Forbearance Agreements Must Be In Writing and Signed By Forbearing Party
As the economic turmoil and concern regarding mortgage foreclosures continues, the California Court of Appeal recently held, in Secrest v. Security National Mortgage Loan Trust 2002.2 et al (2008), 167 Cal.App.4th 544, that a forbearance agreement comes within the statute of frauds, and, therefore, must be in writing and subscribed by the party or parties to be charged.
Prior to this ruling, the California courts had not found a forbearance agreement to be an instrument which required the formalities necessary to meet the statute of frauds. As noted in the ruling, Miller and Starr, a recognized resource in California real estate law, had stated that a forbearance agreement need not be in writing.
In Secrest, a residential borrower who had been in arrears on its mortgage on several occasions throughout the life of the loan, negotiated a new forbearance agreement in January 2002. The draft forbearance agreement had errors, and the borrower had discussed correction of those errors with the lender's agent. Based on such conversations, the borrower had crossed out certain amounts within the forbearance agreement, executed and returned the forbearance agreement to the lender and paid the initial payment required under the forbearance agreement. The lender's agent never completed the audit necessary to confirm the information noted by the borrower, and never had the forbearance agreement finalized or executed on behalf of the lender. The borrower attempted to argue that, as a result of the lender accepting the initial payment, the lender was estopped from denying the effectiveness of the forbearance agreement.
The Court found that payment of money is not a basis for enforcement of an agreement which fails to meet the requirements of the statute of frauds, and stated that the borrower had an adequate remedy at law to recover any sums improperly retained by the lender.
The Court relied upon Civil Code Section 1698 which requires a modification to a contract to meet the requirements of the statute of frauds if the contract was itself required to meet such requirements, and Civil Code Section 2922 which requires that a mortgage can only be created, renewed or extended by a writing meeting the formalities required under the statute of frauds for a grant of real property (See, Civil Code Section 1624).
A related issue that becomes important in the face of the Court's decision in Secrest and the structure of collateralized mortgage obligations, is understanding and confirming the authority of the servicer executing any forbearance agreement on behalf of the lender. Servicing agreements typically established the authority of the servicing agents and the limitations on such authority.
Any agreements with lenders deferring or modifying loan payments, or otherwise providing that a lender will forbear from exercising its remedies for non-payment must be in writing and subscribed by the lender or its properly authorized agent.
Ken Kramer is a partner with the Real Estate Practice Group at Nossaman and practiced real estate law for over twenty years with extensive experience in acquisitions and sales, leasing, entity formation, financing, telecommunications licensing and environmental issues. He can be reached at 949.833.7800 or kkramer@nossaman.com.