3/3/2014
Default and Acceleration
• The first step in the foreclosure process is “acceleration” of the maturity of the debt
• Mortgage usually gives lender, at its option, the right to accelerate maturity of debt upon “default” (as defined by loan documents) [note 1, page 595]
– Upon proper acceleration, entire mortgage debt becomes immediately due and payable
Acceleration (in Context)
• Acceleration clauses can have different effects in different contexts
– E.g., acceleration clause in a lease may accelerate the due date of all future rent payments
– E.g., acceleration clause in a mortgage typically does not accelerate all future installments; instead, it accelerates the maturity of the principal
Acceleration: Loan Docs v. Common Law
• Mortgagor defaults (fails to make monthly payment in timely manner)
• Can the Mortgagee accelerate the maturity of the debt without notice to Mortgagor?
• Or does Mortgagee first have to give the Mortgagor notice and a right to cure the default?
Acceleration
• Common law: lender does not have to give borrower notice prior to acceleration, or a right to cure prior to acceleration, unless a state statute or loan documents so require
– Borrower deemed to be know when he/she is supposed to perform; Lender can give notice, but is not required to
• Compare Fannie/Freddie single‐family DOT [¶ 22, p. 1259]: lender agrees to give notice and 30‐day cure period (precondition to acceleration)
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Graf v. Hope Building Corp.
• HBC owned land subject to mortgage held by Graf
– Mortgage: entire balance shall become due if default in payment of installment continues uncured for 20 days
• HBC’s July 1927 payment was too low (clerical error)
– HBC secretary tells Graf “mistake will be corrected as soon as HBC’s president returns from Europe”
– However, this didn’t happen
• After cure period, Graf accelerated the debt, w/out further notice to HBC, and started foreclosure action
• HBC tried to reinstate, but Graf refused
• Common law: After a proper acceleration, mortgagor cannot unilaterally “reinstate” the mortgage by making the missed payments, but can only “redeem” the land by paying the full accelerated balance
• Borrower can “reinstate” the mortgage only if:
– Mortgagee consents, or
– State law so provides (e.g., CA statute, note 6, p. 599), or
– Loan documents so provide (e.g., Fannie/Freddie single‐
family form, p. 1252, ¶ 19 would allow reinstatement)
• Must a mortgagee (like Graf) give a mortgagor (like HBC) notice and/or a chance to cure before accelerating the maturity of the debt?
• Is Graf’s conduct here sensible? Why wouldn’t/shouldn’t Graf accept HBC’s tender of the shortfall and reinstate the mortgage loan?
• HBC argues (and Cardozo, in dissent, agrees) that allowing acceleration in this situation is unconscionable (and thus, court should have equitable discretion to prevent acceleration). Do you agree? • Why do you think this was a 4‐3 decision?
Questions
Questions
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• Graf majority: acceleration for untimely payment is not inherently unconscionable; court will not intervene absent “fraud, bad faith, or unconscionable conduct” [Restatement § 8.1]
• Comments to § 8.1 reinforce this view:
– “serves an important policy goal of predictability in mortgage remedies” [comment e]
– avoids “difficult and time‐consuming judicial inquiries into such matters as the degree of mortgagor’s negligence, the relative hardship that acceleration imposes, and other subjective concerns” [comment e]
• The real hardship in Graf is a function of the economic circumstances of the time
– By 1930, the crash has begun
– Even though HBC can afford to reinstate, and to make its monthly payments going forward, it likely can’t get refinancing to pay off the full accelerated balance
• Graf is somewhat analogous to the current market for commercial real estate projects (but many current lenders are choosing NOT to start enforcement, i.e., “extend and pretend”)
Acceleration and Insecurity
• Sometimes, a mortgage note provides that a mortgagee can accelerate the maturity of debt “if mortgagee deems itself insecure” [p. 602]
• Such provisions are called insecurity clauses
– Exercise of an insecurity clause in any contract (e.g., a promissory note) is governed by U.C.C. § 1‐309
– Lender can accelerate under an insecurity clause only if lender “in good faith believes that the prospect of payment or performance is impaired”
Freddie Mac v. Taylor
• Taylor (soldier on duty in Philippines) made 4 mortgage payments more than 20 days late (accepted by lender without objection)
• He mailed his Sept. 1973 payment 28 days late
– By time Lender received it, Oct. 1973 payment was past due, so Lender returned Sept. 1973 payment
• Why did Lender do this? Would you have advised Lender to do this?
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• Courts have often held that waiver may prevent acceleration [note 5, page 597]
– Classic example: lender repeatedly accepts late payments w/out objection, then accelerates after a late payment, w/out prior warning to borrower
– Course of performance between the parties = waiver of lender’s ability to demand strict timely performance
• Lender in Taylor was concerned that further acceptance of late payments would be viewed as waiver (especially in light of previously accepted late payments)
§ 1‐303(a). A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if:
(1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
(2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection....
§ 1‐303(d). A course of performance ... is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement.
§ 1‐303(f).... [A] course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.
Modification Programs
• Would you have advised the Lender in Taylor to return the Sept. 1973 payment?
– There’s never a good reason for a lender to return an unconditional payment; accept it!
– The risk of waiver is better addressed and managed by clear communication to Borrower
• “Our accepting this payment does not reinstate your mortgage, which is still in default.” • “Our accepting this payment does not waive your obligation to make timely payments in the future.”
• Hope for Homeowners [note 7, page 604] is no longer in effect (expired it in September 2011)
• HARP [Appendix B, p. 1273] remains in effect
• Impact? According to FHFA, through Sept. 2013:
– Over 1,500,000 permanent HARP modifications
– 750,000 repayment plans (trial period payments)
– 700,000 “nonmodification foreclosure prevention actions” (forbearance, short‐sales, deed‐in‐lieu)
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