The following article appeared in the news on January 4, 2010.
“Property owners at four struggling and bankrupt resorts in Idaho, Montana, Nevada and the Bahamas have filed a $24 billion federal lawsuit against Credit Suisse, saying the bank gave predatory loans to the resorts’ investors as part of a scheme to take over the properties.
Property owners at Idaho’s Tamarack Resort, the Yellowstone Club in Montana, Nevada’s Lake Las Vegas resort and the Gin Sur Mer Resort in the Bahamas filed the lawsuit Sunday. They are seeking class-action status.
The property owners say Credit Suisse set up a branch in the Cayman Islands to skirt U.S. federal banking regulations and appraised the resorts at artificially inflated values as part of a plan to foreclose.â€
$24 Billion â€“ Now that is not your run of the mill, little homeowner who claims being duped into taking on a mortgage that he or she couldnâ€™t possible service. If the borrowers hadnâ€™t borrowed the money there would have been no foreclosure. Claims that the lender over-appraised the properties as part of a scheme to foreclose just fly in the face of reason. The last thing a lender wants is to take over a financially failing property and try to work it out to recover 100% of its investment. If the property value, at the time of foreclosure, will not support the servicing of the debt, then it is axiomatic that the lender will take a loss if it must sell the property or will suffer a financial drain if it must continue to fund operations until the value of the property is restored.
If the borrowers believed that the lender had over-appraised the properties at the time of granting the loan, then they participated in that over valuation by accepting the funding of a loan predicated on that value. If the borrowers had just applied or a loan based on an appraised value that they believed to be reasonable, then the amount they borrowed would have been substantially less.
In this case, the lender Credit Suisse would appear to be the victim and not the borrowers. Credit Suisse did not cause the real estate market to crash. In the current market all kinds of developers have found themselves with loans that they are unable to service. The lenders do not set out with a strategy to foreclose. That is the last thing they want and to claim otherwise is very disingenuous. If all commercial property borrowers could sue and prevail against their lenders when they became unable to service their debts, then the real estate financing market will never be the same. We will go back to the old days when borrowers were required to have a substantial cash investment of their own in the property and achieve pre-sales or pre-leasing targets as a condition of the loan. Maybe that wouldnâ€™t be such a bad idea as it would certainly curtail the type of speculation that contributed to the present economic malaise.
Hopefully, our judicial system will see through this type of lawsuit and not cause lenders to waste incalculable sums of money on legal fees in an attempt to defend their position. This type of lawsuit is like going to the casino and losing a vast sum of money and then suing the casino for allowing you to play. Borrowers must take responsibility for their own actions.
January 6, 2010 â€“
More news stories have appeared relative to the $24 billion suit against Credit Suisse. Based on the stories it would appear that the plaintiffs in the suit are not the people who borrowed the money from Credit Suisse but rather were investors, through homeownership or otherwise, in the projects financed by Credit Suisse. This makes the suits all the more interesting and bizarre. If the news portrayal of the suit is correct, it is very difficult to see how Credit Suisse had any direct relationship to the plaintiffs. It does not appear that the actual borrowers are the plaintiffs in the suit but, for better or worse, it was the actual borrowers who applied for, negotiated the terms of and accepted the funding of the loans. The loans were made at a time when the real estate market was overly exuberant and the bankruptcy of the financed projects resulted from a very negative real estate market not because of any scheme by Credit Suisse to be able to foreclose and acquire the projects on the cheap. That is just a delusional notion. The news stories also indicate that Cushman & Wakefield were complicit because they provided the Credit Suisse real estate appraisals, which implies that Cushman & Wakefield knowingly over-valued the properties to facilitate the schemes of Credit Suisse. That too is a delusional conspiracy theory. Cushman & Wakefield are one of the most respected real estate companies in the world with a gigantic revenue stream. They would have absolutely no incentive to risk their reputation and net worth in return for an appraisal fee that is â€œthe size of a flea on an elephants behindâ€ in relation to the revenue of the enterprise.
The bottom line is that the borrowers knowingly applied for and took the funding of the loans and now are unable to repay according to the loan terms. The lenders recourse is to foreclose. There can be little doubt that those directly involved in the loan, namely borrower and lender, had extreme optimism that everything would work out profitably. Those who became investors must have shared that optimism at the time of making the investment. Yes, the adverse market destroyed the euphoria of the developers and investors alike but to seek recovery against Credit Suisse is an attempt to hold someone else responsible for a bad investment decision. Such suit are akin to an investor who bought a financial stock in 2007 and lost 50% of their investment in the crash of 2008 bringing suit against the investment banks whose involvement in the mortgage backed securities causes the collapse.
Hopefully, the judicial system will see through this charade and will look only to the documentation signed by borrower and lender for any decisions and not to the wishful thinking and twisted logic of litigators.