Investors seek recourse in mortgage meltdown
By Alan Zibel
THE ASSOCIATED PRESS
Friday, Jul. 13 2007
Lawsuits blossomed after Enron Corp.'s collapse, many targeting the energy
giant’s bankers. Wall Street firms could again become the bull’s-eye for
investors seeking recourse from the subprime mortgage debacle.
Billions of dollars are at stake, depending on how many of the mortgages — made to borrowers with shaky credit — default. Credit Suisse Group estimates losses to investors between $26 billion and $52 billion, while Deutsche Bank AG says losses could total $70 billion to $90 billion.
Investors “are going to be looking for deep pockets where they can maximize
their recoveries,” said Rick Antonoff, a New York-based lawyer with Pillsbury
Winthrop Shaw Pittman, which has a group of lawyers assigned to subprime
Homeowners are suing lenders. Shareholders are suing collapsed mortgage
companies. Investors in complex mortgage securities are starting to sue big
Wall Street banks. Those investment banks are turning around and suing the
Court filings show numerous recent cases related to the troubled mortgage
market. The NAACP sued a dozen mortgage lenders Wednesday in U.S. District Court in Los Angeles, claiming the companies discriminated against blacks by steering them into higher-interest subprime loans while giving more-favorable rates to white borrowers.
The defendants say their lending practices are fair.
Meanwhile, a subsidiary of Deutsche Bank filed at least 15 lawsuits in May
seeking as much as $14 million from mortgage companies, alleging they failed to buy back loans with early defaults. Similar lawsuits have been filed by
subsidiaries of Credit Suisse and UBS AG.
Bankers Life Insurance Co. of St. Petersburg, Fla., filed suit in April in a
Florida federal court against Credit Suisse and other defendants, alleging the
risks of mortgages pooled in securities were misrepresented.
The lawsuit says Credit Suisse should have known the mortgage-backed securities contained shoddy loans likely to default, causing the insurance company to lose $1.3 million.
The flurry of litigation comes amid evidence that the mortgage market’s
problems are worsening.
In a report last month, Banc of America Securities warned of a “broader fallout from subprime mortgage deterioration” when homeowners with about $515 billion in adjustable-rate home loans — more than 70 percent of whom are subprime borrowers — get higher monthly mortgage bills as rates reset before year-end.
About $680 billion worth of mortgages will reset next year, the report said.
And the two biggest credit ratings agencies on Tuesday downgraded billions of dollars worth of bonds backed by subprime mortgages.
One indication of how the lawsuits play out could be in last month’s settlement of a class-action lawsuit filed in federal court in Tacoma, Wash., against subprime lender NovaStar Financial Inc.
Just before the trial began, Kansas City-based Nova-Star negotiated a $5.1
million settlement, which involved 1,600 plaintiffs who claimed the company
overcharged them through fees paid to mortgage brokers.
NovaStar denied any improper conduct but agreed to pay $3.3 million to
borrowers and $1.8 million in attorneys’ fees. The company faces a similar
lawsuit in California.
Ari Brown, a Seattle-based lawyer for the plaintiffs, said cash rebates to
mortgage brokers, known as yield-spread premiums, were either disclosed to
borrowers on the day loan documents were signed — or not at all. Such
practices, which were prevalent at numerous subprime lenders, made it difficult for borrowers to dispute a loan’s terms, he alleges.
“Everybody got on this gravy train,” Brown said. “There was so much money to be made in subprime lending.”
One plaintiff in the California lawsuit, Christophe Kubiak, a chef from
Oakland, Calif., said NovaStar refinanced his mortgage two years ago. He and his partner were upset to learn the lender hiked the rate 2 percentage points just as the deal was about to close.
“You feel completely ripped off by that kind of practice,” Kubiak said.
NovaStar said that it settled the Washington case to avoid legal costs and that it appropriately disclosed yield-spread premiums, which it called a common way to compensate mortgage brokers.
Joseph Mason, a finance professor at Drexel University, says it could be an
uphill battle for investors to prove that financial institutions were negligent
or committed fraud.
**Still, he agrees the housing market crisis could result in more lawsuits and a more severe financial impact than Enron and other market meltdowns.
“There are so many more investors and there are so many more levels of
investment exposure to the sector,” Mason said. “These are widely held