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Freddie Mac is Not Liable for the Loan Servicer’s Failure to Use Escrow Funds to Maintain Property Insurance

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015


by Steven K. Linkon
RCO Legal, P.S. – USFN Member (Oregon, Washington)

A panel of the Ninth Circuit Court of Appeals affirmed the district court’s Rule 12(b)(6) dismissal of a homeowner’s claims for breach of contract and breach of fiduciary duty brought against the Federal Home Loan Mortgage Corporation (Freddie Mac). The claims arose after Freddie Mac had purchased the homeowner’s mortgage from Taylor, Bean & Whitaker Mortgage Co., the loan originator. Taylor Bean, which had continued to service the loan after selling it to Freddie Mac, failed to pay the insurance premium from an escrow account and caused the homeowner’s insurance to be cancelled. The home was destroyed by an accidental fire. Safeco denied the homeowners insurance claim because the policy had been cancelled before the fire.

The appellate panel held that the homeowner failed to allege facts that would establish that Freddie Mac had a contractual duty to service the loan: Freddie Mac never agreed to assume the servicing obligations when it purchased the loan from Taylor Bean; the deed of trust provided that the servicing obligations would remain with Taylor Bean, and Washington law did not prohibit the arrangement.

Additionally, the Ninth Circuit held that Freddie Mac did not assume the fiduciary duty of an escrow because under the deed of trust, the duty to hold money for the insurance premiums in escrow remained with the loan servicer, Taylor Bean. [Johnson v. Federal Home Loan Mortgage Corporation (9th Cir. July 14, 2015)].

Editor’s Note: The author’s firm represented Freddie Mac in the case summarized in this article.

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