Suing the Mortgage Industry: Turnabout is Fair Play

Associated Press reporter, Alan Zibel, reports in a recent article that everyone is suing the mortgage industry over the current subprime lending debacle, and industry experts agree that the financial impact of the subprime meltdown will eclipse the most scandalous fraud in financial history – Enron.

Homeowners are suing lenders. Shareholders are suing collapsed mortgage companies. Investors in complex mortgage securities are starting to sue big Wall Street banks. Those investment banks are turning around and suing the mortgage companies.

Recently, the NAACP sued a dozen mortgage companies, alleging that lenders target blacks for higher interest rate loans. See Jay Fleischman’s recent article on “redlining.”

Institutional investors are suing mortgage companies, alleging they misrepresented the risk associated with subprime loans, but the subprime lenders counter that the investors knew the loans were high risk. However, the investors argue that the lenders were approving loans with no proof of creditworthiness or “due diligence.”

The situation is expected to get worse before it gets better. Before the end of 2008, $1.2 TRILLION of adjustable rate loans, 70% of which are subprime loans, will “reset” to higher interest rates and higher monthly payments.

As previously reported here at BLN, the subprime debacle is not just a real estate problem. There is news every day of its effect on Wall Street, including the recent downgrading of billions of dollars worth of bonds backed by subprime mortgages.

Legal problems are not limited to civil lawsuits, either. State Attorneys General, including New York’s Andrew Cuomo, are investigating allegations of fraud by mortgage brokers inserting undisclosed “yield-spread premiums” and appraisers inflating the estimated value of homes.

Stay tuned, as new details emerge every day.