California Lawsuits Could Set Scary Precedents

Could this happen only in California?

On September 3rd a federal lawsuit was filed in the District Court for the Central District of California on behalf of buyers who purchased homes from Beazer Homes USA, Centex Homes, D.R. Horton, Lennar, Richmond American Homes, Ryland Homes, Shea Homes, and Standard Pacific Homes at the peak of the building boom.

The complaint was that these builders created neighborhoods where high foreclosure rates caused home values to plummet, wiping out the investments of many homebuyers.

I find this pretty unbelievable. Big Builder Online reports that “all eight lawsuits are seeking to become national class action cases, representing buyers who put 20% or more down on homes in the builders' neighborhoods across the country. The cases ask for compensatory and punitive damages as well as restitution and/or disgorgement of profits.”

Big Builder Online continues:

The allegations are that the eight builders and their mortgage companies violated two portions of California's Unfair Business Practices Act, “as well as fraud, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing.”

The general accusation is that the builders knew or should have known that by selling homes to investors who would not live in them and buyers who had credit issues and put little money down, they would create communities that could lose their value if home prices failed to climb and buyers with little investment walked from their purchases.

The lawsuits claim that the builders had the responsibility to disclose to buyers that they were selling to investors and buyers with poor credit and/or were investing little in their homes.

"What we believe is that, for the people who were qualified to buy these homes and were financed by the builder themselves through their mortgage companies, there is an obligation from the builder to let them know the facts that could materially affect the value of their homes," McCune (plaintiff’s attorney) said.

The lawsuits allege that the builders' practices in recent years of controlling every step of the home buying process, through appraisals and issuing loans through their finance companies, created an environment where there was no "neutral party" who didn't have a stake in the deal. Plus, McCune said, the fact that the mortgage companies knew the details of buyers' finances bolsters the allegations that the builder companies had to know there could be problems with foreclosures and buyers walking in the future.

"They certainly had knowledge that the house of cards had to come down," McCune said...

"Our local governments are in trouble because of the shrinking tax base," said McCune. "Life savings are gone, and these national builders came and built and then left us with this big mess. I know they feel like the market has affected them badly, but it's hard for me to feel sympathetic because they played such a big part in this."

Yeah, and I’d like to sue “Wall Street” as well. This could start a real pile-on.

This will be one to watch.