David and Karen Shearon were like many other Staten Islanders stuck with bad loans, collapsing financially under the weight of a crushing mortgage less than a year after buying their first home.
But unlike thousands of others who have entered foreclosure as part of the fallout from the subprime lending crisis -- homeowners often embarrassed by their situation and unable to afford legal representation -- the Shearons fought back.
A judge recently ruled that the owners of this Westport Lane townhouse in New Springville home were victims of predatory lending.
They argued through their attorney that brokers aggressively marketed them a high-cost loan and then pressured them to go through with the closing when they could have qualified for a traditional fixed-rate mortgage.
In what is likely to be a precedent-setting decision in New York, state Supreme Court Justice Joseph J. Maltese agreed with the Shearons, recently telling the bank that it could not foreclose on the couple's New Springville townhouse and that it may have to pay them damages for their troubles and void the $355,000 mortgage on their Westport Lane home.
In his 11-page decision, Maltese rips the original lenders and brokers for making the high-cost loan to the Shearons without checking to see if the couple could repay the mortgage -- a violation of the 2002 predatory lending provisions of New York State banking law.
It's the first time in the state that a judge has invoked those predatory lending provisions against a lender, and it could signal a shifting tide in how foreclosures are handled, experts note.
James Tierney, director of the National Attorneys General program at Columbia Law School, said trial judges across the country are beginning to question banks seeking to foreclose on homeowners in similar situations.
"What I am seeing is a number of trial judges saying, 'Enough is enough, fraud is fraud.' They are kind of taking a stand," said Tierney.
In many ways, experts say, the Shearon case is a classic tale of predatory lending in the subprime market, where brokers aggressively marketed more lucrative high-cost loans to people, many of whom lacked the wherewithal to pay those loans when the market turned and home prices began to fall.
Tierney said figuring out liability in such cases is often difficult because subprime loans can be sold and resold two or three times. The original lender and brokers are usually long gone when the new lien holder makes the successful argument that it was not responsible for the original loan and should be permitted to foreclose.
Tierney said such arguments are getting harder for judges to accept when they see people losing their homes.
The Shearons' original lender, WMC Mortgage Corp., is no longer making loans and LaSalle Bank of Oregon, the bank that took over the loan, is seeking to foreclose.
According to court papers, a broker Liberty Capital Mortgage in Pennsylvania told the Shearons they would qualify for traditional loan products with fixed interest rates.
But despite their modest income and relatively good credit, the Shearons were improperly pushed into a high-interest subprime loan, their attorney argued. The couple ended up with two mortgages for $71,000 and $284,000. Payments on the latter adjustable rate mortgage has since jumped from $1,800 to $2,500. The first mortgage is set at 10 percent interest rate over the life of the loan.
Attorney Noah Pusey said his clients tried to back out of the deal before closing but were told they'd lose their $5,000 deposit. They'd also given up their apartment lease and were worried they'd have no place to go with their three children.
"David Shearon was a victim here and he was preyed upon by the bank and their representatives and the brokers," said Pusey, a lawyer with Cilmi & Associates.
Judge Maltese determined the original lender violated banking law by failing to check the Shearons' income and ability to pay the high-cost loan. He said the lender crossed the line again when it financed the home above the $335,000 sale price, using an additional $19,145 to pay the costs and fees associated with securing the high-cost loan. The Shearons' $5,000 deposit, meanwhile, was never deducted from the ultimate $355,000 in financing.
"This ultimately left Shearon with negative equity in the property," the judge wrote.
"The mortgage loans may be unenforceable and the homeowner may be entitled to reimbursement of all prior mortgage loan payments, the fees for obtaining the loans and attorney fees," Maltese added.
At a hearing Feb. 28, the judge is expected to decide whether the mortgage should be voided and damages granted to the Shearons.
"It's a victory for myself and my family, but how many other people are out there? We are not the only ones," said Karen Shearon, who saw a neighbor lose her home.
It's unclear if LaSalle Bank will appeal Maltese's decision. Steven J. Baum Associates, a law firm and debt collector representing the bank, declined to comment.
Margaret Becker, director of the Homeowner Defense Project at Staten Island Legal Services in St. George who represents Islanders in cases of alleged predatory lending, said many others don't have attorneys and don't challenge foreclosures.
"It's good to hear a success story," she said of Maltese's decision. "It is very encouraging that judges are clearly taking the issue of predatory lending in the subprime market seriously and are willing to enforce laws to protect people from these kinds of pernicious practices."
--- Contributed by Karen O'Shea
