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FERRELL v. PIERCE

April 7, 1983

JAMES AND JOYCE FERRELL, ET AL., PLAINTIFFS,
v.
SAMUEL PIERCE, SECRETARY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD); PHILIP ABRAMS, GENERAL DEPUTY ASSISTANT SECRETARY OF HOUSING-FEDERAL HOUSING COMMISSIONER, HUD; THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, DEFENDANTS.



The opinion of the court was delivered by: Will, Senior District Judge.

      MEMORANDUM OPINION

This class action was instituted in 1973 to assert various alleged rights to foreclosure avoidance relief of the plaintiff class of low and moderate income families who had purchased homes with insured home mortgages under specified sections of the National Housing Act. In 1976, plaintiffs and the then-remaining defendants, the United States Department of Housing and Urban Development (hereinafter "HUD" or "the Department") and certain of its officials, theoretically settled the lawsuit. As part of the settlement, HUD agreed to implement a revised policy for accepting assignments of insured mortgages in default in order to provide foreclosure avoidance assistance to members of the plaintiff class. Our order, dated July 29, 1976, approved the settlement and dismissal and incorporated by reference the parties' stipulation detailing HUD's obligations with respect to mortgage assignments.

Thereafter, from time to time, the plaintiffs objected to HUD's alleged violations of the July 1976 order. Finally, in August 1979, the parties agreed to an Amended Stipulation which we approved in November of that year. In the Amended Stipulation, HUD acknowledged that there had been "a significant incidence of error in the administration of the [assignment] program" and agreed subsequently to administer that program in accordance with an internal manual, HUD Handbook No. 4191.2, later renumbered as HUD Handbook 4330.2 (hereinafter "the Handbook"), which had been reviewed by counsel for the plaintiff class and was incorporated by reference in the Amended Stipulation.

This matter is before us again on defendants' motion to modify our November 1979 order incorporating and approving the Amended Stipulation and on the plaintiffs' motion to hold the defendants in civil contempt for violation of the Amended Stipulation. We held a hearing on both motions commencing on September 30, 1982, and have subsequently received briefs from the parties. For the reasons hereinafter stated, defendants' motion to modify the Amended Stipulation is denied. The defendants are enjoined from implementing certain proposed regulations relating to Temporary Mortgage Assistance Payments and Assignments to HUD as previously published, 47 Fed.Reg. 33252 (1982). Plaintiffs' motion for contempt is also denied.

The Amended Stipulation

The Amended Stipulation, which is the focus of both motions, provides in paragraph 3 for HUD's operation of a mortgage assignment program consistent with the terms of the Handbook. Paragraph 3 provides:

  HUD Handbook 4191.2, attached hereto as Appendix A,
  shall constitute binding instructions for
  implementation of the assignment program subsequent
  to the entry of this order. The Department shall
  administer the assignment program substantially in
  accordance with the terms of said Handbook. . . . The
  provisions of the Handbook may be modified in
  accordance with the Department's usual procedures.
  However, during the term of this Amended Stipulation
  the Department will not make any modification which
  would curtail the basic rights of mortgagors under
  the program now in existence. The Department will
  give notice to plaintiffs' counsel prior to final
  action on any modification.

The duration of the obligations created by the Amended Stipulation is set out in paragraph 14 of that agreement, which provides:

  Except as provided in this paragraph, the rights and
  obligations created by this Amended Stipulation shall
  terminate five years from date of execution. The
  termination of the Department's specific obligations
  under this Amended Stipulation shall not diminish or
  compromise the Department's obligation construed
  under the National Housing Act as amended, and
  Section 2 of the Housing Act of 1949 and Section 2 of
  the Housing and Urban Development Act of 1968 to
  provide foreclosure avoidance relief for mortgagors
  in temporary financial distress, and the Department
  shall provide assistance or relief in the form of the
  present assignment program or an equivalent
  substitute to permit mortgagors in default on their
  mortgages to avoid foreclosure and to retain their
  homes during periods of temporary financial distress.

The Handbook, which is incorporated in the Amended Stipulation, sets out procedures for HUD's acceptance of assignments. It lists five eligibility criteria for preforeclosure mortgage assignment assistance, the two most important of which are that the circumstances leading to default have been beyond the mortgagor's control and that there be a "reasonable prospect" that the mortgagor will be able to resume full mortgage payments following a 36-month period of full or partial forbearance. The Handbook also purports to describe the required terms for mortgage payments to HUD on assigned mortgages. Those Handbook provisions relating to the terms of payment and other relevant provisions are set out and discussed in some detail hereafter.

The Amended Stipulation further provides that HUD will maintain and furnish to the plaintiffs' counsel monthly statistical reports on the processing of applications for assignment. Amended Stipulation ¶ 9. The monthly reports are to show the number of applications HUD has received, the number of assignments actually accepted and the number referred back to the mortgagee for what is termed "further servicing." They further indicate, with respect to mortgages accepted for assignment, whether the mortgagor has had payments reduced or suspended or is making a full or increased mortgage payment to HUD.

Statutory Developments

The statutory authority for the Department's operation of a mortgage assignment program was, at the time of the Amended Stipulation, contained in former Section 230 of the National Housing Act, 12 U.S.C. § 1715u (1968), which provided in pertinent part:

  Upon receiving notice of the default of any mortgage
  covering a one-, two-, three-, or four-family
  residence heretofore or hereafter insured under this
  chapter, the Secretary, in his discretion and for the
  purpose of avoiding foreclosure of the mortgage, and
  notwithstanding the fact that he has previously
  approved a request of the mortgagee for an extension
  of time for curing the default and of the time for
  commencing foreclosure proceedings or for otherwise
  acquiring title to the mortgaged property, or has
  approved a modification of the mortgage for the
  purpose of changing the amortization provisions by
  recasting the unpaid balance, may acquire the loan
  and security therefor upon payment of the insurance
  benefits in an amount equal to the unpaid principal
  balance of the loan plus any unpaid mortgage interest
  plus reimbursement for such costs and attorney's fees
  as the Secretary finds were properly incurred in
  connection with the defaulted mortgage and its
  assignment to the Secretary, and for any proper
  advances theretofore made by the mortgagee under the
  provisions of the mortgage.

As is apparent from a previous opinion in this case, HUD has a statutory obligation which formed the basis for the Amended Stipulation to provide mortgage foreclosure avoidance relief in a manner that will advance the national housing policy, stated in 42 U.S.C. § 1441, of providing a decent home and suitable living environment for every American family. Brown v. Lynn, 385 F. Supp. 986, 998-99 (N.D.Ill. 1974).

Congress has since enacted the Housing and Community Development Act of 1980, P-L 96-399, 94 Stat. 1614, 1659, which amends Section 230 of the National Housing Act, 12 U.S.C. § 1715u (hereinafter "section 230" or "amended section 230") to permit HUD to provide foreclosure avoidance relief in the form of Temporary Mortgage Assistance Payments (TMAP) to lending institutions on behalf of eligible mortgagors as well as in the previously provided for form of mortgage assignment. Under TMAP, the mortgagee retains the mortgage and receives payments from HUD. Under the assignment program, the mortgage itself is conveyed to HUD, which arranges terms for the mortgagor to make payments to it. The amended version of section 230 now allows for provision of the TMAP form of mortgage foreclosure avoidance assistance under the same conditions as those under which assignment was available under the earlier statute, as implemented by the Handbook. Paragraph (a)(1) of the statute as amended provides:

    (a)(1) Upon receiving notice of the default of any
  mortgage covering a one-, two-, three-, or
  four-family residence insured under this chapter, the
  Secretary (for the purpose of avoiding foreclosure of
  the mortgage, and notwithstanding the fact that the
  Secretary has previously approved a request of the
  mortgagee for an extension of the time for curing the
  default and of the time for commencing foreclosure
  proceedings or for otherwise acquiring title to the
  mortgaged property, or has approved a modification of
  the mortgage for the purpose of changing the
  amortization provisions by recasting the unpaid
  balance) may make all or part of the monthly payments
  due under the mortgage directly to the mortgagee on
  behalf of the mortgagor, if such default was caused
  by circumstances which are beyond the mortgagor's
  control and render the mortgagor temporarily unable
  to correct a mortgage delinquency and to resume full
  mortgage payments. Payments may be made only in
  accordance with the provisions of this subsection and
  shall be subject to any additional requirements the
  Secretary may prescribe.

The additional restriction on eligibility for relief now on the face of the statute — that the default shall have been caused by circumstances beyond the mortgagor's control which render the mortgagor temporarily unable to correct the delinquency and resume full payments — is a codification of an eligibility criterion contained in the Handbook implementing the assignment program under the previous statute. See Handbook ¶ 2-1(d).*fn1

Amended section 230 now codifies the "reasonable prospect" criterion now contained in the Handbook ¶ 2-1(e).*fn2 Paragraph (a)(2) now provides:

    (2) No payments may be provided under this
  subsection unless the Secretary has determined that
  such payments are necessary to avoid foreclosure and
  that there is a reasonable prospect that the
  mortgagor will be able —
      (A) to resume full mortgage payments within
    thirty-six months after the beginning of the period
    for which such payments are provided or upon
    termination of assistance under this subsection;
      (B) to commence repayment of the payments made
    under this subsection at a time designated by the
    Secretary; and
      (C) to pay the mortgage in full by its maturity
    date or by a later date established by the
    Secretary for completing the mortgage payments.

Although the wording of the statute is different from that in the Handbook and although the statute, in subparagraph (a)(2)(C), does not set a 10-year limit on possible mortgage term extension — as does the Handbook ¶ 2-1(e) — it is apparent that the differences are immaterial to operation of a TMAP program equivalent to the assignment program envisioned by the Handbook.

Paragraph (a)(3) provides for a level of assistance "in an amount determined by the Secretary" that may be as much as the total principal and interest due under the mortgage plus enumerated additional taxes, assessments and other expenses. The subsection provides:

    (3) Payments under this subsection may be in an
  amount determined by the Secretary up to the amount
  of the principal, interest, taxes, assessments,
  ground rents, hazard insurance, mortgagee's expenses
  in connection with payments or repayments under this
  subsection, and mortgage insurance premiums due under
  the mortgage, and the initial payment may include an
  amount necessary to make the payments on the mortgage
  current. Payments may not exceed amounts which the
  Secretary determines to be necessary to supplement
  the amounts, if any, which the mortgagor is capable
  of contributing toward the mortgage payments.

Paragraph (a)(4) governs the duration of TMAP. This paragraph provides for an initial limit of 18 months after default on the period for which payments may be made on behalf of a mortgagor and for extension of the initial assistance period by up to 18 more months. Provision is made for periodic review of the mortgagor's need during the assistance period. Paragraph (a)(4) provides:

    (4) Payments under this subsection may be provided
  for a period of not to exceed eighteen months, and
  any period of default. Such period may be extended,
  in the Secretary's discretion, for not to exceed
  eighteen months where the Secretary has determined
  that such extension is necessary to avoid foreclosure
  and that there is a reasonable prospect that the
  mortgagor will be able to make the payments and
  repayments specified in paragraph (2) of this
  subsection. The Secretary shall establish procedures
  for periodic review of the mortgagor's financial
  circumstances for the purpose of determining the
  necessity for continuation, termination, or
  adjustment in the amount of the payments. Payments
  shall be discontinued at any time when the Secretary

  determines that, because of changes in the
  mortgagor's financial circumstances, the payments are
  no longer necessary to avoid foreclosure or that
  there is no longer a reasonable prospect that the
  mortgagor will be able to make the payments and
  repayments specified in paragraph (2) of this
  subsection.

These limitations on assistance are structurally similar to the limitations on the period of reduced or suspended payments as outlined in the Handbook ¶¶ 5-1 and 5-3.

Repayment of assistance is covered in paragraph (a)(5). That subsection directs the Secretary to secure his assistance by a lien on the property. The Secretary is given virtually complete discretion with respect to the level of interest charged on assistance and with respect to the terms of repayment. The only restriction is a maximum limit on the interest charged on assistance; that rate may not exceed the maximum FHA interest level computed under section 203(b) of the Housing Act, 12 U.S.C. § 1709(b). Paragraph (a)(5) provides:

    (5) All payments shall be secured by a lien on the
  property and by such other obligations as the
  Secretary may require. Payments shall be repayable
  upon terms and conditions prescribed by the
  Secretary, and such terms and conditions may include
  requirements for repayment of any amount paid by the
  Secretary toward a mortgagee's expenses in connection
  with the payment or repayments made under this
  subsection. The Secretary may establish interest
  charges on payments made under this subsection;
  except that such charges shall not exceed a rate
  which is more than the maximum interest rate
  applicable with respect to level payment mortgages
  insured pursuant to section 1709(b) of this title at
  the time assistance under this section is approved by
  the Secretary. Such charges shall be payable
  notwithstanding any provision of any State
  constitution or law or local law which limits the
  rate of interest on loans or advances of credit.

Finally, paragraph (a)(6) provides for repeated cycles of assistance on behalf of a mortgagor only in cases where that mortgagor has made full payments for 12 months following termination of the previous assistance. The language of paragraph (a)(6) is as follows:

    (6) Payments under this subsection may be made
  without regard to whether the Secretary has
  previously taken action to avoid mortgage acquisition
  or foreclosure, except that payments may be provided
  on behalf of a mortgagor previously assisted under
  this section only in cases in which full mortgage
  payments (and any repayments to the Secretary which
  may have been requested) have been made by such
  mortgagor for at least 12 months from the time such
  previous assistance under this section was
  terminated.

As noted above, the amended version of section 230 provides for continued operation of the assignment program. Paragraph (b)(1) of the amended section now states in pertinent part:

    (b)(1) When the Secretary receives notice of a
  default described in subsection (a)(1) of this
  section and makes a determination that assistance
  under subsection (a) of this section would be
  inappropriate in the case of the mortgagor, the
  Secretary (for the purpose of avoiding foreclosure of
  the mortgage, and notwithstanding the facts described
  in the parenthetical material contained in subsection
  (a)(1) of this section and the fact that payments
  have been made under subsection (a) of this section
  with respect to the mortgage) shall, if determined
  necessary by the Secretary, acquire the mortgage and
  security therefor upon payment of the insurance
  benefits in an amount equal to the unpaid principal
  balance of the mortgage plus any unpaid mortgage
  interest and reimbursement for such costs and
  attorney's fees as the Secretary finds were properly
  incurred in connection with the defaulted mortgage
  and its assignment to the Secretary, and for any
  proper advances theretofore made by the mortgagee
  under the provisions of the mortgage. After the
  acquisition of such mortgage by the Secretary, the
  mortgagee shall have no further rights, liabilities,
  or obligations with respect thereto.
  The conditions under which assignment is now available are identical to those under the previous statute, except for the further requirement that assignments are now to be accepted only where the Secretary determines that TMAP is "inappropriate."

Paragraph (b)(2) sets out durational limits on the period of reduced or suspended payments that may be provided for mortgages accepted for assignment. The statute provides that the initial 18-month period of reduced or suspended payments may be extended by up to 18 additional months where the eligibility criteria continue to be met. Compare section 230(a)(4). These durational limits also parallel those in the Handbook. See Handbook ¶¶ 5-1, 5-3. Paragraph (b)(2) also gives the Secretary broad discretion to structure repayment plans for assigned mortgages and allows for interest on assistance but only at a rate at or below the FHA maximum. Compare section 230(a)(5). Paragraph (b)(2) reads as follows:

    (2) The Secretary may provide assistance, to a
  mortgagor whose mortgage has been acquired under
  paragraph (1) of this subsection, through
  forebearance of interest or principal, or both, or
  through other means, for a period of not more than
  eighteen months after the acquisition of the
  mortgage, if the mortgagor has not been assisted
  under subsection (a) of this section within twelve
  months of the date of such acquisition and if the
  Secretary determines that there is a reasonable
  prospect that the mortgagor will be able to meet the
  conditions described in subsection (a)(2) of this
  section. Such period may be extended, in the
  Secretary's discretion, for not to exceed eighteen
  months where the Secretary has determined that such
  extension is necessary to avoid foreclosure and that
  there is a reasonable prospect that the mortgagor
  will be able to meet the conditions described in
  subsection (a)(2) of this section. Such assistance
  (which may include any expenses of the Secretary
  incurred in connection with providing such
  assistance) shall be repayable upon terms and
  conditions prescribed by the Secretary, except that
  in no event shall any interest rate charged on such
  repayments exceed the interest rate chargeable for
  repayments of assistance made under subsection (a) of
  this section. Such rate shall be payable
  notwithstanding any provision of any State
  constitution or law or local law which limits the
  rate of interest on loans or advances of credit.

Paragraph (b)(3) of the amended statute allows the Secretary to acquire a mortgage with respect to which TMAP had been provided in order to permit extension of the mortgage term. That paragraph states:

    (3) In carrying out paragraph (1), the Secretary
  shall, if determined necessary by the Secretary,
  acquire a mortgage, with respect to which assistance
  was being provided under subsection (a) of this
  section immediately prior to such acquisition, for
  the sole purpose of extending the term of repayment
  under the mortgage so that the mortgagor will be able
  to make the full payments on the mortgage.

The amended section 230 also contains subsections (c) and (d) relating respectively to funding for the programs and home-ownership counseling. Neither is directly pertinent to the motions before us today.

The 1980 housing amendments leave unaltered the obligatory national housing policy as stated in 42 U.S.C. § 1441. The foregoing analysis of the amendment of section 230 makes clear — and HUD does not contend to the contrary — that, with the possible exception of the limitations on subsequent assistance contained in paragraphs (a)(6) and (b)(2), the statute is not inconsistent with the continued provision of a mortgage foreclosure avoidance program as widely available and of as high a quality as the one currently in operation.

Moreover, our review of the legislative history of the 1980 amendments confirms the conclusion that Congress did not intend to cut back on the availability and quality of mortgage foreclosure avoidance assistance. Amendment of section 230 was initially proposed by HUD officials who envisioned that the suggested TMAP program would become "the predominant foreclosure avoidance mechanism to the maximum extent possible consistent with [HUD's] . . . obligations under its Assignment Program" and that it would eventually supersede the assignment program altogether. See HUD Proposed Legislation and Commentary at 29, 34, 39.*fn3 The House of Representatives did not adopt the HUD proposal and instead passed legislation substantially identical*fn4 to the amended version of section 230 described above. The House Proposal, H.R. 2719, specifically retained the assignment program and made no provision for that program's termination.

The House of Representatives Banking, Finance and Urban Affairs Committee Report on H.R. 7262*fn5 emphasized that the amending legislation was not intended to affect the viability of mortgage foreclosure avoidance relief:

  In designing TMAP the Committee has attempted to
  conform as closely as possible to the existing
  requirements of the assignment program. What the
  Committee has sought to do is assure that the
  assistance accorded to homeowners under both programs
  will be virtually the same. In essence the two
  approaches differ only in who actually holds the
  mortgage — under assignment it is the Secretary
  and under TMAP it is the private lender. The
  Committee has taken care to assure that the current
  structure, requirements and approach of the
  assignment program will not be altered by this
  legislation. [Emphasis added.]

House Report No. 96-979, 96th Cong. 2d Sess. at 53-54. According to that report, the amending legislation was intended to allow HUD to implement a lower cost alternative to the assignment program which would provide equally effective foreclosure avoidance relief. Id. at 51.

After passage, the House bill was apparently referred to a Conference Committee which produced the changes referred to in footnote 4, supra. The Conference Committee also indicated unequivocally that the purpose of the amendments to section 230 was not to make assistance under that section more difficult to obtain, but only to provide a possibly lower cost alternative to the assistance the Department was already authorized and required to provide. House Report No. 96-1420, 96th Cong. 2d Sess. at 123, U.S.Code Cong. & Admin.News 1980, p. 3506. The Conference Committee further "expect[ed] the Secretary to take steps to assure that assistance provided under TMAP [be] consistent with the relief provided under assignment, and to avoid inequities." Id. at 122, U.S.Code Cong. & Admin.News, p. 3667.

Following enactment, on September 30, 1980, of the amendments to section 230, HUD, on August 2, 1982, promulgated and published, see 47 Fed.Reg. 33242 (1982), the TMAP implementing regulations for which it now seeks our approval. The proposed new regulations provide inter alia for the rate and accrual date for interest charged both on TMAP and on mortgage assignment foreclosure assistance. They indicate that HUD has total discretion with respect to the level of assistance provided under both programs; they provide for determination of a date of default for purposes of establishing whether the default was the result of "circumstances beyond the mortgagor's control" and set out additional assistance eligibility requirements. The proposed regulations provide for review of the payment plans established under both programs and they establish procedures for repayment of both forms of assistance. Specific objections to the proposed regulations are analyzed in detail below.

Defendants propose that the Amended Stipulation be modified to include a new paragraph 16 which would provide:

  16. Nothing in this Amended Stipulation affects or
  interferes in anyway [sic] with the Department's
  implementation of the TMAP program as authorized by
  Public Law 96-399.

Defendants ask that they be permitted to implement the proposed regulations pertaining to TMAP and the assignment program. The modification and implementation are opposed by the plaintiffs who contend that the regulations are inconsistent with HUD's obligation under the Amended Stipulation to operate the assignment program or provide equivalent mortgage foreclosure avoidance relief. See Amended Stipulation ¶¶ 3, 14.

Motion for Contempt

Before reaching the merits of the contentions with respect to HUD's future obligations, we turn to the not unrelated question, raised by the plaintiffs' pending civil contempt motion, of the satisfactoriness of HUD's performance to date under the former statutory scheme. Plaintiffs proceed in their civil contempt motion on two apparently independent theories.

Their first argument is based on the monthly statistical reports of HUD's action on mortgage assignment applications, which — they argue — show that in the period beginning in August 1981, the number of applications accepted dramatically decreased. The plaintiffs argue that this marked drop in the acceptance level constitutes clear and convincing evidence that HUD has failed to operate the mortgage assignment program in good faith in accordance with the terms of the Handbook, as the Amended Stipulation requires.

The plaintiffs' statistical evidence, which was presented at the hearing on this matter and not seriously disputed, does reveal an unpredicted and unfortunate drop in the number of mortgage assignments accepted by HUD in the seventeen month period beginning in August 1981. The plaintiffs' expert divided the monthly statistical data provided by the defendants into three time periods. The first, May 1976 through January 1979, was a period for which HUD later conceded, see Amended Stipulation at p. 2, that there were serious deficiencies in the administration of the assignment program. In that period, 18% of the total cases processed were accepted for assignment; in 23.1% of the cases, the application was referred to the mortgagee as a result of the mortgagee's agreement to forego foreclosure and continue the mortgage, see Handbook ¶ 3-6. HUD rejected the remaining 58.9% of the applications in that period.

The second period, February 1979 through July 1981, was one of relatively higher acceptances and referrals during which HUD accepted 24.7% of the total applications it received and referred 22.2% of the applications ...


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