The coming litigation explosion?

Watching the stock market bounce around lately has made me wonder about the country's over-reliance on speculative real estate loans. The subprime lending industry has been rotten to the core for a long time, preying on the elderly and minorities with abusive and usurious loans that often resulted in poor people losing their homes and ending up in pretty dire financial straits. But in the 1990s, there were lots of lawsuits that helped bring many of the abuses to light, particularly those against the Associates and then-Citimortgage, and there were a few reforms.

Unfortunately, I suspect that one of the "reforms" was for mortgage companies to simply put more mandatory arbitration clauses in their contracts so that aggrieved customers wouldn't be able to get a court hearing if they decided to sue. I wouldn't be surprised if those measures have prevented lawsuits from raising a red flag on the problems in the lending industry a little earlier, before they could drive an enormous hole in the economy, as I think they probably are going to do now. All these bad loans are going to result in massive numbers of home foreclosures (Texas is already seeing it), and eventually big stock market plunges, since the loans have been sold on Wall Street.

In the aftermath, I have a feeling that we're about to see a rash of lawsuits against the banks and mortgage companies that have been making all these no-money-down, interest-only, adjustable-rate loans to people who can't afford them, or who were using them to try to "flip" real estate, only to get caught as the property values stopped appreciating.

The Washington Post ran this story a few weeks ago about a class action against Chevy Chase Bank along these lines. I suspect that it's only a harbinger of things to come. The difference between the current situation and that in the 1990s, when subprime lending abuses started to multiply, is that most of the victims of this latest trend are not going to be poor Mississippi residents, but folks like those in the Post story--middle and upper class Americans. I think they are going to be in for a bit of a surprise when they learn how limited their legal options will be after a decade of tort reform to actually remedy their situations..