Mortgage Modifications Must Be Written and Signed

The popularly named "Statute of Frauds" was enacted by the English Parliament in 1677 to reduce perjury in judicial proceedings. Its complete title was "An Act for the Prevention of Frauds and Perjuries." It required certain agreements be written and signed in order to provide definite evidence. One of these agreements was an "interest in land." U.S. states have enacted statutes based upon this English precedent with some additions and variations. Mortgage agreements and mortgage modification agreements must be written and signed by all parties, including the lender.

The housing crisis produced significant litigation in which borrowers asserted a lender's unfairness or illegality. One asserted claim, among many, has been that a lender's representative verbally promised to modify the terms of the mortgage agreement. These lawsuits are typically dismissed because of the state's Statute of Frauds legislation.

A recent and unpublished U.S. Court of Appeals for the Sixth Circuit decision involved the unusual situation of an unsigned "trial period plan" (TPP) that was understood by the borrower to be a mortgage modification agreement Gross v. ABN AMRO Mortgage Group). When the borrower was laid off and fell behind on his mortgage payments, he requested and signed a TPP agreement offered by the lender. However, the lender never signed the TPP and after receiving 22 subsequent payments, decided to initiate a mortgage foreclosure.

The borrower challenged the foreclosure on numerous grounds including breach of contract, breach of good faith, and defrauding the court. The Sixth Circuit cited Michigan state law that requires mortgage modifications be signed by both the borrower and lender. The fact of an unsigned agreement indicated that there was no "meeting of the minds" as viewed objectively by the conduct of the parties. This TPP additionally stated that the lender would provide the borrower with a signed copy if the borrower qualified, and that it could not be considered a mortgage modification unless signed by the lender.

The applicable Michigan Statute of Frauds specifically requires that promises made by a financial institution to lend money and promises to modify repayment agreements must be written and signed. The statutory requirements prevented the borrower from presenting an argument that by accepting the payments, the lender implicitly agreed to the modification (promissory estoppel). The borrower's other objections to the foreclosure process and Sheriff's sale were also dismissed.

Several lessons are apparent. Financial arrangements should never be approached casually. Obtain signed documentation for any mortgage modifications. Make no assumptions concerning the meaning of the lender accepting loan payments. Follow statutory requirements to the letter. Obtain legal advice from a real estate attorney. Money spent for legal counsel is well spent.