The Law Office of J. Patrick Sutton
Home equity loan modification

Revisions to this Blog

In the interest of accuracy, I have revised and deleted prior blog entries that express a legal opinion that modifications of Texas mortgage loans that increase the principal balance of the loan are illegal. With the Texas Supreme Court's decision in Sims v. Carrington Mortgage Services on May 16, 2014, Texas law is now clear that lenders can capitalize past-due sums under the original loan back into the loan, over and over, without limitation. There is no requirement that an existing lender respect the 80% loan-to-value ratio when capitalizing past-due amounts back into the loan. In fact, a loan that met the 80% requirement at closing can be "restructured" a few months later to add the first several months' past-due interest and property taxes into the note, in effect allowing the borrower to borrow more than 80% of the value of the homestead.Content may continue . . .

Texas Supreme Court decides that Modifications of Texas mortgage loans can roll past-due amounts back into the loans

The Texas Supreme Court, in a case I brought and argued called Sims v. Carrington Mortgage Services, has decided that mortgage lenders can roll past-due interest, property taxes, and insurance into existing mortgage loans, including home equity loans. The Court created a new term under Texas law for such transactions under the Texas Constitution's homestead laws, calling them "restructurings."

This was a loss for my clients in many ways, since they and I believed that continuing to give credit under an existing loan -- which lets the lender take ever more collateral of the homestead -- is dangerous and unfair. However, the case clarified that such "restructurings" are legal. That is very important, because lenders had begun halting all modifications of Texas home equity loans before I ever got involved in these cases. Now, it is established that lenders can restructure these loans.

The Texas Supreme Court was not asked to address, and did not address, whether a "modification" or "restructuring" can impose interest-only payments or include a balloon, neither of which appears to be consistent with the express terms of the Texas Constitution.

The Texas Supreme Court also did not decide whether a "restructuring" can include property tax and insurance due in future periods, and we are seeking a rehearing to decide that narrow issue.
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Texas Supreme Court enforces Section 50 as written

Today, the Texas Supreme Court returned to its Norwood decision of 2013 and reiterated that even if the requirements of Tex. Const. art. XVI, § 50 are inconvenient, they must be enforced as written unless and until the people of Texas amend them:

"Whether the constitutional provision’s intended protection is worth the hardship or could be more fairly or effectively provided by some other method is a matter that must be left to the framers and ratifiers of the Constitution,"

said the Court in denying a request for rehearing.
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Texas Supreme Court to decide multiple Section 50 Issues

Days after the 5th Circuit U.S. Court of Appeals certified multiple questions to the Texas Supreme Court in my pending cases and class actions against major lenders, the Texas Supreme Court agreed to answer the questions. Just getting these questions resolved is a major victory for Texas borrowers, who have constantly been whip-sawed by the lenders. The lenders repeatedly offer modifications but later deny them when they learn (and admit) them to be illegal in Texas.Content may continue . . .

A blow against Nationstar's Loan Modification Practices in Texas

On August 16, 2013, the Texas Multidistrict Litigation Panel combined all my outstanding cases against Nationstar Mortgage (formerly Centex) in one court. Nationstar not only added very large sums to existing home equity loans with 2-page modifications, but concealed the practice by using interest-only and balloon-note clauses that hid how much was being added to the loans. Combining all the cases is a huge victory for the various plaintiffs around the state, since their payments usually jumped way up and put them in a bind -- making it difficult for them to afford the legal fees to fight Nationstar. Nationstar vigorously opposed consolidating the cases, hoping to keep the plaintiffs spread out and alone in the various counties. Now, as new cases get filed, all the cases will go into one court for uniform handling.

The MDL Order is here.Content may continue . . .

5th Cir. Doubtful Decision on Statute of Limitations in Section 50 Cases

In a highly questionable -- well, wrong IMHO-- decision, the 5th Circuit U.S. Court of Appeals has held that Section 50 has a four-year statute of limitations after closing. Priester v. JP Morgan Chase Bank, N.A., 12-40032, 2013 WL 539048 (5th Cir. Feb. 13, 2013). That means that a lien springs into existence after four years even if the loan is wildly noncompliant. For example, if it's an illegal 2d home equity loan on the same property, it will be valid after four years. If it has a balloon at the end of 30 years, that balloon becomes valid after four years. Etc. etc. I submitted an amicus brief to the 5th Cir. (though somewhat late) that I hope will be accepted. The brief is HERE.

There are already cases involving 2d home equity loans that are invalid and home equity loans that recite all sorts of illegal provisions, like personal recourse against the borrower and non-judicial foreclosure. Under the new 5th Circuit rule, all those clauses can be validated a few years into a 30-year home equity loan. The cure provisions of Section 50 thus become irrelevant four years into a home equity loan. One wonders why the people and the legislature of Texas bothered to put in a cure remedy if it was no good for most of the life of a loan.

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Judge in Chase class action dismisses claims

In a setback for the cause, a federal district court judge in Austin has dismissed our claims in the proposed JPMorgan Chase class action. That case has now gone up on appeal alongside the Sims v. Carrington Mortgage Services case from a federal court in Fort Worth. The judge for the Western District of Texas held, among other things, that interest-only schedules of payment are allowable. That runs directly counter to the express wording of the regulation that the judge cited but did not quote. I feel very strongly that the case was wrongly dismissed, and I am hopeful that the appeal will be successful.

At a minimum, Judge Sparks acknowledged that one of the plaintiff's balloon-note modifications was illegal, but the court then appeared to impose a new form of pre-suit notification on the plaintiff such that a Texas home equity borrower cannot bring a lawsuit to enforce Section 50 unless and until the borrower has given the lender advance notice of the suit and a right to cure. Section 50 itself contains no such pre-suit notice requirement, and several cases have held that a Section 50 lawsuit itself constitutes proper notice of the claim. Again, I don't agree with the decision, and I am hopeful the pre-suit notice requirement will also be reversed.

Hang in there, Texas home equity borrowers. It's still early in the game.Content may continue . . .

Nationstar and Centex Texas home equity loan modifications

If Nationstar or Centex modified your Texas home equity (or "cash out") loan to establish an interest-only period or a balloon, call me immediately! I've had a spate of calls involving Nationstar and Centex modifications that presumptively violate the Texas Constitution, and it would be wrongful for Nationstar to foreclose. Do not delay getting in touch with me to discuss your modified loan, but please obtain your loan modification paperwork and be prepared to provide that to me by fax (512) 355-4155 or email ( I require a retainer (a deposit) to take these cases, but if your modification violates the Texas Constitution, Nationstar has no lien to foreclose. It's important that you act quickly to protect your Texas Constitutional rights.Content may continue . . .

Mortgage principal forgiveness law extended by Congress

As part of the recent fiscal cliff deal, the federal Mortgage Forgiveness Debt Relief Act has been extended another year, to Jan. 1, 2014. For purposes of the class actions my colleagues and I have filed relating to Texas home equity loans, that means that the big lenders still have a chance to help borrowers take advantage of principal forgiveness to the extent the law applies. In fact, it's an open question whether past-due interest and escrows that are illegally turned into loan principal even trigger a tax obligation, but if they do, the extension of the debt relief act is a boon to borrowers who get their loans cured. Content may continue . . .

U.S. Supreme Court Review of Pennington v. Wells Fargo sought

On December 20, 2012, the plaintiffs in Pennington v. Wells Fargo Bank timely filed a request that the U.S. Supreme Court hear their appeal. The petition is here. The issue is whether a lender can induce a Texas home equity borrower into a HAMP trial period plan of payments that don't pay all interest coming due, which certainly looks like a violation of Tex. Const. art. XVI sec. 50(a)(6)(L). The petitioners argue that the HAMP schedule creates a balloon if the lender denies the permanent modification and demands payment of the interest that builds up during the trial period even though the borrower is making the monthly coupon payment (typically, HAMP trial plans have coupons that the borrower gets).

It's always difficult to be granted U.S. Supreme Court review, but this is a special case that involves a federal program (HAMP) that, by definition, cannot work in Texas. Under Tex. Const. art. XVI sec. 50, esp. 50(e), lenders cannot (in my opinion) add arrears into the principal amount of any Texas home loan. Lenders can either add reasonable closing costs, in the case of purchase-money mortgages; or else make a home equity loan, with all the bells and whistles. However, brief, 2-page forms that add tens of thousands of dollars in past-due interest or property taxes to the home loan note are not allowed. That being the case, HAMP undermines the Texas Constitution. What was the point of HAMP if the state with about 10% of all the mortgages in the country can't take advantage of it?Content may continue . . .

A Sigh -- Hang in there, borrowers.

I am a solo practitioner who decided, when no other options presented themselves for my clients in foreclosure, to take on big banks on behalf of borrowers. Two recent losses in federal court -- Pennington v. Wells Fargo and Sims v. Carrington Mortgage Services -- are a reminder that seeking to un-do events from the 2007 mortgage meltdown faces enormous hurdles. Unprecedented events in the world at large combine with a lack of precedent in the legal arena to make it hard to fight lending practices that seem outrageous and unfair but find no clear prohibition in the law. Courts are being asked to hold banks accountable for actions done on a system-wide basis, the financial consequences of which could be colossal. The banks bring great resources to bear in fighting borrowers and solo lawyers. While I am hopeful that the Carrington federal district court dismissal will be reversed, the reality is that modifications like the ones in that case (where loan principal was increased without formalities) are everywhere, systemic, and simply assumed by many to be valid if for no other reason than the fact that they were done. The banks argue, in essence, that their lending practices have to be allowed even if they violate the Texas Constitution since forbidding them would benefit undeserving borrowers who defaulted -- never mind that these practices benefitted the banks by keeping loans on devalued assets performing and generating cash at some baseline level that they otherwise would not have. At the same time, the banks argue that they must be free to offer the same sorts of deals to other borrowers in financial distress. Borrowers are either ungrateful freeloaders or the lucky future beneficiaries of bank beneficence, depending on what level of the inferno they occupy. From recordings, we now know that the banks have announced policies of not modifying any Texas home equity loans, in any way. That, too, is wrong on the law, and directly in conflict with the banks' position that the Texas Constitution Section 50 was written to give banks the freedom to do more or less as they wish. It puts me in mind of Lance Armstrong and the overwhelming evidence that has come out against him. At what point do the wealthy and powerful finally give in and admit they were wrong? Content may continue . . .

Pennington: onward and upward

The 5th Circuit U.S. Court of Appeals has upheld the Austin federal district court's dismissal of Pennington v. HSBC Bank and Wells Fargo Bank. Any further appeal must now go to the U.S. Supreme Court. Pennington involves HAMP-program participants who never got finalized loan modifications from Wells Fargo Bank. The 5th Circuit did not examine the Tex. Const. Section 50 claim apart from a footnote. I continue to believe that HAMP form trial plans and permanent modifications are incompatible with Section 50. Any time a borrower gets a schedule of payments that do not pay all accrued interest each month, that seems to run afoul of Section 50, which requires that home equity loans be paid down every month. It will be interesting to see if Plaintiffs seek Supreme Court review.Content may continue . . .

Pennington v. Wells Fargo goes to the U.S. Court of Appeals

The Pennington v. Wells Fargo proposed class action claims that a lender can't lower a Texas home equity borrower's monthly payments without forgiving the arrears that build up, since doing so creates a pool of unpaid interest that can't be added back into the loan (which is what happened in the other class actions I have filed, where the borrowers indisputably got "modifications" that increased the Texas home equity loan principal). In Pennington, the plaintiffs got temporary payment plans (HAMP program agreements), but the Plaintiffs assert that when Wells Fargo finally figured out that the interest arrears caused by the HAMP payment plans couldn't legally be added back into the loan without a Texas Const. Art. XVI Section 50(a)(6) refinance, Wells Fargo didn't forgive the arrears it had created with the reduced payments, as it should have done: it just cut the plaintiffs off from a permanent modification and demanded they catch up immediately. Thus, having drawn the plaintiffs into arrears that could never have been added back into the loan because of the way Section 50 works, Wells Fargo set the plaintiffs up for foreclosure, Plaintiffs allege.

Oral argument is scheduled in New Orleans with the Fifth Circuit U.S. Court of Appeals on September 5, 2012.

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JPMorgan Chase (Chase Home Finance) and Bank of America Proposed Class Actions

I have filed class actions on behalf of Texas home equity borrowers against both JPMorgan Chase Bank, N.A., successor to Chase Home Finance, and also Bank of America, N.A..

These class actions are identical to the Nationstar class action. They involve the claim that JPMC changed Texas home equity loans into interest-only and balloon-note loans, which the Texas Constitution forbids.

The Chase complaint as filed in the U.S. District Court for the Western District of Texas is here.

The Bank of America complaint as filed in the U.S. District Court for the Southern District of Texas is here.Content may continue . . .

Judicial Foreclosure of Illegally-Modified Home Equity Loans

If you have a Texas home equity loan that was illegally modified to include interest-only payments or a balloon, CONTACT ME IMMEDIATELY TO DISCUSS IT.Content may continue . . .

About the Pennington v. Wells Fargo Class Action

My Pennington v. Wells Fargo class action in federal court in Austin, Texas, concerns MODIFICATIONS TO TEXAS HOME EQUITY LOANS that MAY VIOLATE THE TEXAS CONSTITUTION in the following ways:
  • past due interest was included in a new principal amount
  • the modified loan exceeded 80% of the fair market value of the home.
Contact me IMMEDIATELY if you have such a situation, even if it's not with Wells Fargo.
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The Law Office of J. Patrick Sutton