Deerman v. Federal Home Loan Mortg. Corp.

• Decision Date: 31 January 1997
• Docket Number: No. CV 96-B-1379-S.,CV 96-B-1379-S.
• Citation: Deerman v. Federal Home Loan Mortg. Corp., 955 F.Supp. 1393 (N.D. Ala. 1997)
• Parties: James Edward DEERMAN, Patricia L. Deerman, et al., Plaintiffs, v. FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant.
• Court: U.S. District Court — Northern District of Alabama

955 F.Supp. 1393

James Edward DEERMAN, Patricia L. Deerman, et al., Plaintiffs, v. FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant.

No. CV 96-B-1379-S.

United States District Court, N.D. Alabama, Southern Division.

January 31, 1997.

COPYRIGHT MATERIAL OMITTED

W. Lewis Garrison, Jr., Jackson Garrison & Sumrall, P.C., Birmingham, AL, Lawrence Walner, Kristi L. Browne, Martin J. Whittaker, M. Scott Barrett, Lawrence Walner & Associates, Ltd., Chicago, IL, Charles S. Zimmerman, Barry G. Reed, Hart Robinovitch, Zimmerman Reed, Minneapolis, MN, for plaintiffs.

Jere E. White, Jr., Sara Anne Ford, Lightfoot Franklin & White, Birmingham, AL, for defendant.

MEMORANDUM OPINION

BLACKBURN, District Judge.

Plaintiffs, James Edward Deerman and Patricia L. Deerman ("the Deermans") and Francis E. Bauer and Karen A. Bauer ("the Bauers"), filed this putative class action for compensatory, declaratory and injunctive relief¹ seeking cancellation of the obligation in their mortgage contracts to pay for private mortgage insurance ("PMI"). Defendant, the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"), is a corporate instrumentality of the United States that purchased the mortgages of the plaintiffs some time after they were originated by other financial institutions. The FHLMC has moved to dismiss the plaintiffs' complaint pursuant to Fed.R.Civ.P. 12(b)(6). The court is of the opinion that defendant's motion to dismiss is due to be granted.

I. BACKGROUND

A. The FHLMC and The Mortgage Insurance Market

Congress created the FHLMC in order to promote a stable secondary market for residential mortgages. See 12 U.S.C. § 1452 (1994); Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.L. No. 101-73, § 731, 103 Stat. 183, 429. The FHLMC does not make loans; rather, it purchases mortgages that have already been made in order to increase the liquidity of mortgage investments and to improve the distribution of investment capital available for residential mortgage financing. See 12 U.S.C. §§ 1451, 1454. The FHLMC is specifically prohibited from buying loans with a loan-to-value ("LTV") ratio in excess of 80% unless the loan carries mortgage insurance or another type of "credit enhancement" to reduce the risk of an uncollectible deficiency judgment in the event of default. 12 U.S.C. § 1454(a)(2).

Mortgage insurance, whether issued through a federal program (like the Federal Housing Authority) or by a private insurer, is an insurance policy issued to the lender (or its successor-in-interest) that is designed to protect against the risk of loss in the event of default if the value of the unpaid balance of the loan exceeds the value of the mortgaged property at foreclosure. See generally Hinton v. Fed. Nat'l Mortgage Ass'n, 945 F.Supp. 1052, 1054-55 (S.D.Tex.1996). Although the lender takes out the insurance, the existence of the policy enables a borrower to borrow a greater percentage of the purchase price, thereby reducing the amount of down payment required and bringing the price of home ownership within the reach of more people. D. Barlow Burke, Jr., Law of Federal Mortgage Documents § 4.1, at 209 (1989). Because of the 80% LTV cap that would exist without such insurance, mortgage insurance permits the lender to extend credit to high-risk borrowers who would not have otherwise qualified for it with the knowledge that such loans are eligible to be purchased by the secondary market. See Burke, supra, § 4.2, at 216.

The FHLMC does not service the mortgages in which it has an interest. Rather, those mortgages are serviced for the FHLMC by loan "servicers" in the primary market with whom the FHLMC contracts. Mortgage servicing consists primarily of collecting the borrower's payments, maintaining all of the necessary accounts (including an escrow account for taxes and insurance) and making the necessary disbursements (including remittance of principal and interest to the FHLMC and disbursements for taxes and insurance). The relationship between the FHLMC and its servicers is governed by the Freddie Mac Seller/Servicer Guide ("the Guide"). If there is mortgage insurance on a loan when purchased by the FHLMC, Chapter 61 of the Guide includes provisions relating to its cancellation. For example, the lender or servicer agrees that, if the borrower requests cancellation, the servicer must cancel the mortgage insurance, provided that certain narrowly defined conditions are satisfied, including (in many instances) a borrower-paid appraisal of the property's current value. See Guide § 61.2, cited in the Amended Complaint at ¶ 15.

B. Plaintiffs' Mortgages

According to the Amended Complaint, the Deermans and the Bauers each obtained mortgages on their homes, in Alabama in 1988 and New York in 1986, respectively. (Am.Compl. ¶¶ 21, 25). Each originating lender required mortgage insurance as a term and condition of the loan. The loans were later sold to the FHLMC. (Am.Compl. ¶¶ 4-5). Each mortgage agreement specifically addressed the issue of how long the borrower must pay for mortgage insurance if mortgage insurance was required. The Deermans' mortgage states that mortgage insurance premiums must be paid by the Deermans to maintain the insurance "until such time as the requirement for the insurance terminates in accordance with Borrower's and Lender's written agreement or applicable law." (Am.Compl.Ex. A ("Deerman Mortgage") ¶ 7). The mortgage also states that "escrow items" such as "mortgage insurance premiums, if any" must be paid "until the Note is paid in full," subject to applicable law or a written waiver by the Lender. (Deerman Mortgage ¶ 2). The Bauers' mortgage contract similarly provides that they must pay monthly mortgage insurance payments "until the requirement for mortgage insurance ends according to [Borrower's] written agreement with Lender or according to law." (Am.Compl.Ex. B ("Bauer Mortgage") ¶ 7). In other words, the borrowers, if required to pay for mortgage insurance at the time the loan was made, agreed to continue doing so until the note was fully repaid unless some separate written agreement or applicable law provided for earlier termination. Plaintiffs do not allege that any such written agreement exists for the Bauers or the Deermans.

II. SUMMARY OF RELIEF SOUGHT BY PLAINTIFFS

Plaintiffs advance three causes of action. In the "First Cause of Action," plaintiffs allege that the FHLMC violated New York General Business Law section 349 (which prohibits "deceptive acts and practices" in New York) by failing to affirmatively provide notice to the Bauers, the Deermans and each other member of the proposed class of their "right" to cancel mortgage insurance, regardless of the state where the property secured by the mortgage is located. (Am.Compl. ¶¶ 29-32). Plaintiffs alternatively suggest that if New York law does not apply to all borrowers, the deceptive acts and practices laws of the states where the subject property is located may apply. In their "Second Cause of Action," plaintiffs assert a private right of action for damages and other relief under § 6503 of the New York Insurance Law, regardless of the state in which the property secured by the mortgage is located. (Am.Compl. ¶¶ 33-38). The "Third Cause of Action" seeks a declaratory judgment on the rights of the borrowers regarding cancellation of and notice about PMI under the mortgage contract and the Guide.² (Am.Compl. ¶ 39-45).

III. DISCUSSION OF CLAIMS

A. Standard under Rule 12(b)(6)

The court is empowered to dismiss an action "for failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). Such a motion should be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957) (citations omitted); accord Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232-33, 81 L.Ed.2d 59 (1984). The court must take factual allegations as true and resolve any ambiguities or doubts regarding the sufficiency of the claim in favor of the plaintiff. In re Johannessen, 76 F.3d 347, 350 (11th Cir.1996). A complaint should be dismissed, however, if it is clear that no relief could be granted even crediting plaintiffs' allegations of the facts. See id. at 349. Furthermore, the court is under no duty to rewrite plaintiff's complaint to find a claim. Peterson v. Atlanta Housing Authority, 998 F.2d 904, 912 (11th Cir.1993). Finally, the mortgage contracts attached to the Amended Complaint and relevant sections of the Guide may be considered under Rule 12(b)(6) without converting the motion into one for summary judgment. See Fed.R.Civ.P. 10(c); Cortec Ind., Inc. v. Sum Holding, L.P., 949 F.2d 42, 47-48 (2d Cir.1991); I. Meyer Pincus & Assoc. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir.1991). Although the Guide was not attached as an exhibit to plaintiffs' complaint, it was referenced in the complaint, (see Am.Compl. ¶ 13), and is integral to some of plaintiffs' claims. Therefore, the Guide may be considered when deciding defendant's motion to dismiss without converting the motion into one for summary judgment.

B. Plaintiffs' Obligations Under The Mortgage Contracts

Although plaintiffs seek relief under a variety of legal theories, their obligations to pay for mortgage insurance premiums rests ultimately on the terms of the mortgage contracts they signed. Those instruments contemplate life-of-loan³ mortgage insurance, and they do not provide a specific right of cancellation to the borrower. This same conclusion has been reached by at least three other courts that have considered similar mortgage contracts. Those courts rejected arguments that these contracts include a right of cancellation of mortgage insurance in the borrowers or a right of the borrowers to notice from the lenders or their assignees regarding cancellation. See Hinton, 945...