Potential lender defenses against a mortgage lawsuit will include the following:
1- It was not the lender’s alleged misrepresentation (it was a misrepresentation by the buyer or independent appraiser) that caused the loan to go bad. It was not the lender, but the recession or housing collapse or the buyer lying about income, owner occupancy or the appraiser inflating the LTV. If the buyer lied about income, the lender made no “misrepresentation” on the loan. If the loan defaulted because the homeowner lost his job, the lender is off the hook. If housing prices in the whole area fell 30%, it will be hard to argue what the lender did on a specific loan caused that single loan to drop in value.
2- The argument cannot be “banks were irresponsible in lending and housing collapsed so they should pay”. That is not how the documents are drawn. Liability for each loan goes to the specific factors of each loan in the security.
So, then why settle if you are a lender?
1- Nothing in court is guaranteed
2- Litigation will take at a minimum 2-3 yr. or more and will be a cloud over the bank the entire time
3- Litigation costs will be huge
4- Settling puts a definitive dollar amount and timing of payments on everything