Homeowners aim at Wall St to combat woes

By Walden Siew

NEW YORK (Reuters) - Wall Street and a growing army of lawyers are girding for more homeowners like Rodney and Sylvia Gibbons, as the real life consequences of the subprime mortgage crisis become evident in America.

The Gibbons, among eight New Yorkers fighting to keep their homes through the U.S. legal system, live on the first floor of a three-story rowhouse on Halsey Street in Brooklyn.

Boarded up buildings offer the first signs of impact of the subprime mortgage meltdown on the neighborhood, but other signs came earlier.

There was Rodney Gibbons' heart attack in 2002, when he and his wife Sylvia first tried to close on the house. Later came death threats to Sylvia from a tenant who wasn't paying her rent. Just down the street, another sign, in red block letters: "We Buy Homes."

The homeowners are suing Credit Suisse Group (CSGN.VX) and J.P. Morgan Chase & Co. (JPM.N), as well as sellers, lenders, appraisers, and other parties involved in the sale of homes financed with subprime mortgages that are often made to people with inadequate credit histories.

"The role of the investment banks in this process cannot be overstated," said Richard Neiman, New York's acting banking superintendent. "They are facilitators and earned fees at multiple stages in the process."

But Alan Vinegrad, a partner at law firm Covington & Burling, who is representing United Homes, the developer that sold properties to the Gibbons, said: "The lawsuits are without merit and we've moved to dismiss them in court."

Representatives at Credit Suisse and J.P. Morgan declined to comment.

ACCOUNTABILITY BLURRED

At issue is what economists call "moral hazard". If lenders receive a fee to originate mortgages, they may care more about quantity than the quality of the loans. And if lenders know they will be able to sell or securitize loans to investors, they may not worry about whether borrowers can pay their mortgages.

When home loans are securitized, they are often bundled together in packages known as collateralized debt obligations (CDOs) and sold to investors such as hedge funds.

Loans with varying degrees of creditworthiness are bundled into CDOs to diversify the risk for investors, but the lenders themselves, or managers of CDOs to whom lenders sold risky loans, may ultimately be the biggest losers, said Steve Kolyer, a partner at law firm Clifford Chance, which represents asset managers.

"To lump it all together and say there was predatory lending on all of Wall Street and securitization is the culprit is kind of silly," Kolyer said.

"The non-paying homeowner may be a victim of predatory lending practices, but that's a question mark. Is he a victim or part of the problem?"

"A lot of CDO investors view themselves as postured against loan originators," Kolyer said. "From the street perspective, it's the lenders themselves whose practices have to be looked at again."