Craig's Corner For Counsel: Subprime Mortgage Crisis

Sunday, June 1, 2008 - 01:00

The consequences of the subprime mortgage lending crisis are far-reaching and are affecting many different industries. Corporate counsel are involved in regulatory and criminal investigations or private litigation, and even the most conservative of estimates suggest it will take several years to bring the saga to a close.

The losses from securities linked to subprime mortgages will be huge. Standard & Poor's recently estimated they will exceed $285 billion in the United States. A number of people are affected by the crisis - it goes well beyond borrowers and lenders - from appraisers, mortgage brokers, trusts and title companies to underwriting firms, rating agencies and of course publicly traded companies and their leadership.

The securitization of these mortgages has resulted in plenty of work for the Securities and Exchange Commission and federal prosecutors. If you're not already deep into the subprime fallout, you may soon be and should be fully ready for the complex legal process involved in investigating the securitization of subprime loans.

"Companies lucky enough to have escaped litigation so far should not get complacent," said Donald R. Kirk of Fowler White Boggs Banker P.A. "Rather, they should take proactive steps to prepare for it."

Kirk wrote about the subprime crisis in a recent Andrews Derivatives Litigation Reporter (ANDERLR) article titled "How to Prepare for Subprime-Related Litigation."

In the litigation so far, Kirk says plaintiffs "have sued nearly every player in the subprime market: lenders, mortgage brokers, investment banks, hedge fund officers and directors, and even credit rating agencies."

There also are an increasing number of bankruptcy filings by companies affected by the subprime crisis. Several subprime mortgage lenders are among them, including American Home Mortgage, New Century Financial Corp. and Sentinel Mortgage.

Also, many home builders are affected by the subprime meltdown. Kirk says several have dealt with securities class-action lawsuits while others face insolvency. "Florida bankruptcy courts, for example, have seen two significant home builders recently file for Chapter 11: Levitt & Sons and TOUSA Inc.," Kirk said. "The distress these builders face ripples down to their suppliers and subcontractors, which have seen their cash flow severely impaired."

In Andrews Derivatives Litigation Reporter , Kirk says companies often avoid facing issues in the current subprime climate, hoping they will simply go away. "Such complacency usually allows the problem to worsen to a point where it cannot be fixed," Kirk said. "The old adage "nip it in the bud" is truer than ever in this situation. A company should initiate a thorough internal review of its credit and lending practices and procedures."

Kirk suggests a company should look into using independent outside attorneys to help in the process. "Outside counsel may provide a fresh review of the situation with the independence necessary to properly analyze a potential problem," Kirk said.

In April, Westlaw debuted a new Subprime tab to allow attorneys and other professionals to get up to speed quickly and get all the resources they need in one spot. By adding the Subprime tab to your customized Westlaw home page, you put dozens of resources on one convenient screen, including:

• Pending subprime federal regulations

• Pending subprime federal legislation

• Subprime trial filings

• Andrews Subprime Litigation Reporter

• Online version of Andrews' The Subprime Crisis, a Thomson West Report

Chip Cater, executive vice president and chief strategy officer for West, explains the motivation for the collection and distribution of the subprime resources: "Business professionals across the board are affected by the subprime credit crisis, and whether they support the finance, banking, real estate or mortgage lending industry, they need simple and quick access to the most relevant information."

West also offers West First Focus: Subprime Mortgage Crisis, a new multimedia service that includes complimentary newsletters, special reports, online tools, seminars and more. It's available at www.west.thomson.com/firstfocus/subprime.aspx, with compelling content and resources from Andrews Publications, Aspatore Books, West Legalworkand Westlaw.

West First Focus: Subprime Mortgage Crisis includes several books and newsletters on the topic for professionals looking for a general overview or information on a specific subprime issue. Written by experts in the fast-developing field related to the legal and economic ramifications of the credit crisis, the publications include The Subprime Crisis, a Thomson West Report , Mortgage and Asset Backed Securities Litigation Handbook by Talcott J. Franklin and Thomas F. Nealon III, and the Instant Awareness Series from Aspatore.

West First Focus: Subprime Mortgage Crisis also highlights a series of seminars to provide a forum for discussion and learning around the subprime topic. Industry experts will discuss topics such as insurance, bankruptcy, malpractice developments, regulatory updates and collateralized debt obligations (CDO) litigation. Continuing legal education credits are available in states where the program is accredited.

For additional insight on the subprime mortgage crisis, listen to Westcast podcast episode #37 "Credit crisis" with the co-authors of the Asset and Mortgage Backed Securities Litigation Handbook at http://feeds.feedburner.com/Westcast.