Subprime Litigation Could Be Next Leg Down for Lenders

Is there a massive wave of subprime litigation coming? Monoline insurers contend that lenders were responsible for the collapse of mortgage-backed security values because they made fraudulent and negligent loans. These loans, that didn't follow the agreed upon criteria in securities contracts are the primary cause for the whole pool's collapse.

Monolines want to recoup some of their losses through the courts. Question is, who will be responsible if they win, banks with TARP money?

From MBIA's Q308 conference call (MBI):  

Negligent and deficient lending standards have also played an extremely large role in our RMBS losses. We have officially initiated legal action against the two largest mortgage lenders [Countrywide (BAC) and ResCap (GM)] of our second lien RMBS exposure to recover a significant portion of the harm that we have already suffered. 

From PMI Group’s Q308 conference call (PMI):  

The 2007 book in particular had a very high rate of fraud… We'll pay every single claim that is due to our insured, but not in the case of fraudulent loans. And we did see an increase in fraud-related rescissions in the third quarter. I think those factors helped moderate our paid claims in the third quarter of '08. 

From Ambac’s Q308 conference call (ABK): 

You basically kick off looking at loans, re-underwriting loans, individual loans and pointing out where those loans are deficient in relation to the representation warranties that were made pursuant to the description of what loans should have gone into that particular shell and that particular issue… We have to have a very strong view on some of these reps and warranties… [We’re getting] into filing a claim and getting into court. That's what is beginning to happen.

 

Comments

[Lin:]

Judy ,

You are correct in your assessment . What the lenders haven't lost on mortgage losses , will be taken out by lawsuits . Lenders + a load of banks are toast !

2008 Nov 07 06:44 PM