Legal Advocacy
Massachusetts Supreme Court Orders a Halt to Many Mortgage Foreclosures across the State
AARP attorneys supported the Massachusetts Attorney General seeking to uphold an injunction that, invoking state unfair business practice law, halted thousands of foreclosures across the state.
In a strongly-worded and unanimous ruling, the state’s highest court agreed. The ruling prevents this specific lender from foreclosing on mortgage loans without court approval when the loans meet specific criteria dealing with fluctuating interest rates, debt-to-income ratio, and mortgage-to-equity ratio.
Because the Massachusetts Supreme Court detailed why the terms of the loans made it impossible for the lender not to know that the loans would result in default and foreclosure, the ruling will resonate beyond the state and will assist those borrowers challenging home mortgages with similar terms in other states.
The dispute
At the request of the Massachusetts Attorney General’s office, a trial court issued an injunction prohibiting a major subprime mortgage lender from foreclosing on thousands of loans. The Commonwealth of Massachusetts had asked for this injunction, arguing that the state’s consumer protection laws prohibit selling loan products that the seller knows are designed to fail – and that loans such as those at issue, as well as “no documentation” loans (where lenders make mortgages with little or no consideration of the borrower’s income or assets) and other products offered by this lender were destined to fail.
The court order prohibited Fremont General and Fremont Investment and Loan (“Fremont”) from initiating or advancing foreclosure proceedings on mortgages that the court deemed “presumptively unfair” – specifically, loans characterized by full-financing (leaving no equity in the home) and containing a “teaser” rate that escalates in the space of less than three years to a monthly payment that consumes more than half of a borrower’s take-home pay. If a loan meets all of these criteria, the court ruled, Fremont must go to court to prove that the loan is fair before it can move ahead with foreclosure. In other words, the burden is Fremont’s to show that these onerous terms are fair for that specific borrower.
Fremont appealed the injunction and in return, received an even more stinging ruling from the higher court.
The Supreme Court’s ruling
The Massachusetts Supreme Court’s unanimous opinion detailed the factors that made it impossible for Fremont not to know the loans would fail. The court cited regulatory warnings to Fremont, regulatory warnings to the banking industry generally, and well-known and well-documented market conditions that were evident when the loans were made.
The loans Fremont can not foreclose upon carry the following four characteristics:
- They are adjustable rate mortgages with an introductory period of three years or less,
- They carry a “teaser” rate at least 3% below the fully indexed rate,
- Once fully indexed, they leave the borrower with a debt-to-income rate of more than 50%, and
- They leave the home with no equity at the time the loans are made.
The court upheld the determination of the lower court that “when Fremont chose to combine in a subprime loan the four characteristics the judge identified, Fremont knew or should have known that they would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow unless residential real estate values continued to rise indefinitely – an assumption that, in the judge’s view, logic and experience had already shown as of January, 2004, to be unreasonable.”
In issuing the injunction, both the trial court and the Supreme Court took pains to note that while the foreclosures are halted, borrowers are still subject to their monthly mortgage obligations.
AARP’s brief
AARP Foundation Litigation attorneys filed AARP’s brief in Commonwealth of Massachusetts v. Fremont Investment & Loan et al. The brief by AARP and four other advocacy groups detailed enticements made by subprime lenders to get borrowers to sign up for high-interest, high-fee, and often unsupportable loans – even targeting borrowers who actually qualified for conventional loans.
The brief particularly focused on the phenomenon of the “exploding ARM,” the situation faced by borrowers who sign up for deceptively low initial interest rates or monthly payments and then find themselves within a few years faced with skyrocketing rates and payments that their income simply can not support. The situation is exacerbated by massive prepayment fees and penalties that prevent them from refinancing to more affordable rates or terms -- in the brief’s words, borrowers “not only are unfairly trapped in unsustainable loans, but they are also unfairly paying more for being put in a trap.” The brief also outlined the enormous profits made by subprime lending companies from these fees and high interest rates.
AARP’s brief discussed the various studies that have demonstrated the devastating societal costs of foreclosures when a mortgage borrower fails to keep up with escalating payments. Roughly one in five subprime borrowers will lose his/her home to foreclosure – more than 2.2 million families across the country. This represents a devastating loss of both home and investment to a family, but the effects of foreclosure go beyond that family. Surrounding homeowners are affected; one study estimates that homes lose almost one percent of value for each foreclosure within 1/8 of a mile. Cities and towns lose scarce revenue as their property tax base erodes.
AARP argued that the injunction imposed by the trial court—and now affirmed by the state’s Supreme Court -- will not only help slow this downward spiral, but will also discourage subprime lenders from making any more new, risky loans. As the brief argued, “Although lenders should have always known such unfair terms violated Chapter 93A, they will now have no doubt that the combination of terms identified by the Superior Court is illegal.”
The current nationwide financial crisis is founded in large part on the faltering home mortgage market. Predatory lending practices that induce borrowers into taking on loans that are destined to fail – and then trap them into the failing loan by making it impossible to refinance -- not only play a part in this home mortgage crisis, they also violate basic consumer protection law.
This ruling not only affects borrowers across Massachusetts, it provides tremendous guidance for borrowers challenging loans on unfair business practices grounds in other states.
Contact persons
Jean Constantine-Davis
jcdavis@aarp.org
Nina Simon
nsimon@aarp.org
(202) 434-2060
December 17, 2008