Does major loan modification of note, without consent of non-liable mortgagor, release the mortgage as to that mortgagor?

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Thomas Cox

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Aug 6, 2022, 4:21:41 PM8/6/22
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In 2007, Wife only signed a non-negotiable “loan agreement”  payable to Beneficial Massachusetts in the amount of $252,447.00. Husband and Wife then both granted a mortgage on their  summer house to Beneficial Massachusetts.  In 2019, Wife only signed a loan modification agreement purporting to increase the principal amount of the loan to $395,843.77.  The term of the loan under the loan agreement was for 30 years, ending in October 2037. The loan modification extended the term to October 2059.  The original interest rate was, while the loan modification reduced that to 2.1%.  The loan agreement and the loan modification agreement are attached below.

It seems to me that the loan modification agreement is a binding contract between the obligor on the loan agreement and the owner of the loan.

Since  Wife alone signed the loan modification agreement in 2019 purporting to increase the loan balance by over $140,000 and greatly extending the term and  since Husband is a mortgagor and did not agree to that, what is the effect of the loan modification on Husband’s liability on the mortgage?
1. Is there a reasonable argument that the U.S. Bank’s act of making a major increase in the principal and extending the term of the loan secured by the mortgage voids the mortgage as to Husband?  
2. If so, should Husband should file a counterclaim seeking a DJ so holding in response to a just filed foreclosure action?

I looked at the Restatement (Third) of Property (Mortgages) and did not see answers.  I am still digging into old Maine law, but am curious about decisions in other jurisdictions.
Tom

Thomas A. Cox, Esq.
P.O. Box 1083
Yarmouth, Maine 04096
(207) 749-6671
Loan Agreement.pdf
Loan Mod Agmt.pdf

Robert Adams

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Aug 6, 2022, 5:29:38 PM8/6/22
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Most states provide for a  discharge of an accommodation party when the collateral is impaired.  Also, there is a discharge of the surety if the principal's obligation is modified without the surety's consent.  This has been the rule for hundreds of years under contract law.  The UCC adopted it.




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whitm...@gmail.com

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Aug 6, 2022, 5:37:06 PM8/6/22
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Tom – I think there is a pretty good argument that the husband’s interest in the property is now free of the mortgage. The change in terms of the obligation is sufficiently major that it can easily be viewed as a novation – that is, a substitution of a new obligation for the original one. That in turn means that the original obligation no longer exists, and that the mortgage on the husband’s interest in the property no longer has an obligation to secure. The wife’s new obligation, on the other hand, pretty obviously was intended by her to be secured by the original mortgage and therefore probably is secured. (Did she sign anything indicating that the new obligation would continue to be secured by the mortgage? I must confess that I didn’t read the modification agreement, but it’s probably in there.)

 

I think the husband’s counsel could approach this either by filing for a declaratory judgment or by simply filing an answer in a judicial foreclosure action.

 

By the way, there’s nothing in the Restatement that deals with this situation, in which one mortgagor enters into a modification and the other does not.

 

Hope that’s helpful.

Dale

 

Dale Whitman

Professor of Law Emeritus, University of Missouri

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Thomas Cox

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Aug 6, 2022, 11:47:56 PM8/6/22
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Dale, that you for your guidance on this. With more research, the closest that I can get to this issue with the Maine court is  St. Agatha Federal Credit Union v. Ouellette, 1998 ME 279, 722 A.2d 858, which is not exactly on point but which suggests that the Maine court might treat the increase in principal created  by the loan modification agreement as an unsecured future advance.

It would have been good if the ULC could have helped to bring clarity to this issue with its recent drafting committee effort.

Tom

Thomas A. Cox, Esq.
P.O. Box 1083
Yarmouth, Maine 04096
(207) 749-6671

Hulse, Brian

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Aug 6, 2022, 11:48:05 PM8/6/22
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Tom,

 

Take a look at the Restatement of Suretyship and Guaranty.  Under Section 1(1), the husband is a “secondary obligor” or surety for the wife’s obligation by virtue of granting collateral to secure it, even though the husband isn’t personally liable.  Under Section 41 (b), the secondary obligor is discharged “if the modification creates a substituted contract or imposes risks on the secondary obligor fundamentally different from those imposed pursuant to the transaction prior to the modification” unless the secondary obligor effectively waives the defense or consents to the modification (Section 48) or the contract constitutes an effective continuing guaranty (Section 16).

 

Brian

 

Brian D. Hulse | Davis Wright Tremaine LLP
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Subject: RE: [nyclarealprop] Does major loan modification of note, without consent of non-liable mortgagor, release the mortgage as to that mortgagor?

 

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whitm...@gmail.com

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Aug 7, 2022, 7:15:59 PM8/7/22
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I’m not at all sure that the husband in this case would qualify as an accommodation party, a secondary obligor, or a surety. The husband, at least originally, was probably a direct beneficiary of the loan; I assume that he was a resident or occupant of the house that was purchased with the proceeds of the loan. Perhaps he continued to reside there after the modification. In those circumstances, I can’t quite see how he would be in a position to argue that he would be released from liability by the modification.

 

In addition, it could be important to know whether, and to what extent, he was involved in the negotiations with respect to the terms of the modification, which might well subject him to a waiver argument, even if he was considered a surety. I continue to feel that the novation theory offers a better shot at getting the husband off the hook.

 

Dale

Weise, Steven O.

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Aug 7, 2022, 9:25:04 PM8/7/22
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I suspect the answer to these questions in the context of married persons will depend on the relevant state law and the nature of the debt.  For example, under California law a spouse’s separate property is liable for specified debts incurred by the other spouse during the marriage (before separation).  That sounds like primary and not secondary liabilty to the extent the statute applies.  See California Family Code §§ 910-916.

Steve

Steven O. Weise
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Proskauer Rose LLP
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Chuck Calvin

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Aug 7, 2022, 9:25:08 PM8/7/22
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There may also be waiver language in the original loan documents, authorizing either grantor to negotiate changes. The husband may have an out, but I don't think we have enough information to reach that conclusion yet. 

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Robert Adams

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Aug 7, 2022, 9:25:12 PM8/7/22
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 The mere knowledge or involvement in negotiations is generally insufficient to remove the guarantor from the protection of the Statute of Frauds.  A written agreement is required to charge a guarantor or surety in most states under the Statute of Frauds - usually the third element.

Bob

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Lance Pomerantz

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Aug 7, 2022, 9:25:15 PM8/7/22
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The complaint alleges the "Husband" conveyed his interest in the property to the "Wife" by deed in 2008 (I use quotes because there is nothing in the record stating they are or were married. Based on the pleading, which is silent about their relationship to each other, they could easily be parent/child, siblings, cousins, in-laws, or even unrelated). Regardless of the relationship, why would he need to be a party to the 2019 loan mod if he no longer had an interest in the property at that time? On the other side of the coin, why is he a party to the instant foreclosure?
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Lance R. Pomerantz, Esq.
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Thomas Cox

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Aug 8, 2022, 11:33:16 AM8/8/22
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Thank you for all of this input.  I will be gathering more information.  The two grantors of the mortgage were married at the time of the granting of the mortgage in 2007 (the 1998 deed in to the two of them recites that they are husband and wife), but they subsequently divorced and Husband conveyed his interest to Wife in 2008.  Husband and Wife are both defendants in the foreclosure because Maine law requires the plaintiff to name all parties to the mortgage, regardless of a subsequent grant by one mortgagor to the other. 

There is no waiver language in the 2007 loan agreement and mortgage allowing one mortgagor to negotiate a loan modification without the participation of the other.  I do not believe Husband participated at all in the negotiation of the 2019 loan modification, but I will be making certain of that later this week

I am gathering more facts this week, but I do know that Husband and Wife were divorced years before the 2019 loan modification. What I do not yet know is whether Husband continued to use this vacation house after divorce, or possibly even after the loan modification. 

The insight here has been very helpful to me in setting up to ask the right questions to Husband later this week.  Thank you all for the input.

Tom

Thomas A. Cox, Esq.
P.O. Box 1083
Yarmouth, Maine 04096
(207) 749-6671

Lance Pomerantz

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Aug 8, 2022, 2:36:56 PM8/8/22
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Doesn't 33 M.R. S. §480 permit only the owner "spouse" to enter into the mod, especially in the absence of any provision in the original loan agreement and mortgage requiring the consent of both original mortgagors?
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Lance R. Pomerantz, Esq.
Land Title Law
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Erin Wietecha

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Aug 8, 2022, 2:40:44 PM8/8/22
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Banks routinely allow a spouse who can produce a judgment of divorce or proof that their spouse is deceased to “assume” the loan obligations and modify so as to be the only borrower under the modified note and mortgage. I’m thinking this might have happened here. The agreement is usually called an assumption and modification agreement.

Bernhardt, George P

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Aug 8, 2022, 2:49:59 PM8/8/22
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The big question is whether the former spouses both continue to hold an interest in the property.  That’s normally done when the judge awards the house to one spouse.  I did not see anything clear on whether that happened or not.  If the husband still has a 50% undivided interest, then the bank should have gone to him for consent.

 

George P. Bernhardt

Executive Counsel – Global Real Estate

Baker Hughes Company

17021 Aldine Westfield Road, Houston, Texas 77073-5101

Tel: 713-879-1552   Mobile: 713-826-7426

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Subject: RE: [nyclarealprop] Does major loan modification of note, without consent of non-liable mortgagor, release the mortgage as to that mortgagor?

 

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Pamela Simmons

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Aug 8, 2022, 3:17:32 PM8/8/22
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I believe that the question goes to liability under the loan.  The fact that
the husband no longer has title to the property does not necessarily terminate
is duty to pay the loan.  I do not know about the law in your state but this
to me is the key factor to determine.  If he is still liable under the note then
I think the argument that you wish to make is a good one.

During the meltdown we had a lot of trouble getting loan mods for spousals
who had ex-spouses who would not participate in the qualification program.
Many lenders refused to grant mods even though the ex no longer was on
the title. 

 



Pamela Simmons
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