Subprime lawsuits on the rise

Homeowners with subprime mortgages are starting to sue their lenders, and the national number of cases filed so far is on pace to surpass the total number of cases filed during the savings and loan crisis of the early 1990’s.

Subprime-related lawsuits increased by about two-thirds in the second half of 2007, from 97 to 181, said Jeff Nielsen, managing director of Navigant Consulting Inc., a Chicago-based business, financial and regulatory advisor.

"We are already observing a steady acceleration of continuing litigation activity into 2008," Nielsen said. "The course of regulatory investigations, the prospect of government intervention and marketplace variables may affect the volume of filings, but the explosion of cases in 2007 suggests a daunting forecast of what is still to come."

A Navigant spokesman did not have a specific number of cases filed to date in 2008, but said the volume appears to be consistent with the second half of 2007.

The bulk of lawsuits has been filed in states such as California, New York and Florida, where subprime lending and the real estate bubble inflicted the most damage. To date, only 10 percent of subprime-related lawsuits have been filed in the Midwest.

However, there is one case pending appeal and several other issues that bankers, mortgage lenders and others serving the financial services industry should keep an eye on, several area attorneys say.

A recent case involving Bryan and Susan Andrews, a Cedarburg couple, may open the doors for more lawsuits in Wisconsin, Illinois and Indiana, said Laura Gramling Perez, an attorney with Reinhart Boerner Van Deuren S.C. Perez also chairs the firm’s securitized mortgage and loan fraud team.

The Andrews family has filed a federal civil suit against Chevy Chase Bank, a metro Washington, D.C.-based financial institution. The plaintiffs refinanced their home with an adjustable rate mortgage from Chevy Chase Bank, Perez said.

"They’ve made a Truth in Lending claim," she said. "They said that Chevy Chase bank led them to believe that the introductory rate would have last longer."

The couple seeks a rescinding of their mortgage, Perez said.

"What happens is that if you rescind a mortgage, the bank has to repay all fees and interest that you’ve paid them," she said. "And you have to repay the mortgage."

U.S. District Court Judge Lynn Adelman ruled in January 2007 that the bank had violated the Truth in Lending Act, a court document states. 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 allow for subprime-related class action lawsuits against financial institutions, Perez said.

"What will happen if the (7th) circuit upholds (the case) is that within the circuit, plaintiffs can bring class actions for rescission under the Truth in Lending Act," she said. "Potentially, it’s really powerful. It could lead to an increase in litigation here."

Andrews vs. Chevy Chase Bank isn’t the only subprime-related matter that Wisconsin lenders, attorneys and mortgage brokers should keep their eyes upon, Perez said.

"I think we’re going to see other litigation here as well," she said. "What you’re seeing all over the country is banks that made these bad mortgage loans and sold them up the pipelines. They might be securitized or not. But when loans go bad, everyone starts suing everyone else. And the litigation that comes out of that potentially comes out in stages."

Randall Crocker, an attorney with von Briesen & Roper S.C., said there are several companies headquartered in the Milwaukee area that are having subprime-related problems. If those problems persist, one or more of those companies may pursue litigation, he said.

"MGIC (Investment Corp.) is a longtime Wisconsin company and a real leader in its industry," Crocker said. "They have a strong management team and a good business plan. They … could be well perceived as a real victim. I see them as a victim in terms of representations that were made to them on some of their underlying loans, and they sold insurance based on what the product looked like. They have some things out there that they may well be in a situation where they could look at some options."

While subprime-related lawsuits could increase in Wisconsin, that growth is limited, both Perez and Crocker said.

"Even if there were some questionable or careless or fraudulent practices, we don’t have borrowers getting into as much trouble," Perez said. "Because we’ve been more modest, even if we’re seeing the same practices as elsewhere, people have been able to roll with the punches."

"We’re not going to see the kind of litigation (in Wisconsin) that we’re going to see where there has been the large amount of triple-digit appreciation," he said. "I think Wisconsin will not be in the same situation with the lenders situation (in other states). I think lenders have acted as they always have here and made decisions on the perceived value."

 

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