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Editorial: Litigation Alert

In the aftermath of "predatory servicing," MI cancellation and other waves of litigation that targeted deep-pocketed loan servicers, it's small wonder that some class-action attorneys are studying the books on pay-option ARMs and other exotic loans. And according to a recent report in our sister publication, National Mortgage News, class-action lawyers are "ready to pounce" on payment-option lenders once rate resets and delinquencies start to take a toll on borrowers in the second quarter of next year.

When we say pounce on lenders, we'll be talking about the company servicing the loans at that stage of the game. One attorney says the potential cascade of lawsuits "is going to be an absolute nightmare for the industry."

We hope he's wrong. But if past is prologue, there's a good chance he'll be right.

He's not the only one who has been warning about the potential pitfalls of payment-option, interest-only and other increasingly popular loan products that stretch the buying power of homeowners. In fact, federal banking regulators recently came out with commentary warning about potentially loose underwriting on these loans and advising lenders not to pile too much risk onto borrowers. If the proverbial day of reckoning comes, not everyone is going to blame consumers for being too ambitious in their debt outlook. Some are going to blame lenders for being cavalier about risk management and consumer protection.

The math looks bad for some homeowners, especially those who have been choosing the minimum monthly payment option. Some could face mortgage payments triple their current monthly bill when rates reset.

Class-action attorneys are expected to argue that loan originators did not properly warn homebuyers about the risks associated with negative amortization and the potential payment shock involved, NMN reported. They may also turn to the recent underwriting guidance issued by federal banking regulators to back up their allegations that borrowers were given loans that were not suitable for them.

If your company originated or bought the loan, the company will be in the sights of litigators pursuing these claims. And even if you only service the loan, nobody wants to try to service and collect on loans that are tied up in litigation. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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