Editorial: Litigation Alert.(risk undertaking by mortgage banks and likely litigation that follows)(Editorial)

In the aftermath of "predatory servicing," MI cancellation and other waves of litigation that targeted deep-pocketed loan servicers, it's small wonder that some class-action attorneys are studying the books on pay-option ARMs and other exotic loans. And according to a recent report in our sister publication, National Mortgage News, class-action lawyers are "ready to pounce" on payment-option lenders once rate resets and delinquencies start to take a toll on borrowers in the second quarter of next year.

When we say pounce on lenders, we'll be talking about the company servicing the loans at that stage of the game. One attorney says the potential cascade of lawsuits "is going to be an absolute nightmare for the industry."

We hope he's wrong. But if past is prologue, there's a good chance he'll be right.

He's not the only one who has been warning about the potential pitfalls of payment-option, interest-only and other increasingly popular loan products that stretch the buying power of homeowners. In fact, federal banking regulators recently came out with commentary warning about potentially loose underwriting on these loans and advising lenders not to pile too much risk onto borrowers. If the ...