The Housing Chronicles Blog: The next big legal case: class-action suits against mortgage lenders

Thursday, February 28, 2008

The next big legal case: class-action suits against mortgage lenders

One constant refrain that's been repeated by many borrowers who took on subprime, option ARM and other 'exotic' mortgages (i.e., not popularized until well after 2000) was the defense that they'd been duped by unscrupulous lenders and brokers who only cared about their commissions. According to a story in the Washington Post, that defense may turn into a class action movement if a current case involving Chevy Chase Bank and a Wisconsin couple moves forward:

A federal appeals court is nearing a decision on a battle between Chevy Chase Bank and a Wisconsin couple that could for the first time enable homeowners across the country to band together in class-action lawsuits against mortgage firms and get their loans canceled.

The case is alarming Wall Street's biggest banks, which could bear the hefty cost of reimbursing all mortgage interest, closing costs and broker fees to groups of homeowners who uncover even minor mistakes in their loan documents.

After a federal judge in Milwaukee ruled last year that the Wisconsin couple had been deceived and other borrowers could join their suit, Chevy Chase Bank appealed to the circuit court in Chicago. Kevin Demet, the lawyer for the plaintiffs, said a decision by the appeals court is imminent, though others involved in the case said it could be a matter of weeks...

In recent years, home lending has boomed. But standards loosened at many mortgage firms and led to a rise of abuses, in particular predatory practices. Now, record numbers of people are finding themselves with loans that are more than they can afford and many want out.

Estimates vary widely on the number of homeowners who could benefit from the case. Those who have refinanced or hold a home equity loan are already eligible for a refund, while others can get monetary damages. The court's ruling won't change this. But by allowing plaintiffs to file class-action suits, the ruling would make it much easier and more affordable for groups of homeowners to get that relief, several lawyers and mortgage analysts said.

Dozens of class-action homeowner lawsuits have been filed in California and elsewhere against the nation's largest banks. The success of these claims could turn on the decision in the Chevy Chase case...

The law states that even a minuscule violation by a lender can lead to a mortgage cancellation, or rescission. For example, if the annual percentage rate calculation is off by one-eighth of a percent between preliminary and final loan documents or if a monthly payment schedule does not conform precisely to federal guidelines, some borrowers could get a refund for all they have paid to live in their homes for years. They would have to pay back the entire amount of the loan, but they could then seek a new mortgage on better terms.

According to the inspector general for the Federal Deposit Insurance Corp., 83 percent of federally supervised banks that issued loans at the height of the housing boom in 2005 have been cited for "significant compliance violations." Lending abuses were more frequent among the tens of thousands of state-regulated banks and thrifts, such as the now-bankrupt New Century Financial, industry analysts said.

But few homeowners have been successful in getting their loans canceled. Most people are unaware they have this right, consumer advocates said. Others have found the process too arduous and expensive, often requiring long legal battles. Chevy Chase said it negotiated two mortgage cancellations all of last year.

That could change if the U.S. Court of Appeals for the 7th Circuit rules in favor of allowing homeowners to join class-action suits. Plaintiff attorneys also would have far greater financial incentive to take up such cases...

Wall Street banks are also worried. In many cases, the cost of reimbursement falls not on the mortgage lender but on the financial institutions that later bought and securitized the loans.

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