Mortgage Fallout: Lawyers Getting Into the Act

There's plenty of blame to go around in the subprime crisis, and it's only natural that the finger pointing would eventually spill over to the legal system. Lawyers are licking their chops-and imagining their fees-as they enter the fray.

Following the slump in housing values, waves of subprime borrowers have been forced out of their homes. The sting has been felt all the way up the financial food chain, where private investors have recorded millions in losses from mortgage-backed securities that have gone belly up.

The house of cards that's the subprime lending industry is about to complete its tumble, and the aftermath will soon reach the legal system. Because most conflicts in this country usually turn litigious-especially ones involving dollar figures of this size-it's only natural that lawsuits will begin to fly.

Reviewing the mess

 

The crisis began when home values dipped after the bursting of the housing market bubble. Subprime borrowers, many of whom held adjustable-rate mortgages (ARMs), were unable to refinance their homes, because they could no longer pull out enough equity to qualify for a new loan. The low introductory teaser interest rates for their mortgages had expired, and as their loan payments increased, subprime borrowers could not afford the higher amounts.

As loan defaults escalated, the crisis evolved. Many of the mortgages had been packaged as securities and sold on Wall Street to large private investors. When the subprime borrowers began to default, the investment became worthless, resulting in huge losses for investors.

There will be blood

With basically all players losing big in the crisis, everyone's playing the blame game. Subprime borrowers feel that they were duped by lenders. Investors feel that mortgage banks misled them with regard to the stability of the mortgages. And mortgage banks are claiming that both investors and borrowers understood the risks inherent with the loans.

Diving into the fray are lawyers, eagerly boning up on their knowledge of mortgage-backed securities and loan disclosures. The one thing that you can count on emerging from all the crossfire is a series of lawsuits. Who will be sued, and who will actually foot the bill, remains to be seen.

Perhaps no one imagined that the subprime mortgage crisis would cast such a wide swath of destruction over the financial landscape. It's prompted involvement and reaction from the government to the legal system, and it's certain that the fur will fly for a long time to come. There will be lawsuits, settlements, and more lawsuits.

Hopefully, there'll also be a realization that some attention should also be focused on the greed that fueled the crisis in the first place. Besides assigning blame, the government and the mortgage industry will hopefully find a way to address and prevent the greedy practices that started the mess in the first place.