Major law firms representing both investors and financial institutions have been bracing for a flood of lawsuits resulting from the subprime mortgage meltdown. While the tsunami has yet to occur, the storm does appear to be picking up steam.
Business Week reporter Michael Orey examined this situation in the March 24, 2008 issue. Mr. Orey concluded that, while the volume of litigation that most market participants and their attorneys had anticipated has not yet hit, there is also the strong sense that it is coming.
Observers believe that there are various reasons behind the more deliberate approach to claims than often seen in the past. Most cite the differences in the types of victims and the complexity of the securities as primary reasons behind the deliberate approach. The lack of transparency of both marketplace and specific securities is also a contributing factor.
One of the major reasons that the litigation floodgates have not yet opened is that much of the subprime debt (particularly in the forms of Collateralized Debt Obligations and Mortgage Backed Securities) is held by institutions. Institutional investors historically take a much more deliberate approach to litigation, carefully evaluating their options and waiting to see if the situation is going to improve before filing any lawsuits or claims.
Second, the complexity of the investments and inflated valuations assigned to many derivative securities mean that many investors have not yet sorted out their losses. Many of the subprime securities involve highly complex structures and a variety of underlying instruments that must be carefully analyzed and evaluated prior to filing claims. Furthermore, many contend that financial institutions have reported inflated values of subprime securities to their investors and the investors do not yet appreciate their real losses. Such valuation issues are currently under investigation by various authorities.
Additionally, with a number of investigations by both federal and state regulators, including FBI probes, some plaintiffs are waiting for the results of these investigations before deciding whether to file their own cases. Among the different areas being investigated are whether the subprime securities were reasonably and consistently valued, how subprime securities were sold, whether investment firms did adequate due diligence on subprime securities and whether investment firms adequately disclosed specific facts and risks of which they were aware.
All indications are, however, that the situation will get much worse as the year goes on. According to a report by Fortune magazine, it is expected that, by the end of 2008, some 15 million homeowners will owe more on their mortgages than their house is worth and that ultimately more than 20 million homeowners will have negative equity in their homes. The Fortune article also estimates that mortgage investors will ultimately sustain $1 trillion in losses. As matters continue to worsen, the tsunami will be moving closer.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing individual and institutional investors regarding their subprime investment problems. For further information, please contact us.