Shady lenders take note of mortgage relief injunction

A state court helped subprime borrowers and homeowners with onerous mortgages, including Alt-A and jumbo mortgages. The help probably did more than restructuring and individual loan modifications have done thus far. This may mean real relief, rather than what we have seen from many mortgage companies. Just putting the past due amount on the end of a loan is not much help at all.

Massachusetts’s highest court issued a landmark ruling in December 2008 tentatively declaring whole classes of subprime mortgages unfair under Massachusetts law.

“Originating loans with terms that in combination would lead predictably to . . . default and foreclosure (is) within established concepts of unfairness,” state Supreme Judicial Court justices unanimously ruled yesterday.

The decision upholds a lower-court injunction issued against subprime-lending giant Fremont Investment & Loan. Last month, the judge, Ralph Gants, issued a similar injunction against Option One Mortgage, which oversees another 8,000 questionable Massachusetts subprime loans.

Although Gants’ rulings are preliminary, and subject to change as cases work their way through courts, experts still see yesterday’s SJC move as precedent-setting.

Mortgage lenders are walking a fine line between not going to jail, not angering their investors, and not really modifying mortgages to any great degree. Loan modifications reflect this half-hearted effort, while banks line up for bailout money. It is theorized that those known to be subprime lenders, while opting for no bailout help, are actually saying that they do not want anyone to look at their books. Perhaps that is true, but the salient point is when lenders bring homeowners current by placing arrears on the end of the loan the borrower owes even more on a home that is decreasing in value. Perhaps this court ruling can set a nationwide precedent while giving real relief to those duped and conned by shady lenders.