A messy lawsuit against a Berkshire Hathaway mortgage subsidiary alleging investors were misled about the nature of their investments may be close to settlement.
21st Mortgage Corp., a subsidiary of Warren Buffet’s Berkshire, was sued earlier this month in federal court by a group of people who claimed fraud in a residential housing investment scheme and sought millions of dollars in damages. The group took action after they discovered that the mortgage company was foreclosing on loans to which they thought they were only lending their names.
A verbal agreement is in place to release the investors from liability and let them keep the funds — about $5000 — that many of them received as an inducement to participate in the construction loans.
Kevin Clayton, the CEO of Clayton Homes, said that, while nothing has been signed, the plaintiffs will be released from legal and financial liability. 21st Mortgage is owned by Clayton Homes and provides loans to manufactured home buyers. He was quick to point out, however, that the plaintiffs “technically are responsible for those mortgages.” He said the builder, Quality Quest Development LLC, has had “major financial troubles” and was not able to find permanent borrowers.
But the mortgage company might not be out of the woods yet.
Other parties with similar allegations against 21st Mortgage will soon file additional lawsuits, according to a source who requested anonymity.
Clayton Homes, which claims to be the country’s largest maker of manufactured housing, said parent Berkshire Hathaway was not informed of the lawsuit.
The case began when Anthony Blaylock, a former 21st Mortgage senior loan officer, allegedly contacted individual investors who were told that they would be paid from $4,000 to $6,000 for simply making a promissory note, ostensibly a construction loan, to the mortgage company, according to the complaint filed in the legal action. The investor would then take title to a lot of unimproved real property on which the investor would then grant a deed of trust naming the mortgage company as beneficiary. Investors were told that the homes were selling in less than five months after the start of construction. Potential investors were also told that they would not have to repay the interest on the loans or the loans themselves.
Quality would pay the interest on the “investors’ loans” during construction and then retire the investor’s purported indebtedness upon the sale of the completed home, the suit says. But, as financial losses mounted, the mortgage company stopped referring to the plaintiffs as “investors,” started calling them “delinquent borrowers,” and started foreclosure proceedings, the suit says.
The plaintiffs alleged that the mortgage company also forged signatures and falsified applications because it needed the names of investors so that it could make the “loans” without appearing as if the company was investing its own funds.
More lawsuits are expected. Although 41 “investors” participated in the lawsuit filed Oct. 6 in U.S. District Court in Knoxville, the complaint alleges that 150 investors participated in the investment scheme.
Clayton said Clayton Homes will continue to work with Quality to complete the projects and that most of the houses that have been started are “90 percent complete” and about 30 lots that haven’t had any construction will be sold without starting any homes.
Clayton said that no further action is contemplated against Blaylock.
Without denying or confirming the details of the verbal agreement, Richard Ray, 21st Mortgage’s chief financial officer, told MortgageDaily.com in an e-mail, “We think we are in the process of reaching a resolution to this.”
The plaintiffs’ attorney, Martin Bailey, and Blaylock did not return calls for comment.