Mortgage ruling could cause massive putbacks

[J]

Reuters link

Mortgage ruling could shock U.S. banking industry

LOS ANGELES (Reuters) - A lawsuit filed by a Wisconsin couple against their mortgage lender could have major implications for banks should a U.S. appeals court agree that borrowers can cancel their loans en masse when their lenders violate a federal lending disclosure law.

The case began like hundreds of others filed since the U.S. housing boom spawned a rise in sales of adjustable rate loans. Susan and Bryan Andrews of Cedarburg, Wisconsin, claimed that lender Chevy Chase Bank FSB (CCX_pc.N: Quote, Profile, Research, Stock Buzz) had hidden the true terms of what they believed was a good deal on a low-interest loan.

In their 2005 lawsuit, the couple said the loan's interest rate had more than doubled by their second monthly payment from the 1.95 percent rate they thought was locked in for five years. The interest rate rose well above the 5.75 percent fixed-rate loan they had refinanced to pay their children's college tuition.

The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs.

The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

The idea of canceling tainted loans to stem a tide of foreclosures has caught hold in other quarters; a lawsuit filed last week by the Illinois attorney general asks a court to rescind or reform Countrywide Financial Corp (CFC.N: Quote, Profile, Research, Stock Buzz) mortgages originated under "unfair or deceptive practices."

'MASSIVE CLASS SUITS'

The mortgage banking industry already faces pressure from state and federal regulators, who have accused banks of lowering underwriting standards and forcing some borrowers, through fraud, into costly adjustable loans that the banks later bundled and sold as high-interest investment vehicles.

The loans have caused serious instability in the financial sector, as mortgage interest rates adjusted upward and borrowers began defaulting at a significant rate starting in 2007, drawing lawsuits from investors and homeowners.

Federal appeals courts disagree over whether class-wide rescission under the Truth in Lending Act is available, said attorney Christine Scheuneman, whose firm represented Chevy Chase at the district court.

"If class treatment is found to be available for rescission ..., given the current crisis not predicted in 2005, the result all over the country could be massive class suits," said Scheuneman, a partner at Pillsbury Winthrop Shaw Pittman LLP.

The Truth in Lending Act, a 1968 federal law designed to protect consumers against lending fraud by requiring clear disclosure of loan terms and costs, lets consumers seek rescission, or termination, of a loan and the return of all interest and fees when a lender is found in violation.

Should the 7th U.S. Circuit Court of Appeals agree with Judge Adelman, banking industry associations predict "confusion and market disruption" as banks curtail lending further.

"Class certification of rescission claims would saddle the mortgage lending industry and secondary market with billions of dollars of class action exposure for supposed violations of TILA that do not give rise to any actual damages," the financial services associations wrote in an amicus brief.

But the Andrews' attorney, Kevin Demet, said lenders want to scare the judiciary into banning class action rescissions because they were unable to convince Congress to do so in the 1990s.

"If (banks) get relief (from the appeals court), it's activist judges trying to give them what they could not get legislatively," said Demet, of Demet & Demet of Milwaukee, Wisconsin.

Consumer advocates said the banks would have "no more or no less" liability for the tainted mortgages if the court found in favor of the Andrews plaintiffs.

But an adverse ruling for borrowers would cut off an important remedy. Borrowers would "lose the opportunity to use rescission to save their homes from foreclosure or to rescind their mortgages and refinance into affordable ones," the Center for Responsible Lending, the National Consumer Law Center, Public Citizen and AARP Foundation Litigation wrote in an amicus brief filed in the case.

Both sides said the case will likely be decided by the U.S. Supreme Court.

This could be bad, really bad, as in countless billions of dollars worth of mortgages being terminated and put back on the originating bank, plus all mortgage based SIVs going poof. The case is still working its way through the system, but if the final ruling is in favour of the plaintiffs, well, it's going to be a big kablooie.

[Darth Wong]

The government will probably declare that these lawsuits and these evil lawyers are a pox on society, and will pass legislation to limit or outlaw these kinds of suits. They've spent the last 20 years blaming lawsuits for everything, after all.

[ArmorPierce]

I don't understand what the problem is if they were truly misled about the rates being fixed for five years.

[Darth Wong]

I don't understand what the problem is if they were truly misled about the rates being fixed for five years.

Even if they were, I don't see why it means they get to keep the money they borrowed. That would be a rather draconian punishment. At most, I would think that a judge would fine the banks an amount commensurate to the losses incurred by the misrepresentation, not the entire amount of the loans.

[FireNexus]

Would it be unreasonable to require the mortgage company to purchase the securing property at a price equal to the current loan balance if the borrower wishes?

It would get the borrower out of the mortgage without any negative effects to their credit report. Of course, I'm sure that being saddled with all this overvalued property that was previously afforded only by insane loan products that no longer exist could cripple the banks as easily as just making them forgive the loan.

[SirNitram]

You'd never get the banks to go with that. They're all saddled with massive loads of homes from Foreclosures, and they're not even handling their legal responsibility to maintain them.

That's the reason places are enacting foreclosure moratoriums. It's nothing to do with the poor folks losing their homes. It's because blight, squatters, and vandalism skyrocket if the bank gets the home because they don't even look at it.