subprime lending crisis: new regulations and enforcement efforts, business and litigation strategies...
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Subprime Lending Crisis: New Regulations and Enforcement Efforts, Business and Litigation Strategies First Day Overview. March 18-19, 2008. Veronica E. Rendon, Co-Chair Arnold & Porter LLP 399 Park Avenue New York, NY 10022 212.715.1165 [email protected]. - PowerPoint PPT PresentationTRANSCRIPT
Subprime Lending Crisis:New Regulations and Enforcement Efforts, Business and Litigation Strategies
First Day Overview
Veronica E. Rendon,Co-ChairArnold & Porter LLP399 Park AvenueNew York, NY 10022
212.715.1165
March 18-19, 2008
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What Happened and Why Are We Here?
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Why the Market was Ripe for Growth
Issuance of “non agency” MBS grew from $157 billion in 2000 to $1.2 trillion in 2006
Overall issuance of subprime non-agency MBS grew from $96 billion in 2001 to $483 billion in 2006
Created surging demand for mortgage paper and increased competition
Originations and MBS market share have more than doubled over the last few years
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Subprime Originations and MBS Market Share
$120$96
$185
$135
$310
$203
$530
$402
$625
$508
$600
$483
$0
$100
$200
$300
$400
$500
$600
$700
2001 2002 2003 2004 2005 2006
Originations Share of MBS
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Why There Is A BIG Problem The Fed raised interest rates 17 times since 2004 Home prices have fallen dramatically Delinquency and default rates are high Refinancing is difficult Foreclosures Warehouse lenders cut financing Securitization ratings keep falling Negative cycle feeds loss of value Has created more than a subprime issue – really a credit
crisis
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Why There Is A BIG Problem 50 percent of ARM originations over past four years have
been subprime– 80 percent of 2005 subprime originations were ARMs, most were
2/28 hybrids– Nearly 2 million subprime ARMs will reset by the end of 2008, with
monthly payment increases of 30 percent or more
Underwritten differently than before– No doc/low doc– Debt-to-income ratios based on teaser rates– Increasing loan-to-value ratios– Prepayment penalties
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The Subprime Meltdown
“[T]he turbulence originated in concerns about subprime mortgages, but the resulting global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans.”
Ben Bernanke, Chairman of the Federal Reserve, September 20, 2007
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Imploded Lenders
– Alliance Bancorp– Choice Capital Funding– Premier Mortgage Funding– Stone Creek Funding– FlexPoint Funding– Starpointe Mortgage– Freestand Financial– Wells Fargo Correspondent
Alternative– Altivus Financial– ACT Mortgage– Aegis Mortgage Corp.– Ownit Mortgage Solutions– Quality Home Loans
– New Century Financial Corporation
– Fremont General Corp.– Ameriquest Mortgage– Southstar Funding– Oak Street Mortgage, LLC– ResMAE Mortgage Corp.– People’s Choice Financial Corp.– American Home Mortgage
Investment– LoriMac,Inc.– First Magnus Financial– Silver State Mortgage– Sunset Direct Lending
Many lenders have already gone into bankruptcy or are near bankruptcy
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Guaranty Insurers Are Struggling Significant Subprime Exposure
– FGIC– MBIA– Ambac– Radian
Their own ratings are at risk
Causing a lot of discomfort
Worsening market conditions
Plaintiff’s Perspective
“The implosion of an asset price bubble …
… always leads to the discovery of fraud and swindles.”- Charles P. Kindleberger, Economist
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Lawsuits, Lawsuits, Lawsuits Federal securities litigation filings increased in 2007 NERA study: 38 subprime securities class actions
– Concentrated in the Southern District of New York Shareholders claiming public companies made materially
false and misleading public statements overstating performance and understating risk– Press releases– Audited financial statements– Offering documents
Targets: lenders and brokers, builders, credit insurers and rating agencies
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Lawsuits, Lawsuits, Lawsuits Also a significant amount of borrower class
actions– Alleging fraud in the borrowing process
Navigant Consulting study: Federal subprime lawsuits are outpacing S&L litigation
According to Nielsen: "This appears to be just the beginning…. We are already observing a steady acceleration of continuing litigation activity into 2008…. [T]he explosion of cases in 2007 suggests a daunting forecast of what is still to come."
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The Industry At War With Itself?
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Potential Legal Allegations Claims of fraud in the underwriting and origination
process and permeation downstream Claims of misvaluation of assets
– Were modeling assumptions too aggressive? Claims of breach of securitization documents
– e.g., Reps and Warranties Claims of inadequate servicing Claims of inaccuracies in delinquency and default
reporting Claims of omissions or materially misrepresented
audited financial statements and disclosure documents
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Potential Defenses No industry-wide fraud
– At most, sporadic instances occurring at borrower/broker level Very difficult to value a new asset class
– Easy to use 20/20 hindsight to point fingers– Assumptions in models were correct when made– Will adjust as empirical performance data is collected
Reps and warranties were complied with Servicing complied with industry standards Performance data and risk disclosures were accurate
– Sophisticated parties capable of extensive due diligence
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Really talking about foreseeability…
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Monetary Policy
Christopher J. Dodd (D -Ct), Chairman, U.S. Senate Committee on Banking, Housing and Consumer Affairs
“The Fed was encouraging lenders to develop and market alternative adjustable rate products, just as it was embarking on a long series of hikes in short term rates.”
“In my view, these actions set the conditions for the perfect storm that is sweeping over millions of American homeowners today.”
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WE WELCOME YOUR QUESTIONS AND COMMENTS!