Mortgage Ruling Could Shock U.S. Banking Industry

July 2nd, 2008

Via: 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 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) 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.

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2 Responses to “Mortgage Ruling Could Shock U.S. Banking Industry”

  1. Seattle Shortbus says:

    I really wish that articles in a business journal would provide some indication of what, exactly, Chevy Chase was accused of doing. Citing “TILA” provides a very general indication, but I’d really like to know what this case pivots on.

    Here’s a strange quote: Borrowers would “lose the opportunity to use rescission to save their homes from foreclosure or to rescind their mortgages and refinance into affordable ones,” /quote

    To rescind their mortgages and refinance into affordable ones? Given the mechanics of a rescision, I don’t think that is an accurate portrayal of what is at stake here. A judgment in favor of the borrowers with a major TILA violation simply wipes the debt–its gone. The quote from above inaccurately frames the situation as one where people who took bad loans and failed to pay, are being screwed yet again by not allowing them to obtain a loan with more favorable terms–when in fact, they are looking to be rewarded with a free and clear title.

    If there was malicious intent, and intentional fraud then I am all for enforcing TILA and making lenders/investors take that sort of hit as a punitive measure. Those instances are not the result of processes, but of individuals abusing the system–meaning they are not going to apply system-wide.

    So a class action? Give me a break. What you have here is nothing more than opportunism of a grandiose scale that makes my skin crawl. Were lenders guilty of blurring the lines? Absolutely. Did loan officers, realtors, appraisers and others act in self interest? Absolutely. But these borrowers did as well.

    They were greedy and stupid when aggressively seeking these loans (to further fund their debt-fueled lifestyles). They loved these loans when it meant that they could buy a BMW and a Hummer to park in their 2.5MM McMansion, all on the salary of a truck driver and a school teacher. But once the bills come due, they cry foul? WHAT?! Its pernicious behavior by the borrowers, and wrong to reward it.

    What does that say to all of the prudent homeowners who live within their budgets, perform solid due-diligence, and pay their bills on time?

  2. Eileen says:

    @Seattle Shortbus,
    Uh, do you actually believe that a bank would not commit fraud to earn MONEY on loans sold on Wall Street “as if” it were the dream come true for shiesters?
    Give me a break.
    Banks fell down over all of their own drool when the US Congress repealed that law that separated banking from investing. Make money the fast way! At last!
    I think this is GREAT.
    When you are a financial institution and you make a loan to a customer it is a CONTRACT. Regardless of whether the customer was greedy and wanted the loan to get a hair wax on their ass. A contract, is a contract, is a contract. And lots and lots and lots of people make lots and lots of money over breach of contract lawsuits.
    I don’t see why Not, if you are a lending instution and you provide a lie to which you ask your partner in the contract to sign on the dotted line, that you should thus pay the consequences.
    FRAUD. Ha, I love that word. Makes me a useful person in society, even if Fraud sucks.

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