Door Could Open To Class Actions

That could change if the U.S. Court of Appeals for the 7th Circuit rules in favor of allowing homeowners to join class-action suits. Plaintiff attorneys also would have far greater financial incentive to take up such cases.

"It's preposterous to think an individual can fight the bank on a loan," said Demet, the lawyer for the Wisconsin plaintiffs. "And any attorney who's worth his salt does not want to pursue individual action. You could spend $50,000 to $70,000 on a case where you are going up against huge law firms that want to delay and hassle you for several years."

In previous cases, courts have been divided over whether plaintiffs can file class-action suits to have their mortgages rescinded. In general, lower courts have sided with homeowners, while federal courts have favored the banks. Attorneys on both sides of the Chevy Chase case think the U.S. Supreme Court will have to settle the matter.

The case began when Bryan and Susan Andrews, a carpenter and a nurse from Cedarburg, Wis., got a tantalizing ad in the mail in 2004.

"Cashflow 5-Year Fixed; Note Interest Rate: 1.950%," the mailer advertised in boldface. The loan appeared far better than the fixed-rate mortgage they had at the time, which was charging 5.75 percent interest. With college costs rising for his four children, Bryan Andrews said he thought the mailer was a godsend.

But the loan was actually an unorthodox mortgage that allowed the interest rate to rise. The advertised 1.95 percent rate lasted only one month. It quickly soared to above 8 percent.

"The bank kind of trapped us into it," Bryan Andrews said. "We were thinking we were set at 1.95, that it was black and white, but it was not to be. It was pretty stressful the first few months."

Chevy Chase argued that it had disclosed the actual rate and definition of the loan in closing documents, but the district court judge in Wisconsin found those forms were confusing.

A year ago, McCormick said in an interview with The Washington Post that Chevy Chase was not worried about the long-term ramifications of the lawsuit. But times have changed since then, and he acknowledged last week that the bank is concerned about the possible precedent.

Wall Street banks are also worried. In many cases, the cost of reimbursement falls not on the mortgage lender but on the financial institutions that later bought and securitized the loans.

But this unnerving scenario is a source of optimism for lawyers like Demet.

"This is not going to save everyone in the country who got a bad loan, but a lot of people who were misled, we will be able to help those people," he said.

Staff researcher Richard Drezen contributed to this report.