Tuesday August 21, 6:11 am ET
By Les Christie, CNNMoney.com staff writer
The judge ordered Chevy Chase to rescindthe loan and certified the lawsuit as class-action, which couldpotentially release thousands of other borrowers who felt misled.
Accordingto their attorney, Bryan and Susan Andrews believed they were getting aloan with a fixed 1.95 percent annual interest rate for the first fiveyears. What they got was an option adjustable-rate mortgage (ARM); the1.95 percent rate only applied for the first month and rose every monthafterwards.
"The second month, the interest rate was about 5percent," said their attorney Kevin Demet. "After a year it was about 7percent and now it's in the 8s."
The bank said it clearly spelledout the loan terms, but the judge found that Chevy Chase violated theTruth in Lending Act (TILA), which mandates that mortgage documentsmust be clear and understandable. Chevy Chase is appealing thejudgment, and did not respond for comment for this article.
The Andrews' victory is just an early skirmish in what could be a prolonged battle between borrowers and lenders in the mortgage meltdown mess.
"It'sa three-part business cycle now," said Don Lampe, a partner with thelaw firm Womble Carlyle, whose specialty is mortgage matters. "Boom,bust and recrimination. We're moving into the recrimination phase."
"Mostclaims will be against mortgage brokers for putting them into loanswhere they shouldn't have been," said Dan Mulligan, a California-basedreal estate attorney.
One reason that borrowers often did notunderstand the terms of their mortgages according to Jo Carillo, aproperty law professor with the University of California, HastingsCollege of Law, was the novelty of many of these loans.
"Many originators had no experience explaining them," she said. "It appears to be hard to explain the true costs."
Accordingto Carillo, some bad advice from mortgage originators may have beenmade in good faith. Caught up in red-hot housing markets, overlyexuberant brokers and loan officers told clients not to worry aboutconcerns like their ARMs resetting; they could always refinance and,anyway, interest rates were bound to fall.
Even savvy borrowers, said Lampe, "assumed that rising prices would enable them to refinance."
With credit much tighter today, the refinance option is off the table for many. And, as prices have fallen in many places, it's more difficult to sell a home for the amount owed.
"Theycan't refinance it, they can't sell it, and they can't afford it," saidPaul Hancock, a Florida attorney specializing in mortgage brokering andreal estate law.
Aside from bad advice, out-and-out lying alsoseems to have added to the mess. Borrowers often exaggerated income inorder to qualify for larger loans. According to Michael Seng, aprofessor with the John Marshall School of Law Fair Housing LegalSupport Center, mortgage brokers were behind much of this.
"We'rerunning into stated-income loans where brokers got borrowers to signblank forms that the brokers filled in; they often did not accuratelyreflect the borrowers' incomes," he said.
Richard Hagar, aveteran real estate appraiser and expert witness, also blamesappraisers. According to him, many of them puffed up home values tomake deals work. "We saw some really Mickey-Mouse things," he said, "A$200,000 house would come in at $300,000. When appraisers puff upvalues, they can be sued; I heartily recommend it."
Class actionsuits are often the only way for borrowers to gain a remedy, accordingto Seng. "If [individuals] can't make the mortgage payment, they can'tpay a lawyer."
But a ruling earlier this year by an appeals courtin Boston casts doubt on whether class-action suits will be allowed inmortgage rescission cases, whose remedy is that borrowers turn backtheir mortgages and get back their fees and expenses. They then have tofind a new loan.
The court ruled that rescission didn't apply inclass-actions because it is a strictly personal matter. Furthermore,Congress limited TILA violation judgments to a maximum of $500,000, amere fraction of the kinds of sums a class action suit would generate.
Howthe cases will play out is in doubt but there's one thing for sure:There'll be a lot of work for attorneys over the next few months.
