Dealing with the Mortgage Mess Judge Tchaikovsky Does Her Job and Judges
Thursday, May 29, 2008
This is a big deal, and will no doubt strike real fear in the hearts of stated-income lenders everywhere. Judge Leslie Tchaikovsky ruled that a National City HELOC that had been "foreclosed out" would be discharged in the debtors' Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied....The court agreed that the debtors had in fact lied... but it held that the bank did not "reasonably rely" on the misrepresentations....
The whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan--knowing perfectly well that it is doing so--while shifting responsibility onto the borrower, who is the one "stating" the income and--in theory, at least--therefore liable for the misrepresentation. This is precisely where Judge Tchaikovsky has stepped in and said "no dice." This is not one of those cases where the broker or lender seems to have done the lying without the borrower's knowledge; these are not sympathetic victims of predatory lending. In fact, the very egregiousness of the borrowers' misrepresentations and chronic debt-binging behavior is what seems to have sent the Judge over the edge here, leading her to ask the profoundly important question of how a bank like National City could have "reasonably relied" on these borrowers' unverified statements of income to make this loan....
The published guidelines by which the loans were made and evaluated... made it "fast and easy" for fraud to occur. Judge Tchaikovsky directly addresses the issue of the bank's reliance on "guidelines" that should, in essence, never have been relied upon in the first place.... In re Hill (City National Bank v. Hill), United States Bankruptcy Court, Northern District of California, Case No. A.P. 07-4106 (May 28, 2008)....
If you make a "liar loan," the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that's your lookout, not the borrower's. This is going to give a lot of stated income lenders--and investors in "stated income" securities--a really bad rotten no good day. As it should. They have managed to give the rest of us a really bad rotten no good couple of years, with no end in sight...
Top
