Activist judges and the mortgage crisis

[mikester]

My question is - "Should a judge consider the ramifications of his judgment if his judgment is soundly based on the law but will have the possibility of really hurting for example the economy?"

Of course my question has some 'generalizations' and some 'assumptions' that the judge has determined in favor of some class action suit in the article below:

http://www.reuters.com/article/newsOne/idUSN2634924420080630?ref=patrick.net&pageNumber=3&virtualBrandChannel=10179&sp=true

It's an interesting article which mainly says that it is possible for a judge to nullify an existing loan based on the truth in lending act of 1968 if that loan violated the premise of that act. In this case we're talking about some class action suits - so not one loan but quite a few - I don't think it mentions the number but we could say thousands of loan - nullified in which the bank has to return all fees and interest to the borrower.

According to the article congress was lobbied to ban this 'feature' of the Truth in lending act but did not do so. So now the defendants of these class actions are hoping that the judges will not do this based on the effect it may have. If the banks are truly guilty I do not think it would be appropriate or desirable to have a judge hold back on doing this - it would not be 'justice' for the plaintiffs. It would certainly be a good example of an 'activist' judge if he/she did hold back.

There are concrete examples of lenders and borrowers lying and cheating to get these loans processed and they all need to be held accountable.

[legion]

I guess my answer depends on this question:

If a loan is rescinded, who keeps the house? The borrower or the lender?

[Porsche-O-Phile]

We shall reward the idiots.

The fiscally conservative/smart must be made to pay for it.

Welcome to Newmerica.

[mikester]

Originally Posted by legion

I guess my answer depends on this question:

If a loan is rescinded, who keeps the house? The borrower or the lender?

I'm not sure but it's a good question.

Originally Posted by Porsche-O-Phile

We shall reward the idiots.

The fiscally conservative/smart must be made to pay for it.

Welcome to Newmerica.

I don't think these folks are idiots - they may be ignorant but not all of them are idiots. Typically the media does not report on the people very well so it really is hard to tell what these folks really are. What I do know it that you are probably right - the more intelligent folks will pay based on their reasonable choices to not do something generally dumb.

Buying a home for the first time is a daunting experience. It was not easy reading over all of the paperwork involved and while we got our mortgage generally right we did make some mistakes. Due to the complexity in the entire transaction I can understand how the TILA is required and I can understand how someone could 'miss' the fine print - but lets say the 'fine print' wasn't there? Which seems to be what the article is saying. In this case you can't fault the borrower can you?

[RoninLB]

activist judges could make the credit crisis worse.

who wants to make a loan subject to the court's whim?

[RANDY P]

Wait until they start asking for the cash back the borrowers took out in equity. that's a typical response to these scenarios- they will offer to unwind if the money taken is returned.

The other issue is that more than a few notes will be nullified when they find they can't produce the original agreement. It's been traded hands so many times the existing lienholder may not a a clear lien on the house.

[berettafan]

We should always remember the spirit if not the letter.

Similarly, punishments/remedies should be in proportion to the violation.


Stick with this and it'll be ok.

[Rick Lee]

I missed the part about the plaintiffs' loan being fraudulent or how their TIL was somehow out of compliance. Just because you don't understand the terms does not mean the TIL was no good and you have a reason for suing or quitting the loan. Anyone who thinks a 1.95% rate has no catch or, at the very least, won't build up a mountain of negative equity over five years is just an IDIOT. Why does that mean the TIL is no good? I have a hard time understanding my fed. tax forms but that doesn't get me out of having to file.

[Porsche-O-Phile]

I'm sorry, but I'm standing by "idiots". Unless there's BLATANT fraud or misrepresentation involved (which probably isn't the case in 99% of the situations out there), I find few legitimate excuses.

I agree the amount of information is overwhelming, but there is no excuse for reading the text of your documents and disclosures - every word. If you don't understand something, research it. Or ask. Or hire an attorney. The "I didn't know what I was signing" thing is simply B.S. and it holds no water with me.

What's the excuse for not reading the disclosures? Too busy? Turn off the American Idol for a few nights and spend it researching the biggest financial decision of your life. Make the time. Idiots. Didn't understand the legal mumbo-jumbo? Hire a lawyer, his fee is far less than the value of the purchase/risk you're assuming. Idiots. Thought you could re-fi your way out of the ARM before it blew up? That's called "risk". You assumed it and played the game. Deal with the loss. Idiots. Gambled on endless appreciation without researching historical performance? Idiots. Bought into the "this time's different" hype. Idiots.

Life is (and should be) hard on stupid people. Maybe if a bunch of 'em start learning via the University of Hard Knocks, they'll wake up and start valuing (and instilling those values on their kids) education, research, independence, accountability and thinking before acting.

Or I could just be an idealistic dreamer to think that would ever happen in a society gone S.O.S. (Stuck On Stupid). Most likely.

[jyl]

If a bank systematically violates truth in lending laws, then I suppose there should be a remedy. But it shouldn't mean the borrower gets a windfall. Simply an accelerated route to foreclosure.

[Nathans_Dad]

It's not fair. Those big bad mortgage companies forced these innocent people to pay $2 million on a house when their annual income is $80k! How were these unfortunate people to know that an interest only loan would eventually bite them in the arse? They should not be held accountable!!

[Rick Lee]

But I still want to know what was wrong with the TIL. The article doesn't say how it was fraudulent or bogus. Furthermore, every settlement I've been to, probably close to 100, the settlement atty. has explained pretty well what the TIL is. They have to explain everything you sign. IIRC, you receive a TIL within something like 72 hrs. of loan application, which gives you a few weeks to read about it before you have the settlement atty. explain it to you in layman's terms. Sure, it's pretty sleazy of the loan officer to let someone get to settlement without understanding the several big catches to an interest rate way, way below market prices. But at some point, people who are old enough to execute contracts need to be held responsible for reading and understanding what they sign.

[mikester]

Originally Posted by Porsche-O-Phile

I'm sorry, but I'm standing by "idiots". Unless there's BLATANT fraud or misrepresentation involved (which probably isn't the case in 99% of the situations out there), I find few legitimate excuses.

I agree the amount of information is overwhelming, but there is no excuse for reading the text of your documents and disclosures - every word. If you don't understand something, research it. Or ask. Or hire an attorney. The "I didn't know what I was signing" thing is simply B.S. and it holds no water with me.

What's the excuse for not reading the disclosures? Too busy? Turn off the American Idol for a few nights and spend it researching the biggest financial decision of your life. Make the time. Idiots. Didn't understand the legal mumbo-jumbo? Hire a lawyer, his fee is far less than the value of the purchase/risk you're assuming. Idiots. Thought you could re-fi your way out of the ARM before it blew up? That's called "risk". You assumed it and played the game. Deal with the loss. Idiots. Gambled on endless appreciation without researching historical performance? Idiots. Bought into the "this time's different" hype. Idiots.

Life is (and should be) hard on stupid people. Maybe if a bunch of 'em start learning via the University of Hard Knocks, they'll wake up and start valuing (and instilling those values on their kids) education, research, independence, accountability and thinking before acting.

Or I could just be an idealistic dreamer to think that would ever happen in a society gone S.O.S. (Stuck On Stupid). Most likely.

I don't think you addressed the question at all. Stop hi-jacking man, yes we are aware that there were quite a few stupid idiots who for a variety of reasons threw reason out the window and got into loans they had no business being in. Those people should most certainly receive the assistance of our bankruptcy courts and loose what they are entitled to loose through their ignorance. Hopefully they will learn a lesson.

You seem to feel that discounting all of the evidence there there really was predatory lending is okay and I do not share that opinion. I've heard too many reports that include testimony from people doing the lending and processing the paperwork where they encouraged idiots to be dishonest and lied about the mortgages they were selling.

They encouraged people who would not normally consider themselves in a position to own a home to get into loans they could not afford. I find it interesting that you fault these people entirely 100%. Should not the banks be protecting themselves by not offering folks who present a high risk of failure to repay loans with such favorable terms? In my opinion the banks are and lenders are also liable for their risky behavior.

In the end it is the folks who did not do something stupid who will likely end up paying...

[Rick Lee]

Originally Posted by mikester

Should not the banks be protecting themselves by not offering folks who present a high risk of failure to repay loans with such favorable terms? In my opinion the banks are and lenders are also liable for their risky behavior.

In the end it is the folks who did not do something stupid who will likely end up paying...

On the contrary, a lot of banks WERE protecting themselves by offering these kinds of loans. Banks, unlike mortgage companies, are subject to the Community Reinvestment Act (CRA), whereby they have to give FHA-backed loans at below market rates to first-time buyers who would not normally qualify for conventional mortgages. It became a race to the bottom. Gov't. loans were getting so competitive, that the private sector went a step further with subprime, almost pre-empting the gov't., which often comes after banks and mortgage companies for not giving enough loans to enough deadbeats and/or minorities (and I'm not at all implying the two are related). No bank wants to lose money. And when they can find investors who are willing to buy subprime loans, thereby spreading out the risk, why shouldn't they do so? It was very profitable for them. Suddenly, a lot of folks who never would have been able to get even an FHA loan, were able to get into houses.

I could go out today and get into a Ferrari at the local dealership. It would get repo'ed pretty quickly, but I could get into the car and get it home. Would the dealership be at fault for that?

[mikester]

Originally Posted by Rick Lee

On the contrary, a lot of banks WERE protecting themselves by offering these kinds of loans. Banks, unlike mortgage companies, are subject to the Community Reinvestment Act (CRA), whereby they have to give FHA-backed loans at below market rates to first-time buyers who would not normally qualify for conventional mortgages. It became a race to the bottom. Gov't. loans were getting so competitive, that the private sector went a step further with subprime, almost pre-empting the gov't., which often comes after banks and mortgage companies for not giving enough loans to enough deadbeats and/or minorities (and I'm not at all implying the two are related). No bank wants to lose money. And when they can find investors who are willing to buy subprime loans, thereby spreading out the risk, why shouldn't they do so? It was very profitable for them. Suddenly, a lot of folks who never would have been able to get even an FHA loan, were able to get into houses.

I could go out today and get into a Ferrari at the local dealership. It would get repo'ed pretty quickly, but I could get into the car and get it home. Would the dealership be at fault for that?

I think my statement about non-stupid people was too general.

I meant folks to got into loans they could afford and are maintaining the status quo. Right now there are hopes that the banks will be bailed out, the consumers will be bailed out and that everyone will be 'okay' while the folks to were smart enough to not be dumb get the burden of dealing with whatever new regulations are required to get the people on both sides of the table to be stupid.

Still, the article is about banks who do not conform to the TILA and not about people who may or may not be stupid. A bank cannot change the terms of the loan after the paperwork is signed.

[Porsche-O-Phile]

Sorry, hijack not intended. But I don't honestly think there IS anything as "predatory lending". Is anyone holding a gun to these peoples' heads MAKING them sign the paperwork? No. It's done voluntarily and willfully. Sorry, but at some point we need to stop coddling such stupidity and continually "dumbing down" our standards to protect the most indiscriminate and lazy people out there from themselves. . .

Back on topic here:

Judicial "activism" is not something I'm a fan of. I don't really see a way an appellate court could reasonably uphold some kind of class action against lenders unless there was bona fide fraud or misrepresentation and (more importantly) that it can be PROVEN (i.e. more than John & Jane Doe complaining that "they didn't understand", so therefore it must be illegal, right?)

The precedent alone would make it open season for lenders in EVERYTHING. Hell, I'd probably go down the next day and buy that Ferrari 430 that I can't afford. When I can't make the payments, I could just have my lawyer initiate a class-action suit against the finance backers because "I didn't understand" and therefore it must be predatory. . .

This smells rotten.

[Rick Lee]

Originally Posted by mikester

Still, the article is about banks who do not conform to the TILA and not about people who may or may not be stupid. A bank cannot change the terms of the loan after the paperwork is signed.

Again, I'm missing the part about what a bank did wrong wrt the TIL. If the start rate was 1.95%, that means it was some kind of Option ARM or MTA and there would definitely be a lot of paperwork explaining the terms for adjustment. Plenty of people misunderstand the differences between start rates, note rates, fully amortized rates, etc. It doesn't mean the bank lied or changed the terms just because a loan officer told you something and your payment coupon says something else. Somewhere in between, the borrower more than likely skipped over a lot of stuff in the paperwork. Those disclosures are so commonplace now that most of them have bar codes on them. I doubt a bank left themselves open to interpretation by a borrower or judge.

[mikester]

Originally Posted by Rick Lee

Again, I'm missing the part about what a bank did wrong wrt the TIL. If the start rate was 1.95%, that means it was some kind of Option ARM or MTA and there would definitely be a lot of paperwork explaining the terms for adjustment. Plenty of people misunderstand the differences between start rates, note rates, fully amortized rates, etc. It doesn't mean the bank lied or changed the terms just because a loan officer told you something and your payment coupon says something else. Somewhere in between, the borrower more than likely skipped over a lot of stuff in the paperwork. Those disclosures are so commonplace now that most of them have bar codes on them. I doubt a bank left themselves open to interpretation by a borrower or judge.

From the article:

"n their 2005 lawsuit, the couple said the loan's interest rate had more than doubled by their second monthly payment from the 1.95 percent rate they thought was locked in for five years. The interest rate rose well above the 5.75 percent fixed-rate loan they had refinanced to pay their children's college tuition. The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs."

Apparently it was supposed to have a fixed rate for a period of 5 years (Common I believe - my dad had one but got out of it as planned) but the rate still went up before the end of that 5 years. Since the judge has ruled on it - I think we can consider that it happened (proven guilty).

Also, I'm not saying they weren't dumb I'm just saying it is possible to be both dumb and right.

[john70t]

Sounds like they missed 4pt font "offer subject to change without notification" on the 17th page.

[Rick Lee]

Originally Posted by mikester

From the article:

"n their 2005 lawsuit, the couple said the loan's interest rate had more than doubled by their second monthly payment from the 1.95 percent rate they thought was locked in for five years. The interest rate rose well above the 5.75 percent fixed-rate loan they had refinanced to pay their children's college tuition. The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs."

Apparently it was supposed to have a fixed rate for a period of 5 years (Common I believe - my dad had one but got out of it as planned) but the rate still went up before the end of that 5 years. Since the judge has ruled on it - I think we can consider that it happened (proven guilty).

Also, I'm not saying they weren't dumb I'm just saying it is possible to be both dumb and right.

Yes, I read that part. But the reporter totally ignores what the TIL actually said. My guess, if it was a 1.95% start rate, is that the loan was an MTA (monthly treasury average). While they may have been allowed to pay the lowest possible rate for the first five years before having to start paying all the negative equity they would have amassed, the rate, as the name implies, changes monthly, sort of like a COFI or COSI loan. I don't buy at all that a bank just arbitrarily decided to change the loan terms.