Dow Jones Newswire: Mortgage Lenders Escape Class Action On Foreclosure Charges

Some of the nation's largest mortgage lenders have skated clear of a class action lawsuit accusing them of overcharging consumers in foreclosure actions, thanks to a federal judge's decision in Delaware.

Judge Joseph Farnan Jr. blocked a lawsuit by homeowners against Fannie Mae (FNM), Freddie Mac (FRE), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Countrywide Financial Corp., HSBC, GMAC Residential Funding Corp. and JPMorgan Chase & Co. (JPM). The suit accused the lenders of jacking up legal fees and other costs assessed against troubled consumers facing foreclosure.

Farnan's ruling, issued Tuesday, said the lawsuit could move forward, but left only two defendants potentially on the hook.

One is Washington Mutual Bank, the failed thrift seized by regulators last week. The other is a small electronic registry company, which could file for bankruptcy protection if it loses the case, lawyers who filed the lawsuit last year in the U.S. District Court in Wilmington, Del., have argued in the case.

Named as a defendant along with the failed thrift is Mortgage Electronic Registration Systems Inc., or MERS, a 40-person company owned by big mortgage lenders. Plaintiffs say MERS is just a front for the lenders, and might simply file bankruptcy if it loses the class action lawsuit and is hit with heavy damages.

With annual revenues of about $11 million, MERS is the mortgage holder of record for hundreds of billions of dollars worth of home loans.

The class action lawsuit seeks millions in damages - the difference between what foreclosing lenders have contracted to charge to cover their legal costs and what they actually charged thousands of homeowners.

Allegations in the case say mortgage lenders, which often initiate foreclosure actions in the name of MERS, have flat-fee arrangements that allow charges of $400 to $500 per case for foreclosure attorneys. However, homeowners are allegedly being hit with legal costs of two or three times that amount, the lawsuit says.

Jose and Lorry Trevino, the homeowners who launched the lawsuit last year, tried unsuccessfully to bore through MERS to get at the deep pockets behind the registry company. Washington Mutual remains in the lawsuit because it was involved with the Trevino's mortgage directly.

Jeffrey Norton, attorney for the homeowners, said Farnan's ruling does not end the chances of collecting damages in the case, because MERS can turn to its owners if it loses and has to repay millions in foreclosure-related fees. The financial institutions that Farnan let out of the lawsuit because they simply own MERS, are obligated to indemnify it for damage claims, Norton said in an interview Thursday. The attorney, who is with Harwood Feffer in New York, said the lawsuit also seeks an injunction aimed at ending alleged bad practices in an industry seeking to profit from homeowner woes.

"I would have liked to have had everyone there at the table. It would have been an easier resolution. We could have wrapped up the issue in one case, instead of, perhaps, bank-by-bank," Norton said.

The suing homeowners claim the mortgage companies, operating through MERS, violate mortgage contracts by charging homeowners more than it actually costs to pursue foreclosure actions against them.

Mortgage contracts allow lenders to assess homeowners for the costs of collection. The lawsuit says charging more than the actual costs is a breach of those contracts.

Foreclosure is a huge business," Norton said. "There's really very little oversight or internal controls on the costs, and there is no incentive to fix the problem of overcharging, because it's a revenue source."

The lawyer for the suing homeowners said the next major pre-trial battle in the case will be the effort to get a class action certified. MERS and Washington Mutual are likely to argue that there are too many differences among individual cases to allow the lawsuit to move forward as a class action.

"It really takes a class-wide remedy to cure this," Norton said. "A lot of these people were overcharged anywhere from $500 to $2,000. Who's going to go to court against a big financial institution for $500?"

Citi, Countrywide, and other big mortgage industry investors set MERS up in 1996 in order to facilitate the secondary mortgage market, the frothy trading arena where home loans are bought and sold, bundled and securitized.

The Trevinos said MERS was too financially flimsy to shield the entire mortgage industry from liability for its alleged wrongs. Farnan disagreed, siding with mortgage lenders who said that the complaint contained no evidence they were using MERS to "defeat the ends of justice, to perpetuate fraud, to accomplish a crime or otherwise evade the law."