Subprime Bankruptcies: Fertile Ground for Lawsuits

Legal issues have become a growing concern for many involved in the subprime industry. Claims from distressed borrowers against loan originators have begun to increase, as have actions pitting business partners against each other and claims against purchasers of subprime mortgage-backed securities that did not honor an agreement in some way, according to participants in a recent conference on subprime law sponsored by the American Bar Association.

The most common types of lawsuit emerging in the wake of the sunprime implosion are borrowers filing individual and class claims against mortgage lenders. Claims include allegations of federal disclosure law violations, unfair and deceptive trade practices, breach of duties or breach of contract, misrepresentation, usury, and unlawful collection practices.

Assignee liability is also a major focus for business lawyers as lender and Wall Street cunduits try to protect their assets from future lawsuits. (Inside B&C Lending)

Realtor’s Error: This ‘Short Sale’ Led to Loss of Home

by Eric Forster

Edna P. purchased her home in Mount Vernon, NY, three years ago. Her mortgage broker obtained 100% financing for her: A first mortgage (Option Arm) for 80% of the purchase price and a second mortgage for the balance. She could barely afford the monthly payments the first few years. This year, her interest rate was re-set causing the monthly payments to double, and she defaulted on the loans. The first mortgage lender filed for a judicial foreclosure.

The thing to do, she knew, was to sell the house and move back to a rental. She hired a realtor who, after comping the neighborhood, told her that the house was worth $75,000 less than what she’d paid for it. “You’ll need to do a ‘Short Sale’”, he told her, “and any offer you get will have to be approved by your current lenders.” And indeed, within two weeks the realtor had secured an offer to purchase the property, and sent the offer to the foreclosing lender with a request to approve the short sale.

The lender never approved the short sale. Instead, it proceeded with the foreclosure and obtained the Deed to Edna’s house, and then evicted her and her children. It was then that Edna asked a cousin, a branch manager with another mortgage lender, to inquire on her behalf and find out why her lender never approved the short sale.

What the cousin found out has now prompted Edna to sue her realtor. It seems that the realtor had sent the short sale offer to the wrong bank. Edna’s lender was never made aware, as a result, of the pending offer, and had no reason to stop the foreclosure.