Facts: A homeowner obtained an adjustable rate mortgage (ARM) secured by a trust deed on their home. The mortgage terms allowed the owner to make only partial interest payments at a low yearly rate for the first five years, after which the principal and deferred interest would be added to the monthly payment. On origination, the lender verbally told the homeowner the property would appreciate in value in the future, allowing the homeowner to sell or refinance the home before having to make higher monthly payments resulting from the added principal and interest due. When the mortgage rest five years later, the homeowner discovered their home depreciated in value. 

Claim: The homeowner sought money losses and cancellation of the lender’s deed of trust, claiming the lender committed fraud since it falsely informed the homeowner the property would appreciate over time to allow the homeowner to sell or refinance to avoid higher payments, which the homeowner acted on in reasonable reliance.

Counter claim: The lender claimed it did not commit fraud since its statements about the future value of the homeowner’s property were merely speculative opinions not to be relied on by the homeowner.

Holding: A California court of appeals dismissed the homeowner’s claim and held the lender did not commit fraud since the lender’s forecast of the home’s value was mere speculation, not a misrepresentation of known facts. [Cansino v. Bank of America (March 26, 2014)_CA4th_]

Editor’s note — “Don’t worry about the rate adjustment — you can just sell or refinance before your payment increases.” Sound familiar? This was a common refrain during the debauched years of the Millennium Boom. The events of this case happen to coincide with the vicissitudes of the boom and bust cycle; the owner’s obtained the loan in 2005 and had to begin repaying principal (and deferred interest) in 2010, after their property was plunged into negative equity. However, the lender’s faulty sales pitch does not excuse the owner from their loan commitment.

Related articles:

Lenders vs. owners and the real estate interest of each: 2000-2011 and beyond

Underwater homes decrease in California