Abusive Lenders And The Brokerages That Finance Their Deals
It’s a familiar story: Homeowners across the country face foreclosure on their home because of abuse and reckless lending practices. The surge in foreclosures is in part linked to the predatory lending practices of mortgage lenders. On the sidelines, however is a silent partner in the problem: Wall Street financial institutions that helped finance the mortgage loans and concocted the securitization arrangements that pooled the loans together and then sold them to investors.
So far the latter group has remained under the radar when it comes to legal responsibility for the mortgage loan crisis. That may be changing, however, predict legal experts, citing several high-profiles cases in which plaintiffs contend the investment firms involved in the securitization process of toxic mortgage loans worked so closely with the lenders that they, too, should face liability as members of a joint venture.
Gretchen Morgenson writes about this issue in the July 11 edition of the New York Times. She points to a lawsuit in Atlanta where homeowners Patricia and Ricardo Jordan are suing over a home foreclosure they say was the result of an abusive and predatory loan made by NovaStar Mortgage. Also named as a defendant in the case is JP Morgan Chase, the initial trustee of the securitization containing the Jordans’ loan.
The lawyer for the Jordans contends JP Morgan should be held liable because it was involved in the securitization of their loan and profited from it.
Another case involving a brokerage firm/predatory lender partnership is First Alliance and Lehman Brothers Holdings. As its main source of financing, Lehman had provided First Alliance, which declared bankruptcy in 2000 over fraud charges, some $500 million over the years. More than 7,500 borrowers successfully sued First Alliance for fraud, according to the New York Times article. In 2003, a jury also found Lehman liable for its role in assisting First Alliance, and ordered Lehman to pay $5.1 million.
“As we are unpeeling what was happening on Wall Street, we may see that Wall Street didn’t find the safety from litigation risk that it hoped to find in securitization,” said Kathleen Engel, a professor at Cleveland-Marshall College of Law at Cleveland State University, in the July 11 New York Times article. “I think there is potential for liability if borrowers can engage in discovery to see exactly how much the sponsors were shaping the practices of the lenders.”
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
