Mortage lawsuit holds 'potential nightmare' for banks

Happy Independence Day. Reader Tsky pointed out this Reuters story in the comment section, and it's worth a post: "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 suit in question was filed by a Wisconsin couple who said they believed their "teaser rate" -- 1.95% -- was locked in for five years. Instead it more than doubled by their second monthly payment. Before you dismiss their argument, here's the crucial ruling: A federal judge ruled that their lender, Chevy Chase Bank, had violated the Truth in Lending Act and that thousands of other Chevy Chase borrowers could join them as plaintiffs.

More from Reuters: "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."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Reuters
Hat tip: Tsky via comments, link via Patrick.net

Comments

[LA-renter]

The Reuters story is frustrating to read (and typical news reporting). Instead of he-said-and-she-said, can someone explain what the case is actually about? What do the plaintiffs claim that was misleading?

I find it amazing that a lender would systematically mislead borrowers -but, these days, nothing surprises.

Who else has an incentive to be sure that a borrower can repay?

If the plaintiffs are right, the lender deserves his loss.

[LA]

LA-renter, I'm surprised at you. How un-Patriotic of you to suggest that facts matter, and on today of all days!

Besides, it's only a matter of time before the U.S. Supremes decide that the economy is a matter of National Security and, therefore, lawsuits against banks, mortgage lenders, mortgage brokers, mortgage insurers, realtors, and Wall Street are null and void in the interests of the Homeland.

Sheesh, it's warm. Pass the Kool-Aid, please!

[coakl]

The plaintiffs don't really "win." If the loan is canceled, then the borrower has to return all of the principal to the lender. Fair is fair, you don't get a free house just because a disclosure rule wasn't followed. So, how is the borrower going to come up with all that principal?

[Jack]

This is a common occurrence with loans that where written in the last several years. The major cause is the mortgage brokers who enticed people into these type loans based upon an inflated income with the borrowers knowledge, but in most cases unknown to the borrower.
Incomes were inflated otherwise most borrowers could not qualify. Under the law TILA and RESPA the lender should have done due diligence before buying the loan. There will be many more of these cases.

[syscom3]

If the plaintiffs win, then all those people (in the class action lawsuit) with ARM's can force the bank to refinance under better terms.

[el_guapo]

Better than 1.95%?

[litijess]

Great!
I'm going to sue GM because the teaser rate on gas was $2.50 when I bought a Tahoe.

GM never disclosed to me that gas could go up, nearly double, in just a few years.

To all the victims of this deceptive, criminal practice: join with me to help establish justice!

[SoCalRealEstateNews]

I googled this case, and it's pretty interesting. It's actually been going on for a couple of years, and a decision is expected fairly soon by the appeals court, which will almost certainly be appealed to the supreme court.

It's pretty typical of the mortgage hype that was pretty common 2 -4 years ago, and not that rare today. Deliberate confusion between fixed payment and fixed rate. In this case, the ad read: "Cashflow 5-Year Fixed; Note Interest Rate: 1.950%," although the interest rate was only fixed for one month, a pretty common practice back then.

The court found that the required disclosure documents were confusing and misleading as well. The appeal seems to be focused on the class-action aspect. And if the loan is rescinded, it means the borrower gets all interest payments and loan fees back, but still has to repay the principal. That would probably work real well for these borrowers, who've been paying around 10% since 2005.

This sort of deliberate misleading of borrowers, combined with some hard pressure by mortgage brokers, is a big part of what got us into the subprime mess and housing meltdown. Apparently this court found that the bank crossed the line. I've got plenty of other sad stories from the front lines in "How we got into this mess," the March 29th post on our blog,

http://SoCalRealEstateNews.com

[LeftLA]

litijess: Strawman argument. GM doesn't control the price of gas. The lender does control the interest rate, even if it's based on an index.

[E]

So how come none of you dumb-ass mortgage brokers saw this coming when all the bubble blogs were screaming that it would all end badly.

Why was it that every realtor / mortgage broker blog praised ARM loans and said that was just the way it is now.

Over and over and over we were told..."It's not the home you can't afford...it's the loan you can't afford. You shouldn't think about a 30 year fixed loan. How bout an ARM? You can always refinance! How about a 40 or 50 year mortgage?"

Insane loans led to insane prices and mass foreclosures. If you can't see the connection then you deserve to go hungry Mr & Mrs out of work mortgage brokers.

[a visitor fom wisconsin]

The case revolves around a blatantly deceptive ad and even more deceptive TILA. The TILA is such a joke that the bank keeps changing there story and who they blame for it. At one point, I think, they were actually blaming the printer. The Bank in question has a long and interesting history, that includes a few other lost cases. Remeber this, the Bank lost this case in Federal Court, they are appealing the decision, not on the facts, but rather they are appealing class cerification. The net effect is they want 100s of thousands of borrowers to sue them individually. It is all a huge stalling game, but at the end of every hog line is a sausage factory!

[Jerry Waters]

You advertise a "1.950% rate?" And only intend to give that for ONE month but you say "5 Year fixed?" What else could you be doing but trying to deceive? What value is ONE month of low interest? Sixty years ago we had usury laws to protect borrowers and if one charged over 10% the loan was written off. Banks made money then charging reasonable rates. America was at its greatest. Let's go back to then.

[SoCalRealEstateNews]

E,

Not all realtors and mortgage brokers pushed adjustables with low teasers, but way too many did.

To answer your questions about those who did:

"How come none of you dumb-ass mortgage brokers saw this coming when all the bubble blogs were screaming that it would all end badly?"

"Why was it that every realtor / mortgage broker blog praised ARM loans and said that was just the way it is now?"

1) Lots of the agents and loan reps were inexperienced, young, and in it for the money.

2) Poor supervision by their brokers.

3) An inherent conflict of interest where the real estate agent also functioned as the loan agent--a fairly recent development. In the good old days of the last millenium the agent was more apt to keep the lender honest, but there were still plenty of kick-backs and conflicts of interest.

4) People were just making too much money to care, or at least to think through what was happening. And many of them were in junior high or grammar school back in 1991, the last time our market headed south like this. They actually thought real estate only went up.

[I.Want.To.Know]

LeftLA wrote:
"litijess: Strawman argument. GM doesn't control the price of gas. The lender does control the interest rate, even if it's based on an index."

Not true. The lender may be borrowing money from other financial institutions to cover the mortgage loan. In which case the interest rates that they have to pay can be anywhere from 3% to 12%. Granted, that's not prudent banking, very risky and that's not the way mortgages were done thirty years ago but that's how many of the mortgage lenders shuffle funds around today.

[jeff]

People are fools. With over 25 years experience in mortgage banking and consumer finance, I have witnessed few who actually read or even attempt to understand the closing documents. I cannot imagine obligating myself to a multi-year contract and the complexities of an adjustable rate mortgage without professional advice. This is why America is becoming a nanny state. We don't get the government we want because we get the one we deserve.

[Mark G]

Mortgage lawsuits. Congressional action. "Hope Now". The courts will throw out the lawsuits against the banks. Congress will enact a bailout. And the banks get "hope" for their balance sheets.
There's no help, or "hope" for homeowners. The FED and Government's help and "hope" is for the banks and brokerages. Two words: Bear Sterns.

[LeftLA]

I.Want.To.Know: Doesn't matter. The borrower's mortgage interest rate and potential adjustments are spelled out in the loan docs. Gas prices and potential adjustments are NOT spelled out in a car loan or auto bill of sale.

[Daniel]

Amazing. I cannot understand how people can successfully lay blame at anyone's feet but their own. I have no Ph.D in economics, am not a mortgage expert, , know little about interest rates, loan terms and amortization tables, yet I secured a 25 year fixed loan at a competitve rate rather than one of the fixed rate loans. I did not understand all the funky terms and resets on those products, I hate math and economics. Surprise, I didn't sign something I didn't understand and I am now in no danger of losing my home, which coincidentally I financed factoring in a 50% decline in prices to ensure I would never be underwater. There's that math stuff again.

God, elect me president, I must be the smartest man alive. Everyone else seems dumb by comparison. Surely they must blame the mortgage companies for making them so dumb.

D

[Matt]

While it's true that many people don't read the details of the mortgage documents they sign, it's also true that we have regulators and rules designed to prevent fraud. No amount of "reading" will help all people avoid situations where they're being taken advantage of.

Just be aware that another bubble market is building somewhere and we'll being going over the same "people should have known arguments" again.

[Bigtimecynic]

Litijess tries to be clever with a faulty analogy:

"Great! I'm going to sue GM because the teaser rate on gas was $2.50 when I bought a Tahoe."

Ummm.. not quite. GM does not sell or set the rates on gas. A correct analogy would be if you financed your Tahoe through GMAC and then they changed the interest rate on your loan. By the way, I'm not saying that a variable rate car loan is evil. I am just saying that your analogy doesn't hold water.

[Craig Wilson]

This is too funny. These people that are complaining about their mortgage are the same people that will look over a bill at a restaurant 10 times over to make sure an extra soda was not put on their bill by mistake. However, when it comes to their mortgage, they could not sign the documents fast enough. I don't have to prove my income? Great! NO documents? Great. I make 35K a year, but I can get a 500K home? Great. You get what you deserve. No sympathy here.

[Jools]

Having bought two homes and sold one, I feel pretty confident in saying that it is ultimately up to the homeowner to read and understand what s/he is signing and agreeing to. It is unrealistic to think you're going to receive a 1.95% fixed interest rate. You don't get something for nothing-it was the homeowners' resposibility to thoroughly understand the type of loan they were agreeing to and ask questions about this ridiculously low interest rate.

With regard to the subprime loans - again, I strongly feel this crisis has been caused by all the people out there who did not want to "earn" their homes. I live in the Washington DC metropolitan area, where real estate prices were skyrocketing up until a year ago. The same people driving overpriced Hummers, Tahoes, and Excursions are living in the overpriced McMansions and are caught up in subprime or interest-only mortgages to be able to even afford them. I seriously doubt that these people's arms were twisted into buying the biggest house on the block.

The real problem is, people don't want to work for anything - everyone in this country feels entitled and focuses too much energy on appearances. Well, too bad - things cost money. I certainly don't want my taxes to go up to bail out the people who were too dense to prevent themselves from getting in over their heads. I don't have a Hummer or a McMansion, and I do not want to pay for someone else to.

Take responsibility for your actions and quit expecting the rest of us to bail you out.

[Denis Saucier]

I have an issue with a GMAC loan and was advised to google GMAC inflated loans to see if it is a common case with them. I just recently looked at my documents and saw that the price of my house was inflated by $285,000 in order to approve the loan I received 2 years ago. I am not asking to have the loan removed just need some help to make it affordable. I contacted them and they said what I have cannot be changed. If anyone has any information for me to pursue this I would appreciate it. email is des19572003@yahoo.com