Lender's don't fear borrower litigation much. They know most homeowners in financial distress lack the money to pay a lawyer to sue.  However, Banks fear the legal wrath of the big money investors that funded the lending boom.

As predicted, investors in mortgage backed security trusts are beginning to sue Banks for all of the bad loans originated with investor money.  Banks took upwards of 30% in fees of the one billion dollars raised in a typical trust and went on to purchase poorly underwritten loans with inflated appraisals.  Now the investors want their money back.  For more details, read the article below:

Since the housing bubble burst more than three years ago, lenders have been fending off legal challenges from homeowners who say they were duped by bad mortgages. Now the industry faces a potentially more formidable adversary: investors who bought bonds backed by those bad loans.

Citibank became the latest lender to disclose that it faces legal challenges from investors demanding a refund on billions of dollars lost on bonds backed by faulty loans. On Friday, Citibank disclosed in a regulatory filling that Charles Schwab, the Federal Home Loan Banks of Chicago and Indianapolis and a hedge fund have filed lawsuits claiming the bank misled them when it sold bonds backed by pools of home mortgages.

The key issue: Who will take the losses for billions of dollars worth of failing mortgages written during the height of the housing boom?

Investors are pursuing several strategies, but they generally center on a promise made in the documents that created bonds backed by mortgages. These so-called "representations and warranties" assured investors that certain underwriting standards would be followed.

Yet underwriting was often lax during the boom years, with lapses including inflated appraisals,  overstated incomes and false assurances that a borrower would live in the house he was buying.

"If you tell my bondholders that this is an owner-occupied property and it's not owner-occupied, that's an incorrect fact," said Kathy Patrick, a Houston-based attorney representing investors who want Bank of America to buy back bad mortgages. "And an owner of occupied property has very different credit qualities than an investment property where somebody has 20 properties and may default strategically."

Patrick is representing a high-powered investor group that includes Freddie Mac, Pimco Investment Management, Blackrock Financial Management and the Federal Reserve Bank of New York, which took over mortgage-backed investments held by American International Group.

Lenders have vowed to put up a vigorous defense against the claims, arguing that investors who bought mortgage-backed bonds knew they were taking a risk. Just because those bets aren't paying off, lenders say, investors shouldn't expect to get their money back.

"If you think about people who come back and say, 'I bought a Chevy Vega but I want it to be a Mercedes with a 12-cylinder,' we're not putting up with that," Bank of America CEO Brian Moynihan told analysts and shareholders in a conference call with last month. "We're protecting the shareholders' money."

Lawyers representing mortgage bondholders don't see it that way.

"That argument is just dead wrong," said Alcott Franklin, a Texas attorney who is helping investors take on lenders. "These are warranty claims. Whether we bought a Vega or a Mercedes, it was under a warranty. And they violated the warranty."

By John W. Schoen

http://www.msnbc.msn.com/id/40075142/from/toolbar