A major legal development in the foreclosure crisis occurred today in Massachusetts. The Massachusetts Supreme Judicial Court, regarded as one of the finest state courts in the country, upheld a preliminary injunction against Fremont Investment and Loan for foreclosing on any "structurally unfair loan" without court approval.
The Massachusetts Attorney General had argued that "a lender’s failure to reasonably assess a borrower’s ability to repay his loan and the use of loan features that predictably lead to foreclosure is unfair and deceptive and in violation of Massachusetts law." More precisely, a consumer loan that is not intended to be repaid, but intended to be refinanced (a process that can only work if property values rise indefinitely) is inherently predatory. By upholding the preliminary injunction, the SJC endorsed this view and imposed a serious good faith workout effort on Fremont.
The SJC pretty much told Fremont (and subprime lenders in general): You made the mess, now clean it up without burdening the state's resources with foreclosures. Go work it out.
There is something to be said for not letting the engine of law (judicial or non-judicial foreclosures…all under color of law, though) be used to effect an unfair and deceptive bargain. Somewhere in Mt. Auburn Cemetery, Justice Story must be whispering "He who comes into Equity must do so with clean hands" (or maybe he's indulging in legal Latin and chortling ex turpi cause non oritur actio or aequitas numquam cacum tolerat).
It'll be interesting to see if the SJC ruling provides a model for other states.
The Massachusetts AG's press release, with a link to the ruling, is here.
Comments
10 responses to “Massachusetts SJC to Subprime Lenders: Clean Up Your Own Mess”
“More precisely, a consumer loan that is not intended to be repaid, but intended to be refinanced (a process that can only work if property values rise indefinitely) is inherently predatory.”
So, this would apply to say, a 5 year ballon loan (intended to be refinanced)? Are there other loan structures these would apply to? Does this also go to the income/resources of the borrower or just the structure of the loan? Reading the article did not make that at all clear to me. Clearly (?), this would not apply to a standard 30-year fixed ever, unless characteristics of the borrower are also a consideration…
The law can indeed be a splendid thing.
Let us also take note that the trial court judge was just given the nod for a seat on the SJC. The Globe article on the appointment says he has also enjoined “Option One and American Home Mortgage Servicing from automatically foreclosing on up to 9,700 Bay State homeowners”.
“a lender’s failure to reasonably assess a borrower’s ability to repay his loan and the use of loan features that predictably lead to foreclosure is unfair and deceptive and in violation of Massachusetts law.” More precisely, a consumer loan that is not intended to be repaid, but intended to be refinanced (a process that can only work if property values rise indefinitely) is inherently predatory.”
Seems like a very slippery slope. First, there is no solid data to show that the loan features are the driving force behind foreclosure. Rate adjustments and so-called predatory lending are not causing massive foreclosures. The foreclosures are driven by income curtailment from job loss, divorce, and medical emergencies. The other driver is speculation on the part of the homeowners and amateur flippers. If this weren’t the case, more than half of all the granted loan modifications wouldn’t be back in default as reported earlier this week.
I have client’s that can’t refinance right now just because a HELOC lender won’t subordinate to a new first mortgage even though the borrower is just doing a rate/term refinance to a 30 year fixed rate at 5.125%. No cash out, 740+ FICOs, and a combined ltv between 1st & 2nd mortgage of 90%. Hardly any second mortgage lenders go to 90% CLTV anymore, so the existing note holders are just forcing a payoff as opposed to allowing the borrower to refi the first. Are these loans inherently predatory as well since the borrower can’t refinance? I would love to see a lawsuit brought against second mortgage holders.
Also, what do you do about subprime borrowers who can’t refinance because of their own mistakes? They continued to make late payments so now they can’t qualify for an FHA or conventional loan. Refinancing is not entirely dependent upon rising property values. Is the court going to investigate the borrower’s circumstances?
It seems to me a fully-disclosed balloon loan isn’t deceptive, but a “stealth” balloon loan (that balloons because of teaser rates, negative amortization that will force a refinacing because the borrower’s income can no longer service the loan) is a different matter. Applying deceptive practices laws to mortgage situations where a borrowers actually were deceived (and staying foreclosures to make that assessment) seems quite reasonable to me.
MANDAB–An Economic Proposal by Eric Strong
Why don’t we insist any financial institution who takes government “bail-out” money do the following: If they take deed to property by foreclosure, they have to have an absolute auction, with no reserve, within fifteen days of taking title to that property. We can call it “mandatory absolute” or MANDAB. MANDAB will be opposed because the companies will allege they are going to get too little for the properties, but here is how it can help the larger economy: 1.) The companies will be more motivated to do “work-outs” or refinances of struggling borrowers, and 2.) If they do foreclose, the property is going to be sold quickly and the market keeps moving.
Now, it seems like there are bank-owned properties everywhere that just sit. The banks/lenders/servicers/etc. who own them after foreclosure are glacially slow and delusional about their low value so they just sit and the real estate market has trouble coming back to life. MANDAB could help the economy from two directions. More borrowers getting helped, and foreclosed properties getting into productive hands more quickly.
EMERGENCY LEGISLATION to allow Bankruptcy Judges the Authority and the right to modify and provide a principal reduction on PRIMARY HOMES.
This seems to be a real solution to the mortgage mess and if congress changes the Bankruptcy Code millions of homeowners will soon be able to modify their mortgages with substantial principal reductions without being at the mercy of their lender’s discretion. Since a change in bankruptcy laws in chapters 7 and 13 cases are the equivalent of Federal Court Orders, there is nothing the lender can do to prevent such modification, and must accept the new loan terms. IMHO
Not that I don’t think that SOMEthing needs to be done about the entire flippin’ mess BUT –
From a basic contract law standpoint, isn’t it a tad dangerous to allow the legal system to essentially “re-write” a valid contract? Wouldn’t other sectors of law be able to point to any mortgages re-written by a BK judge and use them as support to potentially negate/re-write ANY otherwise binding contract?
I’m unclear who, precisely, regard the MA SJC as “one of the finest state courts in the country.” If this opinion is indicative of the quality of that bench’s reasoning, I’d say such opinion lacks foundation. In short, the court is substituting its vision of what is “structurally fair” and deciding that those who made bad decisions should be spared the consequences.
There’s been too much of such thinking already.
> there are bank-owned properties everywhere that just sit.
> The banks/lenders/servicers/etc. who own them after
> foreclosure are glacially slow and delusional about their
> low value so they just sit and the real estate market has
> trouble coming back to life.
Does anyone recall for sure if that requirement for prompt resale was part of the New Deal bank law that was overturned in the 1980s? I thought it was one of the rules the banks spent 40 years trying to get rid of and succeeded in removing during deregulation.