Livinglies's Weblog

By GRETCHEN MORGENSON

The facts surrounding the Jordans’ case are depressingly familiar. In 2004, interested in refinancing their adjustable-rate mortgage as a fixed-rate loan, they said they were promised by NovaStar that they would receive one. In actuality, their lawsuit says, they received a $124,000 loan with an initial interest rate of 10.45 percent that could rise as high as 17.45 percent over the life of the loan.

Mrs. Jordan, 66, said that she and her husband, who is disabled, provided NovaStar with full documentation of their pension, annuity and “More articles about Social Security.” statements showing that their net monthly income was $2,697. That meant that the initial mortgage payment on the new loan — $1,215 — amounted to 45 percent of the Jordans’ monthly net income.

The Jordans were charged $5,934 when they took on the mortgage, almost 5 percent of the loan amount. The loan proceeds paid off the previous mortgage, $11,000 in debts and provided them with $9,616 in cash.

Neither of the Jordans knew the loan was adjustable until two years after the closing, according to the lawsuit. That was when they began getting notices of an interest-rate increase from Nova- Star. The monthly payment is now $1,385.

“I got duped,” Mrs. Jordan said. “They knew how much money we got each month. Next thing I know I couldn’t buy anything to eat and I couldn’t pay my other bills.”

All the defendants in the case have asked the judge to dismiss it. The Jordans are awaiting his ruling. Perhaps the most famous case that linked a brokerage firm with a predatory lender was the one involving First Alliance, an aggressive lender that declared bankruptcy in 2000, and “More articles about Lehman Brothers.” Lehman Brothers its main financier.

More than 7,500 borrowers had successfully sued First Alliance for fraud, and in 2003 a jury found that Lehman, which had lent First Alliance roughly $500 million over the years to finance its lending, “substantially assisted” it in its fraudulent activities. Lehman was ordered to pay $5.1 million, or 10 percent of damages in the case, for its role.

Another case, from 2004, took up the issue of liability for abusive lending that went beyond a loan’s originator. That case, which involved “More information about Wells Fargo & Co” Wells Fargo and a borrower named Michael L. Short, was settled after the court denied two motions to dismiss it.

That matter turned on the language in the securitization’s pooling and servicing agreement, which provides details not only on the types of loans in a pool but also on the relationships of various parties involved in it.

Diane Thompson, a lawyer with the National Consumer Law Center, said that the meaning of the agreement was that “the trustee was a joint venture with the originator and was therefore responsible for everything that happened in that joint venture.”

Many such agreements, she said, create a joint venture by force of law. “Everybody I know that has tried this argument has had pretty good success. Absolutely we are going to see more of these cases.”

And let us not forget that late in the mortgage mania, Wall Street was no longer content simply to package these loans and sell them to investors. Eager for the profits generated by originating these loans, big firms bought subprime lenders to keep their securitization machinery humming. This could expose the firms to liability.

“I think something that hasn’t been explored much is the extent to which the financial services industry has exposure to litigation risk in securitizations,” Professor Engel said. “As the industry got faster and looser, Wall Street just stopped paying attention. And when you stop paying attention, you get in trouble.”