Class Sues Banks Over Option ARM Mortgages

ST. LOUIS (CN) - World Savings Bank, Golden West Financial and Wachovia misled customers about terms of "Pick-A-Payment" - or Option ARM - loans, homebuyers say in a federal class action.

Named plaintiffs Michael and Mary Harber say the misrepresentations center around three types of Option ARM loans.

The Harbers claim that up to 80% of Option ARM borrowers pay only the minimum each month because the defendants do not properly inform them of the consequences.

The minimum payment does not pay down any principal and pays only a portion of the monthly accrued interest, the plaintiffs say. The unpaid interest is added to the balance of the mortgage in a process called "negative amortization."

Once the balance reaches a certain amount, usually 125 percent of the original loan principal, the loan is automatically recast as a fully amortizing loan with a monthly payment substantially higher than the one the borrower was previously making, the suit states.

The plaintiffs claim the mortgages contain hefty pre-payment penalties that trap borrowers into unfavorable loans for three years without possibility of refinancing.

The Harbers say lenders play up the low minimum payments and do not talk about the negative amortization, and that brokers are told to avoid discussing the negative amortization.

The Harbers say the defendants pushed the ARM mortgages because they are profitable on paper. Under generally accepted accounting principles, the entire interest payment due could be booked as income when only the minimum payment is made, which allowed the defendants to use Option ARM loans as a way to generate phantom profits that boosted their stock price, the suit states.

The class includes all Missourians who bought a "Pick-a-Payment" loan from the defendants. The class seeks damages, declaratory judgment and rescission of the loans. It is represented by Evan Buxner.

Follow @@joeharris_stl

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit