Defending Foreclosure Class Action, Mortgage Loan Modification, and Attorneys General Lawsuits
State Attorneys General and other entities have filed class-action lawsuits against many mortgage investors and mortgage servicers over alleged foreclosure errors, alleged missing documents, alleged business practices that they do not like, mortgage loan modifications, and other matters. Renowned nationwide banking expert witness Don Coker explains some important issues that impact defending these class action lawsuits.
The “Blame Game” is on, and has been, for quite some time, over who is to blame for borrowers not being able to afford the mortgages they sought and signed. The whole situation is incredibly distressing for everyone involved, including the borrowers, lenders, present owners of the mortgage loans, loan servicers, and many others.
Mortgage lenders granted loans, in many cases, based upon realistically optimistic expectations that the borrowers would be able to make the payments for which they agreed to be responsible, and enabled those borrowers to improve their quality of life by living in better housing than they did before; and in many cases, to become homeowners for the first time. Unfortunately, and primarily due to the direction taken by the national economy, things did not work out as expected for many of these loans; and brought us to the tenuous situation where we are today.
In my professional opinion, it is unfair to place the blame for this situation totally with the mortgage lenders. The mortgage lenders did not pick out houses for the borrowers and force them to sign loan documents. Clearly, these were choices made by the borrowers of their own free will.
The Mortgage Lending Process
The mortgage lending process always has been that a prospective borrower finds a house that he or she wants to buy, and then applies for a mortgage loan to pay for it. The mortgage lender either approves the loan or turns it down. This does not imply a “gatekeeper” role for mortgage lenders whereby the lender decides what housing a borrower should be buying. A prospective borrower is responsible for using prudence and their own knowledge of their overall financial situation – present and future - in determining how much they should be allocating to pay for housing. The mortgage lender does not play the role of matching up housing inventory with borrowers that the lender thinks fits the borrowers, and the mortgage lender has no responsibility to a borrower to only grant them a loan that they will be able to repay. Rather, mortgage lenders granted loans along the lines that prospective borrowers sought.
Personal financial responsibility of the borrowers appears to be totally overlooked in the present crisis. And why? Because the borrowers do not have the financial wherewithal to correct their unfortunate situations, and they think that the lenders have a money printing press, which they do not. It is economically unrealistic to expect that the mortgage lenders have the financial resources to correct the present mortgage loan problems.
Assessing the Performance of a Mortgage Lender or Mortgage Servicer
In my professional opinion, the key to assessing any responsibility to a particular mortgage lender or mortgage servicer is did the lender or servicer operate according to nationwide industry standard practices in their origination and servicing of the mortgage loans, including their practices in applying payments, assessing late charges, dealing with delinquencies, and in foreclosing when other collection methods failed.
An examination of the mortgage lender’s or mortgage servicer’s standard operating procedures should indicate whether the company exhibited good faith, fair dealing, ordinary care, honesty in fact, and observed reasonable commercial standards in the handling of the mortgage loans under consideration.
Mortgage Loan Modifications
As explained supra, mortgage loans vary so greatly that a blanket modification decree by a court would be useless. Problem mortgage loans and their borrowers have different problems that can only be addressed on an individual basis and not en masse.
Class Action Factors
In my professional opinion as one who has over forty years of experience in the field, mortgage loans and underwriting factors can take an unlimited number of forms so that it is impossible to truly create a recognizable class. Consider the following:
● Numerosity – It is my professional opinion that it is not unreasonable to think that the borrowers on foreclosures or troubled loans that have individual problems could negotiate individually with their lender or utilize litigation to resolve their individual specific problems. Keep in mind that not all loans that are in trouble or in foreclosure have problems that need to be addressed. There still is such a thing as a truly delinquent mortgage loan and a mortgage loan that needs to be foreclosed.
● Commonality – It is my professional opinion that there is no “common” type of mortgage loan. As explained in some detail here, there are endless variations that make one mortgage loan quite different from another, such as:
● Type of property, new single family residential, used single family residential, high quality construction, low quality construction, etc., all of which may affect the marketability.
● Single family detached, townhouse, row-house, high rise, mobile or manufactured home, etc., all of which affect the marketability.
● Property condition – Occupied, abandoned, habitable or uninhabitable, in good condition not needing any repairs or in need of repairs, needing minor or major repairs.
● Location – Urban, suburban, rural, region of the country, etc.
● Loan characteristics – High or low loan-to-value ratio (“LTV”), fixed rate or floating rate (and there are innumerable floating rate structures), straight amortization or balloon structure, interest rate indexed to prime, LIBOR, or some other, second mortgage (and other junior mortgages) present or not, single borrower, couple borrower, new loan or seasoned loan,
● Who owns the mortgage loan, and what are their requirements regarding the servicing of the loan that impact the modification of the loan?
● Size of the loan – Could be $10,000 or $10,000,000.
● Whether the collateral is worth more or less than what is owed, and the degree or lack of equity.
● Innumerable other possible variations.
● Typicality – Considering the multiplicity of factors discussed supra, it is my professional opinion that it is difficult to make a case that any particular loan in a portfolio of any reasonable size could be considered “typical” of the entire portfolio.
● Risk of Inconsistent Judgments – In my professional opinion, a class action lawsuit over alleged widespread mortgage problems would present a serious risk of inconsistent judgments since the characteristics of the mortgages and the borrowers could vary within a virtually limitless range of factors, as explained supra.
● Predominance and Superiority – In my professional opinion, due to the great variations that could be present in a portfolio of mortgage loans or in an REO/OREO portfolio, it would be difficult to claim predominance and superiority as to the claims and the method of their resolution.
● Borrowers should accept significant blame for their own financial misjudgments.
● Mortgage loan modifications have to be structured individually to fit the needs of each mortgage loan and each borrower.
● Mortgage loans and their surrounding circumstances vary so greatly that a class action solution to these problems is impractical.
ABOUT THE AUTHOR: Banking and Mortgage Banking Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.
Clients have included numerous individuals, over 75 banks, and governmental clients such as the IRS, FDIC. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.
BA degree from the University of Alabama. Postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.
Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.