Major news from Massachusetts this week, with the state’s Supreme Judicial Court upholding an injunction forbidding Fremont Investment & Loan from foreclosing on borrowers to whom it had issued what the court judged to be predatory loans. As Adam Levitin observes at Credit Slips (emphasis mine):

The Massachusetts Attorney General had argued that “a lender’s failure to reasonably assess a borrower’s ability to repay his loan and the use of loan features that predictably lead to foreclosure is unfair and deceptive and in violation of Massachusetts law.” More precisely, a consumer loan that is not intended to be repaid, but intended to be refinanced (a process that can only work if property values rise indefinitely) is inherently predatory. By upholding the preliminary injunction, the SJC endorsed this view and imposed a serious good faith workout effort on Fremont.

The decision by the court to recognize as inherently predatory a class of loans that are designed to be all but impossible for the borrower to pay off as structured can’t be emphasized enough. It’s beyond reasonable doubt at this point that the final years of the housing bubble were powered by increasing numbers of teaser-rate mortgages, especially in the option ARM or “pick-a-payment” space, that were never intended to be repayable by the borrower after the reset period. Even borrowers who aren’t currently upside down on such loans may encounter difficulty refinancing their way out if credit remains as tight as it has recently; those that can’t refinance often find their monthly payments doubling or worse. If the Massachusetts SJC’s interpretation of what constitutes an inherently predatory loan catches on in other states it could mean relief for thousands of distressed homeowners.