March 2008
Subprime Mortgage Meltdown Spurs Wave of Litigation
By Steven J. Mintz, LITIGATION NEWS Associate Editor
Section of Litigation to track emerging issues
The subprime mortgage crisis, in which a surge in high-risk loan defaults and home foreclosures has triggered ripple effects throughout the banking and securities industries, has led to a wave of litigation. Attorneys general of at least three states—Massachusetts, New York, and Ohio—have sued subprime lenders and appraisers, while other states have launched similar investigations; federal class actions have been filed that allege fair lending claims, including so-called reverse redlining in the marketing and pricing of nontraditional mortgage loans; investors have sued Wall Street firms that traded in mortgage-related investments whose values have since plummeted; and securities class actions and derivative suits have been filed against companies whose stock prices have fallen as their exposure to subprime losses has become known.
“As a result of the subprime meltdown, there is going to be significant litigation involving actions by state and federal enforcement agencies against lenders, servicers, appraisers, brokers, and other intermediaries plus other actions between lenders, securitizers, and investors who currently own devalued mortgage loan portfolios. This litigation will involve virtually every institution that has touched subprime lending over the past five years,” says Andrew L. Sandler, Washington, DC, cochair of the Section of Litigation’s Consumer and Personal Rights Litigation Committee.
Subprime-related litigation issues will be the subject of a program, “Subprime Meltdown—Regulatory and Litigation Challenges,” at the Section Annual Conference April 16-18 in Washington, D.C. The program, sponsored by the Section’s Real Estate Litigation and Construction Litigation Committees, likely will feature top federal regulators, a state attorney general, and private attorneys and present a discussion on government enforcement efforts and class action litigation by borrowers and others seeking to hold liable various intermediaries in the mortgage loan process.
In addition, “the subprime meltdown will be the focus of the Real Estate Litigation Committee this year,” says John S. Morris, III, Richmond, VA, cochair of the committee. “We will post articles and case notes on the committee website as they emerge, and will print articles in the committee newsletter,” he adds. His committee also has asked members to volunteer as regional reporters for cases and legislative actions in each federal circuit.
Few subprime mortgage-related cases have reached final judgments or reported decisions at this point. In one case, however, a federal district court dismissed without prejudice 14 foreclosure cases that had been brought on behalf of mortgage investors, ruling that the plaintiff-lenders failed to show Article III standing because they did not prove that each was the holder and owner of the note and mortgage on each property when the foreclosure actions were filed. In re Foreclosure cases. The court refused to accept documents showing an intent to convey the rights in the mortgages—as opposed to proof of ownership—a decision that could slow the ability of investors in mortgage securities pools to reclaim properties.
Some trends, however, are already becoming apparent in the emerging litigation. Lenders should expect plaintiffs to use two recent pronouncements issued by federal banking regulators, entitled Interagency Guidance on Nontraditional Mortgage Product Risks [PDF] and Statement on Subprime Mortgage Lending [PDF], “as blueprints for fair and predatory lending lawsuits. These actions likely will allege that lenders inadequately disclosed the nature and risks associated with nontraditional mortgages and failed to determine whether the nontraditional mortgages were suitable for targeted borrowers,” says Sandler.
Lenders should also anticipate that the Federal Trade Commission will bring enforcement actions alleging unfair and deceptive marketing of nontraditional mortgage products; that the Civil Rights Division of the Department of Justice, which enforces the Equal Credit Opportunity Act and the Fair Housing Act, will investigate and bring enforcement actions against lenders whom it suspects as having aimed higher-cost and higher-risk nontraditional mortgage loans at borrowers in a protected class; and that state attorneys general will bring enforcement actions under state consumer protection and anti-predatory lending statutes “against lenders whose business practices fall short of those outlined in the federal and state regulatory initiatives,” Sandler adds.
