Housing prices do not always go up, interest rates do not always stay down, borrowers cannot always refinance, and physical shelter can be lost for not making mortgage payments. Were our cars as dangerous as the new mortgage products on the market, we might all be injured or dead. Still, lenders claim that innovative lending products enhance consumer access to credit. They believe increased access to credit democratizes the housing market. And they insist - against a growing body of evidence - that option adjustable rate mortgages, though untested, are safe financial products.
But reality is setting in. Option ARMs can be dangerous to consumers, if not ruinous, in the perfect financial storm. When an option ARM product adjusts upward, what was once affordable can become unmanageably expensive. Imagine charging $331,200 - the median mortgage owed by buyers in default in California in April of 2007 - on an adjustable rate credit card charging 11% APR and rising. Now add your current credit card debt to that amount, and the ordinary expenses of living. For many consumers, the result is bankruptcy or rescission. Indeed, lawsuits are in the works as thousands upon thousands of consumers realize that the loan that lured them with promises of low monthly payments has left them even more mired in mortgage debt than before.
This article analyzes and places into market context three recent consumer class action lawsuits that were brought under Section 1635 of the federal Truth in Lending Act (TILA). TILA allows for class action lawsuits for damages under Section 1640, but TILA is silent on whether classwide rescission claims are permissible under Section 1635. On the legal side, whether a class seeking rescission can be certified will depend on how courts interpret Section 1635. On the economic side, it will depend on how access to credit issues are framed.