Subprime Showdown in 9th Circuit Hearing

     SAN FRANCISCO (CN) – After the subprime mortgage meltdown, developers misrepresented the risk of buying new properties that had lost value, homeowners argued in the 9th Circuit.

     Sylvester Maya is the lead plaintiff of a class action consolidated with seven others against Centex Corp. and related entities. The group appealed to the 9th Circuit after U.S. District Judge Virginia Phillips dismissed their case for lack of standing under the Class Action Fairness Act, finding that the homeowners could not trace their alleged injures to Centex.
     Attorney for the homeowners Andrea Bierstein told a three-judge panel Monday that her clients were “qualified buyers who did not know the truth” that developers had sold homes in new developments to people with poor credit in the subprime market, creating a “sketchy” and “marginal” neighborhood full of lenders with a high risk of losing their homes through foreclosure.
     But the developers say that the homeowners have failed since Day 1, the day they bought their homes, to show any injury. Their attorney, Nathaniel Garrett, pointed out Monday that, according to the suit itself, housing prices actually went up in the few months after at least some of the plaintiffs bought their homes.
     If a person sold his home six months after buying it, in what the plaintiffs referred to as a “hot market,” for a profit of $100,000, that person would not have standing to sue, Garrett said. But the injuries started to happen later, not on Day 1, when the “foreclosures and short sales started to happen,” he said.
     Bierstein disagreed. If the homeowners had known on Day 1 that lots were being marketed to people who were not qualified to own them and could never afford their mortgage payments, they would have had the right to rescind the contracts, she argued.
     The developers’ actions also led the homeowners to overpay for the property, Bierstein continued. Though the developers say it requires a complicated analysis to prove overpayment, Bierstein says it is a “question of historical data on what the risk premium was between stable and unstable neighborhoods.”
     It would be “unprecedented” for the court to “hold that a defrauded purchaser lacks standing to sue its own seller,” Bierstein said.
     If someone bought a house on an undisclosed earthquake fault, that person would have standing to sue, the attorney argued. The injuries suffered by the buyer are independent of the occurrence of an earthquake, she said.
     The homeowners’ case revolves around the injuries they suffered because of “misrepresentations and omissions,” Bierstein claimed, not the “unprecedented decline of the housing market or growth of mortgage-backed securities or the subprime lending market.”
     While developers advertised properties in traditional, “stable” neighborhoods, they concealed that they were selling houses to almost “anybody who wanted to buy one,” Bierstein said. The defendants’ omission of the fact that they were selling to high-risk buyers is an “undisclosed material fact” that is “fundamental to the case,” she added.
     Circuit Judge Sidney Runyan Thomas asked how the developers could know that many of the buyers were not qualified for their loans without invading their privacy. Bierstein responded that the developers knew the credit and income situations of the buyers because they were building a development from scratch and had a “captive mortgage company” that was extending 90 percent of the loans in the developments.
     If the developers simply remove identifying information during discovery, the court can examine the records without invading anyone’s privacy, Bierstein suggested.
     Sellers are required to disclose material facts to prospective buyers when such facts will affect the value of a home, she added. Failure to do so causes immediate injury.
     Judge Thomas countered that “the representation of stability might have been accurate at the time.” Subprime buyers have long received credit in California, without problem as long as the market continued to rise, he said.
     Bierstein disagreed, arguing that the unqualified borrowers in the defendants’ developments were going to default on their loans even if “the rest of the economy was rosy because they could not afford their homes,” which the defendants knew and the plaintiffs did not.
     The developers’ attorney said the homeowners failed to show causation because “not everybody who took a loan from the 8 biggest lenders in the country had their houses foreclosed.” Garrett also claimed it is not possible to disentangle all the causes of the subprime housing market to determine damages owed to each plaintiff.
     It would be impossible to assign blame if a person living in a risky neighborhood loses his job and can still afford to make mortgage payments, but chooses to let his or her home go into foreclosure because he is paying more for it than it is worth, Garrett said.
     A person cannot simply allege that they relied on a misrepresentation and that is why they bought a home as a way of proving standing, he concluded. Instead the person has to show that the “content of the misrepresentation is why [the] value [of the home] went down,” Garrett said.

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