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The Law: Can a home be foreclosed if the owner didn't qualify for a home loan in the first place

The issue: Can a home be foreclosed if the owner didn’t qualify for a home loan in the first place?

It sounded too good to be true—a mortgage with a low, low “teaser” interest rate.

And as more than 14,000 Massachusetts borrowers learned, the sales pitchwasn’t true. Many of the homeowners couldn’t afford the mortgages they were offered; the adjustable rates soared after two or three years; and the risk of foreclosure skyrocketed.

But there is some good news. In December, these refinancing loans—part of the nation’s massive banking crisis—were found by the state’s Supreme Court to have packed such a combination of unfair and deceptive terms and practices that the homeowners would be protected from foreclosure.

Fremont Investment & Loan, whose home offices are in Anaheim, Calif., originated the 14,578 mortgages between January 2004 and April 2007. In some cases, borrowers were not required to provide documents proving their ability to pay off the loans. And exploding interest rates consumed more than half of some borrowers’ take-home pay. Fremont even imposed a penalty for any borrowers who refinanced their mortgage before the adjustable rates began their upward spiral.

After the state attorney general won a series of lower-court decisions, Massachusetts’ high court called Fremont’s actions unfair and illegal. The courts also castigated Fremont for its lending practices and standards and ruled that the company had to prove that a loan was fair in the first place before it could move ahead with foreclosure.

“These abusive mortgages have become a critical issue for our members,” said Jean Constantine-Davis, senior counsel for AARP Foundation Litigation, which with other consumer groups filed a friend of the court brief. “And the well-reasoned and courageous actions by the Massachusetts attorney general and its courts will be an important model in the coming months if we are to salvage the homes of tens of thousands of Americans.”

Representatives for Fremont would not comment on the case, although Fremont argued the ruling “may jeopardize the flow of credit to Massachusetts.”

What it means to you: If you’re having trouble repaying an adjustable-rate mortgage, contact the attorney general’s office in your state. Some states already have lawsuits pending against subprime lenders.

Emily Sachar is a journalist and author based in Brooklyn, N.Y.


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