WHO IS TO BLAME FOR THE SUBPRIME DISASTER?
by Lawrence C. Melton, Esq., lmelton@dhayeslaw.com
THE HAYES LAW FIRM, www.dhayeslaw.com, (toll free)866-332-3567
In 2006, three things occurred: (1) there was a housing boom in the U.S., (2) investors became strongly interested in mortgages, and (3) lenders relaxed their underwriting standards. As a result, millions of borrowers with poor credit obtained subprime mortgages.
What does subprime mean? A subprime mortgage loan is a loan secured by real property that is made to a borrower with a poor credit history. The designation "subprime" means the borrower has a poor credit rating.
What is the subprime mortgage meltdown? When the news media speaks of the subprime mortgage meltdown, they are talking about the rise in foreclosures that started in 2006. The rise in foreclosures has resulted in subprime mortgage lenders shutting down or filing for bankruptcy. As a result, there has been a collapse in prices for the subprime mortgage industry.
Who is to blame for the subprime disaster? Presently, default rates on subprime mortgages are still rising. Borrowers continue to face foreclosures on their homes. Investors in subprime mortgages continue to face losses. Who is to blame? Many say the Wall Street investment banks. According to Reuters, investment banks often commissioned reports showing substantial risks in subprime loans to less creditworthy borrowers, but did not disclose that information to investors. (Patrick Rucker, Wall Street often shelved damaging subprime reports, Reuters, August 1, 2007)http://www.iht.com/articles/2007/08/01/bloomberg/sub.php
What are due diligence reports? Wall Street investment banks who bundle and sell home mortgages hire mortgage consultants called "due diligence firms." The due diligence firms make sure the blocks of mortgages conform to the mortgage sellers standards. To facilitate the process, the due diligences firms issue due diligence reports to the investment bank.
We are now finding out that many Wall Street investment banks suppressed due diligence reports that showed increasing risks in subprime loans. In other words, when the investments banks received damaging due diligence reports, they failed to pass on that information to credit rating agencies and to investors. (Patrick Rucker, Wall Street often shelved damaging subprime reports, Reuters, August 1, 2007)http://www.iht.com/articles/2007/08/01/bloomberg/sub.php
Why did Wall Street firms suppress the due diligence reports? "During the housing frenzy, many Wall Street firms appear to have overlooked due-diligence warnings about problem mortgages in order to keep up with the market...As lenders relaxed their underwriting standards during the recent housing boom, Wall Street firms followed suit by easing the guidelines that due diligence companies followed..." (Patrick Rucker, Wall Street often shelved damaging subprime reports, Reuters, August 1, 2007)http://www.iht.com/articles/2007/08/01/bloomberg/sub.php
Do investors in subprime mortgages have legal recourse? Investors are now beginning to file lawsuits against investment banks on the basis that they failed to perform or disclose proper due diligence on the mortgages it sold to investors. Presumably, if the investors had been given all the information, they would not have chosen to invest in subprime mortgages. (Patrick Rucker, Wall Street often shelved damaging subprime reports, Reuters, August 1, 2007)http://www.iht.com/articles/2007/08/01/bloomberg/sub.php
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567 (toll free)
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