The federal Home Affordable Modification Program (HAMP) provides a mechanism for struggling homeowners to modify mortgage loans with participating lenders. HAMP’s effectiveness has been questioned, but it recently provided the legal basis for a preliminary injunction against a foreclosure. In the bankruptcy proceeding In re Cruz (pdf), the debtor, Mr. Cruz, had applied with Wells Fargo Bank, N.A. to modify his loan under HAMP. Wells Fargo instead took steps to foreclose the mortgage. With the foreclosure sale imminent, Mr. Cruz moved to enjoin the sale, and the bankruptcy court granted that motion. Applying the preliminary injunction standard, the court had little trouble finding that Mr. Cruz would suffer irreparable harm if the injunction was not issued – he would lose his home to foreclosure. The court found that Mr. Cruz had a likelihood of success on the merits of his claim – not that he was a third–party beneficiary of the bank’s agreement to participate in the HAMP program, but that the bank had breached the duty of good faith and care that, as a mortgagee, it owed to Mr. Cruz under Massachusetts law. The court found that the harm to the bank of waiting was far outweighed by the harm to Mr. Cruz of foreclosing, and that it was “in the public interest to ensure that lenders foreclose on properties only when they are entitled to do so.” Mr. Cruz was obligated, however, to make the monthly mortgage payments to which he had agreed in his bankruptcy filings.
The Cruz decision, like the Supreme Judicial Court’s decision in U.S. Bank National Association v. Ibanez , is an indication that courts are closely scrutinizing foreclosure proceedings and will stop a foreclosure in its tracks if something seems amiss. It also tells us that HAMP may have some teeth after all.