Deceptive and Unfair Mortgages

by L. Jed Berliner, Western & Central Massachusetts Consumer Lawyer

December 9, 2008

Mortgages are “presumptively” deceptive and unfair if they have these four characteristics, says the Massachusetts Supreme Judicial Court.

First, the mortgage must be adjustable, with the first adjustment taking place within the first three years.   (Well, okay, this is two requirements which the court combined into one.)

Second, the introductory interest rate is at least 3% lower than the fully indexed rate (the base index rate plus the adjustment factor).  The rest of us call this a “teaser” rate, since it teases the borrower into thinking that the early affordable payments will always be affordable.  It also teases the borrower into thinking that the loan can be refinanced if the payments became too expensive, since home prices would always go up – right?

Third, the borrower’s debt-to-income ratio is at least 50% if the fully indexed rate is used, and not the teaser rate.  This means that, half the borrower’s income or more would go to mortgage payments if there is no change to the interest rate calculation factors and there were no teaser rate.

Last, 100% of the home’s value is being borrowed.

In this case, “presumptively unfair” means that the Massachusetts Attorney General must be notified before any foreclosure can take place by the lender, Fremont, allowing time for a court to stop the foreclosure unless the lender can show it took reasonable steps to work with the borrower to avoid foreclosure.

The court rejected Fremont’s argument that its earlier loans should not be held to current standards of unfairness, noting that many government agencies warned against these loans as far back as the late 1990s.  Fremont knew, or should have known, that loans with these characteristics would guarantee default by the borrower unless home prices rose indefinitely, which was an unreasonable assumption.   But a default would not hurt Fremont, since it sold most of its mortgage loans.

The Attorney General filed the case to stop unfair foreclosures, but it did not seek damages.  This issue is left open for another suit by a private borrower, but the decision throws open the door to recovery.

Commonwealth v. Fremont Investment & Loan, and another, 2008 WL:5122699 (Mass.).

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L. Jed Berliner practices exclusively in consumer bankruptcy, foreclosure defense, and related consumer protection litigation such as credit card defenses and suing debt collectors. He established his Springfield, MA practice in 1988. Attorney Berliner is a regular and active contributor to the Bankruptcy Law Network, the Bankruptcy Roundtable, and the National Association of Consumer Bankruptcy Attorneys, three specialized consumer bankruptcy forums on the Internet, and is an informal mentor to regional practitioners. He is recognized by his peers as an expert in consumer bankruptcy issues. He thoroughly enjoys being rated "excellent" in his client surveys.

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Last modified: December 9, 2008