As the US housing market crashes in flames, the lawyers are moving in, and issuing lawsuits. The lawyers have the mortgage lenders in their sights. The lenders are being accused of pushing inappropriate refinancing options on unwary and naïve borrowers. In some extreme cases, lenders are accused of misleading borrowers over interest rates and fees, particularly when borrowers refinanced.

Mortgage refinancing played a crucial role in sustaining the housing bubble. Maybe the lenders adopted some rather aggressive sales techniques. However, far too many people entered the housing market with a chain of unrealistic expectations.

The chain started with a belief that housing prices never drop. This expectation linked into the idea that interest rates would not go up significantly. These misplaced imaginings pushed borrowers into taking on too much debt to pay for overvalued houses. Interest only loans and teaser rate arms reconciled the borrower’s high levels of debt with stagnant incomes. People could only think of monthly payments, and not long term personal debt sustainability. Finally, refinancing was the last link in the chain. People stupidly thought that they could keep their monthly payments low by periodically refinancing.

It is not hard to see how many borrowers, desperate to refinance, could fall prey to unscrupolous sales pitches. “Oh yes, we can keep your interest rate at just 7 percent, so long as you sign here”. However, refinancing only makes sense as long as rates remain low. Once they rise, the chain breaks, and over-leveraged borrowers begin to understand that the level of debt and not just the monthly payments are important.

Here is a story of one lawsuit from St.Louis. The accusation has a ring of plausibility.

(STL Today, May 10th 2007) Twenty-nine families in St. Louis and four Missouri counties have filed lawsuits accusing Ameriquest Mortgage Co., a California-based mortgage lender, of engaging in abusive practices related to refinancing home loans.

The suits say that Ameriquest encouraged borrowers to refinance their loans by saying they could get better rates. When the loans were refinanced, the borrowers owed more than previously because of prepayment penalties and other fees, and their interest rates went up, not down.

The lawsuits were filed on behalf of families in the St. Louis and Kansas City areas. Four were filed Wednesday in circuit court in St. Louis, St. Louis County, St. Charles County and Jackson County, Campbell said. Another suit was filed March 30 in Jefferson County Circuit Court.

One plaintiff, Harold Bowyer of Festus, refinanced a $107,100 mortgage with a 7.7 percent interest floor and a 13.7 percent ceiling. He was told the new loan would have an interest rate of 6 or 7 percent. But after the new loan was closed, Bowyer learned that the amount he owed had risen to $122,550, including $6,519 in fees. The interest rate floor was 10.15 percent, and the ceiling was 16.15 percent, according to the lawsuit.