Class Action Suits Against Mortgage Lenders...fair or extreme

I was reading the business section of The Washington Post today and it had an article about a Wisconsin couple who is going after Chevy Chase Bank for mortgage fraud. That sounds fine, on the surface, but it turns out that their attorney is also trying to get the courts to approve a class action suit to have all “bad” mortgages rescinded. It appears as though this is something that has not been allowed in the past and, although it only seems fair that lending institutions that made fraudulent loans should be penalized, the thought of thousands (probably hundreds of thousands) of loans being rescinded seems pretty scary.

According to this Post article, “83% of federally supervised banks that issued loans at the height of the housing boom in 2005 have been cited for ‘significant compliance violations.’” Can you imagine what would happen if all those affected were part of a class action suit and became eligible for some sort of relief?  I don't know how that would impact the relatively "safe" real estate market in Bethesda and much of the Washington DC Metropolitan area, but on a national basis, the implications would be enormous. 

Clearly the lending institutions ran amuck. Although many were still playing the game fairly, others were enticing people with teaser rates and programs where failure (in the long run) had to be the only obvious outcome. And, although this outcome was obvious to the lenders, it was not always obvious to those receiving the loans. We all need to take responsibility for what we sign and make sure that we read the fine print, but there’s something to be said about not burying the important stuff in the fine print. If we ask food producers to let us know what they’re adding to our food, shouldn’t we make sure that lenders tell us what we’re going to be paying on our loan?

But the answer may not be in a class action law suit. It just seems like, although that would be a very serious wake-up call for lenders (somehow I think they’d been awoken already), the big winners are probably not going to be the affected homeowners, but instead will be a few lawyers. We need to clean up the lending business..but this doesn’t look like the right vehicle of change.

- Contributing blogger Gretchen Koitz

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