Mortgage lawsuits last year were dominated by investors accusing companies of financial fraud, according to a new mortgage litigation report. Other types of lawsuits frequently filed against lenders involved mortgage fraud, secondary marketing and employment.
The report was prepared based on lawsuits covered by MortgageDaily.com during 2007 with the assistance of Washington, D.C.-based Weiner Brodsky Sidman Kider PC, which provides timely information and analysis of litigation that impacts mortgage bankers.
During 2007, 53 cases were reviewed where mortgage companies were accused of misleading investors. Many of the lawsuits were certified as class actions.
Mortgage fraud was alleged in 25 cases. In many of those suits, lenders allegedly pressured real estate appraisers to inflate property values.
Another big area where mortgage bankers faced litigation was secondary marketing. Many of these cases involved investment bankers attempting to force lenders to buy back loans that had either defaulted early on or involved mortgage fraud. A total of 23 secondary marketing lawsuits were reported.
Mortgage employment cases reported numbered 16. These involved overtime, employment discrimination and employment contracts. Whistleblowers and WARN notice violations cases were also covered.
"With the collapse of the subprime mortgage market and the spillover effect on the rest of the housing market, these are undeniably challenging times," said Mitch Kider, managing partner of Weiner Brodsky. "According to some observers, the litigation spawned by the subprime crisis will be unprecedented. While it is true that many of the emerging lawsuits facing the mortgage industry will be new and unprecedented, what has not changed is the fact of litigation."
Kider, a frequent speaker on industry matters and a Faculty Fellow of the Mortgage Bankers Association who says he has handled over 100 class actions, noted the housing boom of the past 7 years saw plenty of private action lawsuits as well as initiatives by federal and state governments challenging industry practices.
He noted that in addition to predatory lending suits alleging discrimination based on race, language, and property location, cases involving RESPA claims also flourished.
"There were HUD enforcement actions that focused on sham affiliated business arrangements and referrals conditioned on payments of a thing of value," said Kider, who heads up his firm's litigation practice. "We saw the continuation of lawsuits as well as criminal investigations related to alleged fraud on the part of all industry players -- brokers, lenders, borrowers, settlement agents, and appraisers."
He cited an increase in litigation and proposed legislation related to so-called foreclosure rescue schemes, and added that this trend is expected to continue in 2008 given the record number of foreclosures.
"Now that the housing bubble has burst, in addition to continued litigation of existing issues, we are seeing new and different types of cases that will challenge the industry in 2008 and for some time to come," Kider explained. "Cities such as Baltimore and Cleveland have filed lawsuits against lenders and the investment banks that packaged and sold mortgage-backed securities. Baltimore's predatory lending suit asserts that a lender unfairly marketed subprime mortgages to African-Americans. Cleveland, on the other hand, is invoking its public nuisance laws in an attempt to hold 21 of the nation's largest banks and financial institutions responsible for the widespread foreclosures and abandonment of properties throughout that city.
"The growing foreclosure crisis has also led to lender suits filed by state attorneys general alleging loans were made to borrowers who did not quality. Fraud suits against each and every player in the industry will continue in 2008, as will investor claims of shoddy lending practices and demands that lenders and brokers repurchase defaulted or problematic loans. A whole new slew of securities-related investigations and lawsuits are anticipated for 2008 as the industry and government attempt to deal with the fallout of the subprime meltdown. New York's State Attorney General presently is investigating whether investment banks that sold mortgage-backed securities disclosed the risks to investors and credit-rating agencies."