happen that a person with a mortgage – known as a mortgagor in legal lingo – becomes unable to consistently make payments to their lender. There can be any number of reasons as to why this may happen: for example, a job loss can suddenly turn an otherwise good mortgage into a troubled one very quickly. Sometimes, a mortgagor can repair a mortgage loan by working out an agreement with the lender. But if such an agreement between the mortgagor and lending institution cannot be reached then the mortgagor will inevitably face foreclosure.
However, what not everyone realizes is that lenders are still obliged to act within certain ethical bounds even after a foreclosure has been implemented. All lenders – or “mortgagees” – must conduct themselves with “good faith” and exercise “due diligence” to see that the adverse impact of the default is kept to an absolute minimum. Failure to abide by these ethical standards is a serious issue and transgressors can face severe penalties. When a default occurs, mortgagees must try to reach an outcome which fairly settles the matter, they cannot simply view the default as an opportunity to enrich themselves.
The case of Murphy v. Financial Development Corporation (1985) provides a sense of what due diligence requires from a lending institution. This is a case which all mortgagors should be aware of, even those who figure they have not the slightest chance of ever falling into financial trouble.
The plaintiff (Murphy) suffered a job loss in early 1981 and fell behind with making payments on his mortgage loan. The plaintiff attempted to negotiate with the defendant (Financial Development Corporation) in order to repair the loan. However, the plaintiff was not able to successfully repair the loan and eventually the defendant sold the house at auction to one of its representatives in December of 1981.
The plaintiff had approximately $19,000 of equity in the home and owed roughly $27,000. The defendant sold the house to its representative for $27,000. Immediately following the sale to its representative, the defendant sold the house to a new buyer for $38,000. Hence, the initial sale of $27,000 to the defendant’s representative had the dual effect of making the defendant “whole” while failing to account for the plaintiff’s substantial equity. At the time of the auction, the house had a market value of around $46,000.
Though the defendant clearly acted in good faith by negotiating with the plaintiff and giving the plaintiff an opportunity to repair the mortgage, the question before the court was whether the defendant acted with due diligence by selling the house to its representative.
Whether a mortgagee has acted with due diligence when selling a house which has been foreclosed upon requires a case-specific analysis. In general, due diligence requires that a mortgagee expend reasonable effort to obtain a fair price for the property.
The court (Supreme Court of New Hampshire) upheld the decision reached by the trial court and ruled in favor of the plaintiff. The court determined that, in this instance, the defendant had acted in good faith but failed to exercise due diligence. The court based its decision on the following facts: the defendant put only a small amount of effort toward advertising the auction; the defendant did not place a minimum bid at the auction; the defendant accepted an offer substantially below the market value of the property; and the defendant immediately sold the property to a new buyer for a quick profit.
As mentioned before, the determination of whether due diligence has been exercised is a case-by-case analysis. In this case, though the defendant acted in good faith, it was clear that not enough action was taken in order to meet the requirement of due diligence.
All mortgagors need to be aware of this fact: even if you fall behind on your payments, you still need to make certain that your lender conducts itself according to prevailing ethical standards.
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