NATIONAL NEWS

First we saw a subprime mortgage boom, followed by a bust. Now here come the lawsuits.

As the subprime mortgage crisis continues to place some homeowners at risk of foreclosure, mortgage lenders and Real Estate professionals are increasingly becoming targets of blame.

In a recent case, Bryan and Susan Andrews filed a federal civil suit against Chevy Chase Bank, a financial institution that financed the couple’s home with an adjustable-rate mortgage.

The couple alleged that the bank was not truthful in its lending practices, and led them to believe that their introductory rate would last longer. Chevy Chase Bank argued that it had disclosed the actual rate and definition of the loan in closing documents.

The couple sued for a rescinding of their mortgage, in which the bank must repay all fees and interest that was paid. U.S. District Court Judge Lynn Adelman ruled that the bank had indeed violated the Truth in Lending Act, a 1968 federal law that mandates that lenders clearly state basic information, such as the rate and payment schedule on a loan. The judge said that the loan documents were confusing. However, Chevy Chase Bank appealed, and the case has been sent to the 7th Circuit Court of Appeals in Chicago.

If the case is upheld, it may open the doors for a new wave of subprime-related class-action lawsuits against financial institutions. "This would put a lot of banks in a bad spot," says Bill Taylor, a New York Real Estate consultant. “And, in most cases, this mess could have been avoided if buyers took the time to understand what they were getting into.”

A recent report shows that the national number of cases filed will likely surpass the total number of cases filed during the savings and loan crisis of the early 1990s.

In 2007, nearly 300 subprime-mortgage-related cases were filed in federal court, according to a report by consulting firm Navigant Consulting. Of these cases, 43 percent were borrower class actions, many accusing mortgage companies of failing to disclose details regarding option adjustable-rate mortgages, as well as discriminatory lending practices.

Navigant Consulting revealed that 170 federal lawsuits related to the subprime crisis were filed during the first quarter of 2008 alone. The company said that 2008 cases will likely outnumber subprime-related litigation figures from last year.

The study found that virtually every participant in the subprime mess is being sued. Fifty-six percent of the defendants are Fortune 1000 firms, with mortgage bankers and loan correspondents representing the largest category of companies at 32 percent. However, mortgage brokers, lenders, homebuilders, title companies, appraisers, and loan servicers are all getting a share of the subpoenas.

According to Jeff Nielsen, managing director of Navigant, the subprime litigation is on track to outnumber the 559 lawsuits brought against savings and loan associations in the early 1990s. However, he said it is too soon to tell the outcome of this litigation wave, as most of the cases are still “in their infancy” and have yet to see even preliminary legal motions.

The bulk of lawsuits have been filed in states such as California, New York and Florida, where subprime lending and the Real Estate bubble-burst hit hardest.

According to Bill Taylor, many of these lawsuits are “frivolous, at best.” He says that as more and more people face foreclosure, they are looking for someone to take the blame. He has received several queries from people asking if they have a case against anyone from their lender to their agent to the securities companies that backed their loans.

“In some cases, we find legitimate cases of fraud,” says Bill. “But more often than not, homeowners are claiming fraud when it was simply a matter of unrealistic expectations. For example, when the Real Estate market was good, a lot of people did whatever they could—including misrepresenting their incomes—to get into homes they couldn't afford, hoping for quick equity gains. Now that the market has dropped, they’re in a bad position and looking for a scapegoat.”

Homeowners usually argue that their lender failed to tell them enough about the risks of their mortgage, that they had an inadequate debt-to-income ratio, or that their loans would require frequent refinancing.

Brad Cohen is one example. Brad is a homeowner who refinanced his southeast Las Vegas home with an adjustable-rate mortgage in 2005 and can no longer afford his payments. In a recent lawsuit, Brad accuses eight defendants of fraud, negligence, breach of fiduciary duty, negligent misrepresentation, intentional misrepresentation, and breach of covenant good faith and fair dealing. The defendants are: Countrywide Financial Corp.; Countrywide Home Loans; HSBC Mortgage Corp.; Direct Equity Mortgage Corp.; Alex Burke, an employee of Direct Equity Mortgage; Countrywide Tax Service; Rob's Tax Service; and National Title Co.

Brad’s lawyer, Robert Cottle of Las Vegas law firm Mainor Eglet Cottle, argues these professionals failed in their fiduciary duty to fully explain borrowing options, and to provide recommendations that met their clients’ best interests. He expects to bring many more cases to court, and is planning a public announcement to let more homeowners know he's handling such cases.

“The outcome of these cases will likely be driven by facts,” says Bill. “Documentation and procedures will reveal whether a homeowner was misled or deceived. If fraud is discovered, the lender will be responsible. If a lender informs a borrower of the loan's terms, however, and the borrower ignores the paperwork, the blame is on the borrower. It is unrealistic to expect more handholding just because a loan is subprime.”