Lenders Likely to Face Class Action Lawsuits Over Foreclosures

By | October 13, 2010

U.S. lenders already facing intense scrutiny from lawmakers and regulators over questionable foreclosure practices will likely face class-action lawsuits on behalf of thousands of homeowners nationwide.

Bruce Simon, a class-action attorney with Pearson Simon Warshaw & Penny LLP in San Francisco, said a filing from his firm is imminent, while two other prominent firms said they were also exploring filing class-actions.

So far, most of the courtroom activity over reports of shoddy documents used by lenders in foreclosure proceedings has come in the form of defenses mounted by individual homeowners, or limited class actions filed in state courts.

However, a lawsuit on behalf of homeowners nationwide could seek a court order that would suspend foreclosures much more broadly, class-action lawyers said.

“We are all hands on deck at the moment,” said Simon of Pearson Simon Warshaw & Penny.

Another firm, Lieff Cabraser Heimann & Bernstein LLP, in San Francisco, is set to decide “within the next two weeks” whether to file a lawsuit, according to Eric Fastiff, a partner there. He said the firm, which is on the steering committee for BP Plc oil spill litigation and also plays a leading role in lawsuits against Toyota Motor Corp over acceleration problems, currently has five attorneys and two paralegals assigned to the foreclosure issue.

“The absence of government enforcement demands, as always, the need for private enforcement of the laws,” Fastiff said.

The scrutiny over foreclosures comes amid allegations that some lenders used faulty paperwork to evict struggling homeowners. Bank of America Corp , the largest U.S. mortgage servicer, has temporarily halted evictions nationwide, while JPMorgan Chase & Co. and Ally Financial Inc.’s GMAC unit have confined suspensions to 23 states.

If a class includes all borrowers who have been foreclosed upon, plaintiffs could recover billions of dollars in damages, said Andrei Rado, a partner at class-action firm Milberg LLP in New York, which is also looking into bringing a case.

JPMorgan recently halted 56,000 foreclosure proceedings in 23 states. Banks are expected to take over a record 1.2 million homes this year, up from about 1 million last year and 100,000 in 2005, real estate data company RealtyTrac Inc said last month.

But fashioning a national class action over foreclosures is tricky, plaintiffs’ lawyers said. They cited differences in housing law across the country, the variety of lenders involved and the array of individual borrower circumstances.

Attorneys are busy trying to come up with claims that are broad and common enough to stand up as a class action.

“I think it’s doable, but it won’t be easy,” said Rado.

Even if a judge were to deny requests for an injunction to suspend foreclosures, in general, attorneys could still seek monetary awards. Plaintiff attorneys are usually paid a portion of the damages they recover.

A judge would still have to figure out how to define damages for a borrower who defaulted on their payments, but whose lender did not follow proper legal rules, Rado said. Those scenarios could include attorneys fees and other costs.

On Tuesday, the White House rejected calls for a broad moratorium on foreclosures, saying it feared such a step could hinder a housing recovery.

Several attorneys general have announced investigations into lenders’ practices, but it is unclear whether any single regulator has the power to impose a nationwide shutdown of foreclosures.

(Reporting by Dan Levine; Editing by Leslie Adler)

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