Mortgage expert witness: Types of mortgage litigation

There are many types of litigation involving loans secured by real property; they often fall into one of six general themes:

1) The sub-prime (or other institutional type loan) borrower lawsuit: Here, the owner(s) of a dwelling, (usually their residence) obtained a refinance loan or loans, (or loan to purchase a property) and later determined they didn’t understand, couldn’t afford, or were otherwise unhappy with the loan terms or some part of the process.

Cases often involve loans taken out in 2007 or before, when “sub-prime” loans with easier qualification standards were widely available, often in much larger loan amounts due in part to the higher property values of that era.

Typical allegations in these cases are that the originator of the loan (who may have been a loan broker / arranger, or the actual lender who loaned the funds) misrepresented the terms of the loan to the borrower, failed to properly qualify the borrower for the loan, breached a fiduciary duty, engaged in and unfair practice or predatory lending, or in some other way behaved so as to cause or contribute to the borrower’s loss.

While “Institutional loans” made by banks, mortgage banking companies, or credit unions are referred to, this category of loan problems also impacts private money or non-institutional lenders, who are sometimes referred to as hard money lenders. (For the purpose of this article the term “private money,” or “private money lender” will be used for hard money or other types of non-institutional loans or lenders.)

2) The commercial loan gone bad: In this case, again often involving loans originated in 2007 or before, (and with a surprising percentage originated in either 2006 or 2007) a commercial property owner or developer has obtained a loan, or often a series of loans from a commercial institution or private money lender.

Problems in these transactions often revolve around the manner in which the loans were originally set up or documented, claims that rates and terms were usurious, issues related to subsequent loans from the same provider, default penalties and default interest rates, advances or modifications, various lending and borrower entities, documentation, lien priority and matters related to title insurance coverage.

3) Private investor’s loss of capital: Here, the lender, rather than the borrower, has a complaint. In these cases, private investors who have invested funds in private money loans are suing the providers/organizers of the loan investment(s), (who may be loan brokers, “pool or fund” managers, or others who accept funds from investors) the borrowers, or other parties to the transaction. Issues revolve around the manner in which the funds were raised, duties of the provider to analyze and underwrite the loan, disclosure of risk, possible “self-dealing” and undisclosed conflicts of interest, violations of securities laws and failure to properly manage (service) the various aspects of the loan after origination.

4) Loan servicing, default and modification issues: Cases involve what occurred after a loan was originated, including issues about application of payments; the processing, denial, or granting of loan modifications; and foreclosure.

5) Issues relating to licensing requirements and practices, or usury: Not as common as some of the other cases, these often center on the licensing of the originating organization or individuals, and their ability to have legally made or arranged the financing at issue. A related topic is usury, where a dispute exists over whether or not a loan was usurious, or if an exemption from usury applied.

6) Loan fraud issues: Advanced technology and a down economy have contributed to increases in both the quantity and complexity of direct real estate and lending related fraud. Forged documents, false reports, “straw” buyers or borrowers, fraudulent entities, falsified income, credit and appraisal documentation, and “short sale” fraud or fraud related to lender-foreclosed property comprise just a partial list. Having been defrauded and often unable to find or collect from the original perpetrator(s), parties often sue those that can be found and have assets or insurance coverage. These may include loan origination entities or officers, escrow holders or title insurers, appraisers, and loan or real estate brokerage firms.

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