Housing crash spawns big lawsuits

A flood of legal claims -- of fraud, discrimination, predatory lending and more -- has followed the sharp downturn in the real-estate market. Some borrowers are even seeking compensation for the hits to their credit ratings.

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By David Koeppel, MSN Money

For nearly a year, Lori and Mark Pestana of Boston desperately tried to modify their home loan in hopes of avoiding foreclosure and eventual eviction. The Pestanas maintain that Washington Mutual ignored their mortgage-modification application and numerous attempts to contact bank officials by phone. In the end, the bank filed a foreclosure action.

Now the Pestanas are fighting back in court.

Will the fight be worth it?

Audio: 'Nightmare of phone loops'

For the Pestanas, and for thousands of other families in similar straits, the odds of succeeding in court are not very promising. That hasn't stopped folks from suing. Lawsuits against the mortgage industry began to skyrocket in 2007, when foreclosures began to increase. Claims of fraud, discrimination and predatory lending have been brought by players ranging from individual homeowners to wealthy shareholders and state attorneys general.

Owners were 'doing everything possible'

Suits against real-estate agents and appraisers have also been on the rise, though to a lesser extent than those against the mortgage companies, experts say.

Keith Gumbinger, a vice president at HSH Associates, a mortgage-information publisher in Pompton Plains, N.J., believes we're seeing only the beginning of a huge wave of mortgage- and real-estate-related lawsuits. He is skeptical about the merits of the suits.

Though Gumbinger believes some people filing suit were in fact victims of predatory lending, he thinks many others have only themselves to blame for their predicaments.

"Some people involved in these lawsuits may have self-inflicted wounds," Gumbinger says. "Borrowers who don't read documents or don't have someone to help them understand the documents can't absolve themselves of responsibility."

Suing for bad customer service?

Kevin Costello, an attorney with Roddy Klein & Ryan, a Boston law firm, and one of the lawyers representing the Pestanas, says the couple filed their lawsuit in August. Washington Mutual, which was seized by the FDIC in September and then sold to JP Morgan Chase, has responded by denying the claims in the complaint, but it did stop eviction proceedings against the Pestanas.

The lawsuit maintains Washington Mutual went back on its promise to "effectively and comprehensively review their modification application" and that the Pestanas' paperwork got lost in a bureaucratic "morass" until the foreclosure action was filed.

This type of problem isn't unusual, according to lawyers, mortgage brokers and homeowners.

"The left hand often doesn't know what's going on with the right hand," Costello says. He and his clients allege that groups within Washington Mutual weren't communicating as they should have.

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Washington Mutual does not comment on continuing litigation, says Geri Ann Baptista, the bank's vice president of corporate communications.

"We are fully committed to helping our customers stay in their homes," she says. "We provide a variety of options aimed at helping customers with financial challenges succeed as homeowners. We believe foreclosure should be a last resort."

To qualify for a loan modification, the Pestanas were told they needed to show they were 50 days delinquent in their mortgage payments. They say they stopped making payments in October 2007 for that reason. Lori Pestana had lost a consulting job in February 2007, and the couple recognized that in order to keep the home they had purchased in 1999 they would need a modification of the mortgage terms. The Pestanas refinanced their home in 2004 with a $275,000 fixed-rate loan.

The couple are asking the courts not only to reverse the foreclosure but to award them unspecified monetary damages to compensate them for the impact on their credit rating. Costello says a class-action suit by Washington Mutual borrowers in Massachusetts is under consideration.

The city of San Diego is also suing Washington Mutual to stop the bank's foreclosures statewide. The city is seeking civil penalties and accusing WaMu of "unlawful, unfair or fraudulent predatory lending practices."

Elsewhere, California Attorney General Jerry Brown and attorneys general from 10 other states sued Bank of America's Countrywide Financial unit and pressured the lender into a settlement that could cut borrowers' mortgage payments by as much as $8.68 billion.

The settlement, which is aimed at borrowers with subprime mortgages, will temporarily cut interest rates, reduce balances and help borrowers refinance their loans.

The settlement doesn't let Countrywide off the hook. The FBI is investigating several of the former mortgage giants, including Countrywide, Washington Mutual, IndyMac, Fannie Mae and Freddie Mac, for possible mortgage fraud.

The number of mortgage fraud cases opened by the FBI has more than doubled since 2004, according to MortgageDaily.com, an online news site. In 2007, the agency had 1,204 fraud cases pending. As of August, there were 1,569 cases pending, compared with 436 in 2003. These numbers include cases against mortgage lenders and brokers, as well as appraisers and borrowers.

The FBI investigates only cases of at least $500,000. It claimed $595.9 million in restitutions and $21.8 million in recoveries in 2007.

Last year, there were 46,717 mortgage-fraud-related suspicious-activity reports filed with the FBI. This year, the agency projects there will be 60,000 such reports, a 28% increase.

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There were 310 subprime-related federal civil lawsuits filed in the first half of 2008, compared with 297 for all of 2007. By comparison, the savings-and-loan crisis of the early 1990s spawned 559 federal suits, according to MortgageDaily.com. (This statistic doesn't include the thousands of cases filed in state courts by homeowners and attorneys general.)

In one such case, Brad Cohen of Las Vegas has filed a claim of fraud against his lender, Countrywide, and its local agent, Direct Equity Mortgage, the entity responsible for refinancing his home loan. Las Vegas has been among the cities hit hardest by the mortgage crisis. Now the lawsuits are mounting, and they're likely to keep coming for a while, says Cohen's attorney, Rob Cottle.

Cohen, 58, a former dairy worker, has been receiving Social Security disability payments for nearly 18 years. He has survived open heart surgery, a heart attack, 11 surgeries on his left leg, high blood pressure and diabetes. He refers to himself as "a walking time bomb."

In 2005, Cohen went to his lender to refinance the home he had bought for $119,000 in 1999. He says he was short of cash and needed money to pay off personal debts and medical bills.

He says his lender discouraged him from reading the entire 200-page loan agreement, noting that he and the lender had done business before. Cohen says he trusted that the loan officer was looking out for his best interests. He alleges information about his income on the loan application was falsified by the broker and that instead of a fixed-rate loan, he was put into an adjustable-rate mortgage. He also says his 740 credit score should have made him eligible for better terms than the subprime loan he was given.

In September 2007, Cohen's monthly mortgage payment rose from $1,700 to $2,500 -- more than he could afford to pay. Now he owes more than his home is worth. He faces foreclosure and possible eviction.

"I feel totally violated. I really do," Cohen says. "I trusted my agent to be straight with me. It was a matter of trust, and I shouldn't have trusted her. I thought she was working for me and looking out for my best interests. I need (the lawsuit) to put me into a position that will make me whole again."

Cohen says he wants to own his house free and clear, and wants a "sizable" settlement so he can be self-sufficient.

Cottle, Cohen's attorney, says his firm has been filing one lawsuit a week against brokers, agents and appraisers in the Las Vegas area.

"We see forgery, fraud, misrepresentation and bait-and-switch," Cottle says.

Shirley Norton, a spokeswoman for Bank of America, which purchased Countrywide in January, says, "We believe the allegations are without merit."

Robert Graham, an attorney for Direct Equity Mortgage,

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disputes the allegations more vigorously.

"Direct Equity's position is simple," Graham says in a statement. "The plaintiff received a substantial benefit over the years through refinancing his home multiple times and taking equity out of his home each time. The plaintiff was speculating that his home's value would continue to climb to provide him with a continuous supplement to his income. . . . In this case the plaintiff had a degree of sophistication which will work against his claim in fraud or equity."

Graham adds that "personal injury attorneys are picking up the banner of homeowners in trying to obtain a financial recovery from mortgage lenders. For the consumer's sake, I hope they are paying more attention to the attorney retainer agreements than they did their mortgage closing documents."

Marc Savitt, the president of the National Association of Home Mortgage Brokers in McLean, Va., agrees there have been cases of outright fraud and discrimination against homebuyers, and he concedes the people responsible should be punished. But Savitt also believes homeowners need to accept responsibility and argues that a lawsuit isn't always a good answer.

"Trust but verify," Savitt says regarding individuals dealing with mortgage lenders. "In the end, you can only trust yourself. Get everything in writing and make sure the information is accurate. Shop around. Don't just go to one company. A big company doesn't mean an honest company."

Consumers need to be sure they understand the documents they sign, Savitt says. If they don't understand something, it's better to postpone the closing, he says. Savitt recommends that every contract be reviewed by an attorney.

Buyers who believe they've been wronged should contact their state regulatory agency or attorney general's office before suing, he says.

"Who really benefits from a class-action suit?" he asks rhetorically. "Just the lawyers."

In April, Marty Ummel of Carlsbad, Calif., lost a highly publicized case in which she and her husband charged they had been misled about home prices in their new neighborhood. They say a real-estate agent caused them to overpay for a home they otherwise wouldn't have purchased. Ummel says the agent feared they would pull out of the deal and that he would be out $30,000 in commission. The couple paid $1.2 million for their home and then discovered a similar residence nearby had sold for $105,000 less.

A San Diego County Superior Court jury ruled against the Ummels, saying the agent had not breached his fiduciary duties and had not been negligent.

The Ummels are appealing the verdict. Marty Ummel says their case was hurt by the portrayal of her as a woman who would "never be satisfied" with any home purchase. The jury heard that real-estate agents had shown her 60 homes before she settled on one to buy.

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Walter Molony, a spokesman for the National Association of Realtors, says there are good reasons there have been few cases brought against real-estate agents and brokers. He says the blame for the mortgage mess belongs with the mortgage industry. Mortgage reps were "pushing a lot of snake oil" on consumers, he says, adding that many consumers were pushed into loans that were set up to fail.

"There's a lot of anger out there, and we are a litigious society," Molony says. "Thankfully, most are lashing out at the guilty party, the lending community."

Savitt, of the National Association of Home Mortgage Brokers, sees the blame game a bit differently.

"There are bad apples across the board," he says. "Brokers, lenders -- there are bad guys in every industry. We all need to take responsibility for the action of our peers. We have a responsibility to get them out of the industry."

Produced by Anh Ly

Published Nov. 13, 2008