National Housing Law Project Housing Law Bulletin

Background

The Ferrell case, now in its twenty-fifth year, was initiated in 1973 as a nationwide class action by owners of HUD-insured single-family homes who were facing foreclosure of their loans. They successfully argued that HUD had statutory authority to provide them with foreclosure relief by having the holders of the insured mortgages assign the mortgages to HUD whenever the owners defaulted on their loans due to circumstances beyond their control, and that HUD’s failure to exercise that authority violated the national housing goals.¹

Two years later, in 1976, HUD and the plaintiffs in Brown, by then renamed as Ferrell v. Hills, entered into a consent decree wherein HUD obligated itself to implement what has become known as the assignment program. Under the program, owners who defaulted on their loans due to circumstances beyond their control would have their mortgages assigned to HUD and, after the assignment was complete, would receive partial or full forbearance on their mortgage payments for up to 36 months.²

The consent decree notwithstanding, HUD field offices failed to properly administer the newly created program. After additional litigation challenging HUD’s implementation of the 1976 consent decree, the parties, in 1979, entered into a court-approved Amended Stipulation to the 1976 Consent Decree. That stipulation, among other things, obligated HUD to continue to operate the assignment program, or an equivalent alternative, indefinitely.³

HUD staff never liked the assignment program and, through regulations, Handbooks and administrative practices, erected numerous barriers to homeowners’ obtaining the envisioned foreclosure relief. HUD’s actions spawned a multitude of lawsuits challenging HUD’s repeated denial of assignments to individual homeowners for purportedly not meeting the eligibility criteria established by regulations and set out in HUD Handbooks.⁴

HUD’s distaste for the assignment program prompted HUD to ask Congress, in 1980, for legislation authorizing the implementation of another mortgage relief program, called the Temporary Mortgage Assistance Payment Program (TMAP).⁵ After TMAP was enacted, HUD attempted to substitute that program for the assignment program. The plaintiffs in Ferrell successfully challenged HUD’s actions by arguing that TMAP was not equivalent to the assignment program and that its substitution for the assignment program violated the 1979 consent decree in Ferrell.⁶ As a result, TMAP was never implemented.

In 1996, HUD made another end run at the assignment program by getting Congress to repeal the statutory authority for the program and substituting provisions granting the Secretary of HUD discretionary authority to implement another foreclosure relief program, called the Partial Payment program, to assist single-family homeowners. In an effort to terminate the assignment program, the statute, which had been drafted by HUD, explicitly stated that "no provision of the [National Housing] Act, or any other law, shall be construed to require the Secretary to provide an alternative to foreclosure."⁷ In addition, it precluded judicial review of any and all HUD decisions with respect to the implementation of any foreclosure relief program.⁸

Current Litigation

Shortly after enactment, HUD promptly terminated the assignment program in April of 1996. Several months later, on September 27, 1996, HUD filed a motion with the court seeking to vacate the 1979 Amended Stipulation. In response, plaintiffs filed a motion with the court seeking to hold HUD in civil contempt for discontinuing the assignment program in violation of the Amended Stipulation and without the court’s prior permission, and requesting that HUD be directed to reinstate the assignment program or an equivalent, as required by the 1979 Amended Stipulation.

A hearing on the parties’ motions was held in October 1996, after which the court concluded that resolution of HUD’s motion to vacate the Amended Stipulation would require a lengthy court process. Consequently, the court agreed with plaintiffs that briefing on the motions proceed in stages and that the first issue to be briefed was whether HUD should be ordered to reinstate the assignment program or an equivalent substitute pending resolution of the underlying issues. After the parties filed their briefs on that issue, the court rejected plaintiffs’ argument for reinstating the program because they had not presented any evidence of irreparable harm as would be required to grant a preliminary injunction.⁹

In response, the plaintiffs filed a renewed motion supported by evidence of the irreparable harm. Another hearing was held in December of 1996, at which the court requested that both parties brief plaintiffs’ renewed motion and that HUD specifically address why there is no equivalent program to the assignment program. Nearly 18 months after receiving the parties’ briefs, the court ruled in plaintiffs’ favor by requiring HUD to reinstate the assignment program or an equivalent substitute.¹⁰

In reaching its conclusion, the court considered three issues: first, whether HUD had statutory authority to implement the assignment program or an equivalent program; second, whether the court had authority to order HUD to comply with the 1979 Amended Stipulation; and, third, whether the plaintiffs had met the burden for obtaining a preliminary injunction.¹¹

HUD’s Authority to Operate the Assignment Program or an Equivalent Substitute

Contrary to the court’s specific request, HUD’s brief did not address the question of whether there is a program equivalent to the assignment program. Instead, it presented arguments why it could not, or would not, implement such a program. First, HUD argued that the assignment program was ineffective, that other relief programs are superior, and that requiring a uniform foreclosure relief program deprives homeowners of the opportunity to receive individually tailored forms of relief. Second, it argued that it is unable to comply with the 1979 Amended Stipulation because Congress enacted new legislation that forbids it from operating a mortgage assignment program and prohibits judicial review of HUD decisions relating to the program.

The court summarily rejected HUD’s first argument by agreeing with the plaintiffs that HUD may not unilaterally rescind the court’s 1979 order, even if it believed that the program was ineffective and that the issue before the court is not which program is more effective but whether the program currently operated by HUD is equivalent to the assignment program.¹²

The court also rejected HUD’s second argument. It found that, while the 1996 legislation may have eliminated HUD’s authority to operate the assignment program under 42 U.S.C. § 1715u, it did not eliminate altogether the Department’s authority to operate an assignment program.¹³ The court reached its conclusion by weaving together HUD’s obligations under the National Housing Goals — namely, HUD’s statutory obligation to exercise all of its powers, functions and duties consistently with the national policy of providing decent, safe and sanitary housing for every American family — with other statutory provisions authorizing HUD to seek an assignment of mortgages and to modify the terms of the mortgage once it is held by HUD. In support of the proposition that HUD had authority to operate an assignment program, the court pointed to 42 U.S.C. § 3535(d), which provides HUD with general rulemaking authority to carry out the Secretary’s powers and duties; to 42 U.S.C. § 3535(i)(3), which authorizes the Secretary to sell or exchange any securities or obligations upon such terms as he may fix; and to 42 U.S.C. § 3535(i)(5), which authorizes the Secretary to consent to the modification, with respect to the rate of interest, time of payment of any installment of principal or interest, security, or any other term of any contract or agreement to which he is a party or which has been transferred to him.¹⁴

The court found, moreover, that even if the 1996 legislation precludes HUD from operating an assignment program, it does not prohibit it from operating an equivalent foreclosure relief program, and that such a program was indeed authorized by the legislation. Specifically, that legislation authorizes the Secretary "to establish a program for payment of a partial claim to a mortgagee that agrees to apply the claim amount to payment of a mortgage on a [single-family] residence that is in default."¹⁵ When that legislation is coupled with the Amended Stipulation, the court concluded that HUD could structure a mandatory program of foreclosure relief that would be as equivalent as possible to the assignment program.¹⁶

The Court’s Authority to Compel HUD to Comply with the Amended Stipulation

The court also concluded that it had authority to order HUD to comply with the Amended Stipulation. It rejected HUD’s argument that any court order to fulfill the Department’s obligation under the 1979 Amended Stipulation would violate the provisions of the 1996 legislation that prohibit judicial review of any of the Secretary’s decisions to provide foreclosure relief and that preclude the Act from being construed to require the Secretary to provide an alternative to foreclosure. The court reasoned that the 1996 amendment did not alter HUD’s obligation to seek relief from the Amended Stipulation before terminating the assignment program. Indeed, it pointed out that that obligation existed before Congress enacted legislation to relieve HUD from judicial review of its decisions with respect to the provision of foreclosure relief.

Having concluded that HUD had authority to run an assignment program or an equivalent program, and that the court had authority to compel HUD to operate such a program, the court next turned its attention to whether the plaintiffs were entitled to a preliminary injunction. As a preliminary matter, the court rejected HUD’s argument that the plaintiffs are not entitled to relief because they had failed to seek emergency relief for nearly six months after HUD had terminated the program. First, the court did not find the delay of such significance as to require a denial of plaintiffs’ claims. Second, it concluded that the delay was understandable in light of the fact that plaintiffs’ counsel was unable to file a new claim in this national class action lawsuit due to his being employed by a Legal Services-funded program. The court found that because of Legal Services restrictions, the plaintiffs’ lawyer was unable to file a claim in the case until he had resigned from the Legal Services-funded program and had received the court’s permission to substitute his new firm as counsel in the case, a process that precluded his taking any action for three months after HUD terminated the assignment program.¹⁸

On the issue of irreparable harm, the court accepted plaintiffs’ affidavits as alleging harm to thousands of home-owner class members who face loss of their homes due to HUD’s termination of the assignment program. It did so in light of the fact that HUD did not refute the evidence but merely challenged the affidavits as inadmissable hearsay on the ground that they came from attorneys and housing counselors instead of from homeowners. The court rejected HUD’s argument due to the fact that the declarants had experience in assisting homeowners in foreclosure proceedings and had had dealings with HUD on behalf of homeowners facing foreclosure after HUD had terminated the assignment program.¹⁹

Finally, on the issue whether the plaintiffs are likely to prevail on the merits, the court focused on whether the plaintiffs are likely to prevail on their contempt motion against HUD. It applied a sliding scale approach under which the plaintiffs’ burden of proof for prevailing on the underlying motion decreased as the harm suffered by the plaintiffs increased. Having concluded that the harm to the plaintiffs was great, and HUD having conceded that it had failed to move promptly to vacate the Amended Stipulation before terminating the assignment program, the court had no problem finding that "[g]iven the law on the issue of contempt and the defendants’ blatant disregard of the court’s order without seeking prior vacation of the order, it is likely that the plaintiffs will prevail on the issue of contempt."²⁰

The court thus granted plaintiffs’ motion seeking to
reinstate either the assignment program or an equivalent substitute.²¹

The injunction notwithstanding, it is unlikely that HUD will reinstate the assignment program, or an equivalent, anytime soon. HUD is likely to seek a stay of the decision from the Seventh Circuit Court of Appeals. Aside from questioning the substance of the district court’s decision, the agency is expected to argue that it does not have the capacity to reintroduce the program due to the massive reduction in staff that has been going on at HUD for nearly two years, and that reinstating the program will cost the Department hundreds of millions of dollars. Thus, the 25-year history of Ferrell v. HUD is likely to extend for several more years.

Copies of the March 30, 1998, temporary injunction may be requested by contacting Leonard Claudio at the Project’s Oakland office, Tel. 521-9400, ext. 107, Fax (510) 451-2300.

1. See Brown v. Lynn, 385 F. Supp. 986, 998-99 (N.D. Ill. 1974).
2. See 12 U.S.C.A. § 1715u(b) (West 1996).
3. Ferrell v. Harris, No. 73 C 334 (N.D. Ill. Aug. 2, 1979) (Amended Stipulation, ¶ 14).
4. See, e.g., Federal Nat’l Mortgage Ass’n v.The court found that program not to be equivalent and ordered HUD to reinstate the assignment program or devise an equivalent substitute. Rathgens, 595 F. Supp. 552, 557 (S.D. Ohio 1984).
5. See 12 U.S.C.A. § 1715u(a) (West 1996).
6. See Ferrell v. Pierce, 560 F. Supp. 1344, 1372 (N.D. Ill. 1983), aff’d, 742 F.2d 454 (7th Cir. 1984).
7. The Balanced Budget Downpayment Act, Pub. L. No. 104-99, 110 Stat. 26, 45-47 (1996).
8. Id.
9. See Ferrell, 1996 WL 680245 at 1.
10. Ferrell v. HUD, No. 73 C 334 (Mar. 30, 1998), at 14.
11. In the court’s view, the standard for determining whether HUD would be required to reinstate the assignment program was identical to that on a motion for a preliminary injunction, namely, the prevention of irreparable harm to the plaintiffs pending resolution of the matter, which in the court’s view, could be considerably delayed.
12. Id. at 5.
13. Id. at 8.
14. Id. at 6.
15. Id. at 8.
16. Id. at 9.
17. Id. at 9-10 (citations omitted).
18. Id. at 11-12.
19. Id. at 12-13.
20. Id. at 14.
21. Id.