The housing market went boom. Then it went bust. Now it goes to the courts.

Now, before everyone jumps on the anti-litigation bandwagon, keep in mind that while I’m not a proponent of abusing the legal system for personal gain - at times when facts about your mortgage and financial obligations have been grossly misrepresented leaving you to hold the entire burden, there are few other options.

CNN Money reports thatindividual homeowners are starting to sue their mortgage brokers, lenders, and anyone else they can pin the tail to.

Earlier this year, a Wisconsin couple won a judgment against Chevy Chase Bank that said the bank deceived them over the terms of their mortgage.

The judge ordered Chevy Chase to rescind the loan and certified the lawsuit as class-action, which could potentially release thousands of other borrowers who felt misled.

According to their attorney, Bryan and Susan Andrews believed they were getting a loan with a fixed 1.95 percent annual interest rate for the first five years. What they got was an option adjustable-rate mortgage (ARM); the 1.95 percent rate only applied for the first month and rose every month afterwards.

“The second month, the interest rate was about 5 percent,” said their attorney Kevin Demet. “After a year it was about 7 percent and now it’s in the 8s.”

The bank said it clearly spelled out the loan terms, but the judge found that Chevy Chase violated the Truth in Lending Act (TILA), which mandates that mortgage documents must be clear and understandable. Chevy Chase is appealing the judgment, and did not respond for comment for this article.

“Boom, bust and recrimination. We’re moving into the recrimination phase.”

So who’s fault is it? Aren’t the borrowers to blame? The answers are “Everyone” and “In some cases”. With stated income loans, the fraud aspect definitely seems to be two-fold. You had brokers not quite explaining the process and risks, but you also had borrowers helping to misrepresent or at least “gently fudge” the numbers.

“Most claims will be against mortgage brokers for putting them into loans where they shouldn’t have been,” said Dan Mulligan, a California-based real estate attorney.

One reason that borrowers often did not understand the terms of their mortgages according to Jo Carillo, a property law professor with the University of California, Hastings College of Law, was the novelty of many of these loans.

“Many originators had no experience explaining them,” she said. “It appears to be hard to explain the true costs.”

According to Carillo, some bad advice from mortgage originators may have been made in good faith. Caught up in red-hot housing markets, overly exuberant brokers and loan officers told clients not to worry about concerns like their ARMs resetting; they could always refinance and, anyway, interest rates were bound to fall.

Even savvy borrowers, said Lampe, “assumed that rising prices would enable them to refinance.”

With credit much tighter today, the refinance option is off the table for many. And, as prices have fallen in many places, it’s more difficult to sell a home for the amount owed.

“They can’t refinance it, they can’t sell it, and they can’t afford it,” said Paul Hancock, a Florida attorney specializing in mortgage brokering and real estate law.

Aside from bad advice, out-and-out lying also seems to have added to the mess. Borrowers often exaggerated income in order to qualify for larger loans. According to Michael Seng, a professor with the John Marshall School of Law Fair Housing Legal Support Center, mortgage brokers were behind much of this.

“We’re running into stated-income loans where brokers got borrowers to sign blank forms that the brokers filled in; they often did not accurately reflect the borrowers’ incomes,” he said.

Richard Hagar, a veteran real estate appraiser and expert witness, also blames appraisers. According to him, many of them puffed up home values to make deals work. “We saw some really Mickey-Mouse things,” he said, “A $200,000 house would come in at $300,000. When appraisers puff up values, they can be sued; I heartily recommend it.”

One thing to keep in mind about appraisals is that every appraiser will appraise differently. Having worked with subcontracting appraisals before, it was not uncommon for certain lenders to use their in house crew who would all but guarantee whatever price was set.

When you’re picking inflated values out of a bag with your eyes closed, it’s hard to take seriously the home values we saw in the past couple years.

Tags: housing bubble, foreclosure, suing, court, case, homeowner, real estate, class, action, lawsuit, interest rate, chase bank, stated income