The Massachusetts Appeals Court issued an important decision last week concerning a homeowner’s legal rights following a loan modification. In Barrasso v. New Century Mortgage Corporation, the Appeals Court held that a homeowner was unable to raise prior claims related to their mortgage loan after accepting a modification of that loan (a copy of the decision is below).
In Barrasso, the homeowner entered into a loan modification with their lender, for the purpose of making the loan payments more affordable. Years later, the homeowner brought a lawsuit against the lender, challenging several of the mortgage loan assignments and whether the present holder of the mortgage was the proper holder of the loan.
Barrasso held that the homeowner was estopped from challenging the transfer of his mortgage due to the homeowner’s signing of this loan modification. Estoppel is a legal defense that prevents a party from making an allegation or defense that contradicts a prior representation. The loan modification in Barrasso, like most loan modification agreements, required the homeowner to agree to several factual representations about the mortgage loan, namely, who held the mortgage. The Court reasoned that, because the homeowner benefited from this loan modification agreement, it could not then deny one of the prior statements in this agreement that it had agreed to: who the owner of the mortgage was.
Implications to Homeowners
Barrasso follows a line of reasoning that I have often taken with loan modifications: the signing of one of these agreements generally waives any prior legal claims associated with the loan. A loan modification, in essence, is a new loan, with new terms and conditions. If a homeowner had legal claims arising from the original loan (such as predatory lending), the homeowner probably won’t be able to raise them following a loan modification. As explained by Barrasso, if a homeowner gets the benefits of a loan modification, it can’t then go back and raise matters that arose before the modification.
Some loan modification agreements, such as those coming from the federal Home Affordable Modification Program (“HAMP”), do not require a homeowner to waive any legal rights against a lender. Barrasso makes clear, however, that a loan modification has strong implications for one’s legal rights following one of these agreements. Homeowners should keep this in mind when considering accepting a loan modification: homeowners generally won’t be able to raise claims arising out of the prior loan.
Barrasso should not scare homeowners away from accepting a loan modification. Loan modifications are the best means of avoiding foreclosure, and a homeowner should absolutely accept a modification with an affordable loan payment. The key is to make sure that such a modification is right for the homeowner. If you find yourself in such a scenario, contact me for a consultation.Barrasso v. New Century