Hope of Home Appreciation Isn’t Fraud, Court Finds

By Randy Sullivan

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The American Dream of home ownership, with its implicit promise of value appreciation, turned into a nightmare for many when the housing bubble burst in 2007.

That set off a wave of litigation as borrowers claimed representations by mortgage brokers and lenders amounted to fraud. The plaintiffs pointed to loan terms and statements that borrowers would be able to refinance home loans because home values would continue to appreciate.

Many of the loans that have been litigated arose in 2005 and 2006, and at this time now are largely barred by statutes of limitation based on the date escrow closed.  As a result, borrowers now plead delayed discovery allegations to circumvent the statute of limitations.  That is, they claim they are excused for not discovering an allegation sooner.  It is a tall order to extend the statute of limitations for claims focused on loan terms because the loans closed years ago.

The current trend has been to focus on another allegation commonly found in borrower complaints.  This claim is based on the related allegation that they recently learned the appraisal was incorrect and the borrowers were told home values would appreciate.

The recent case of Cancino v. Bank of America addresses the allegation that borrowers were told that their home would increase in value, so that they would be able to sell or refinance. Plaintiffs claimed that they did the refinance because it would allow for the monthly payments to be reduced and with the expectation they could also take advantage of any appreciation, so that they could sell or refinance the home at a future date at an appreciated value before having to pay the principal or higher monthly payments.

This is a common allegation found in almost any complaint by any borrower against the lender or mortgage broker. The court in Cancino upheld prior related rulings on issues concerning representations of future value by finding they are not actionable for fraud.  The court also found that the plaintiffs’ claim they did not discover that the appraisal was allegedly false and allegedly inflated due to artificial market conditions created by lenders in 2010, was not reasonable.  Any such claim should have been discovered far sooner, the court found, and thus the claim was time barred.

This area is sure to be one that will continue to be litigated in the mortgage broker and lender context – both as to the appraisals and borrowers claims of delayed discovery.  Moreover, holdings such as that in Cancino will be applicable in a number of other circumstances where there are claims against person (brokers, or agents) based on their representations of future value for transactions of businesses or real estate.

Finally, these rulings are important because they allow lenders a route to avoid discovery and reduce the costs of defense.

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Randy Sullivan, a partner at Patton & Sullivan, specializes in business and real estate litigation. For questions or comments he can be reached at randy@pattonsullivan.com.

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