Regulators going after Wall Street banks over subprime mortgage meltdown
BOSTON — State and federal regulators are trying to punish Wall Street for the subprime mortgage meltdown.
Observers don’t expect the financial penalties that regulators extract in the civil cases to be massive. But the cases could turn up evidence of bad behavior that could spur private investors to file even more lawsuits than the hundreds they’ve already brought to recover losses.
"This could get a lot nastier, for many reasons," said John Akula, a business law lecturer at the Massachusetts Institute of Technology’s Sloan School of Management. "Prolonged close scrutiny often turns up all kinds of dubious practices that in normal times are under the radar."
Some regulators say greed and fraud underlie much of the subprime mortgage mess that has spread across the broader housing market, triggering a spike in foreclosures.
Although the foreclosure-blighted cities of Cleveland and Baltimore have sued seeking to recover damages from mortgage lenders, most of the cases filed so far are from regulators alleging violations of state securities laws.
Attorneys general in New York and Ohio are targeting alleged systematic inflation of home appraisals by major lenders and appraisal firms. Litigation in Massachusetts and other states seeks to demonstrate that investment banks failed to disclose risks about mortgage-related securities to investors.
Until recently, cash from Wall Street banks and investors extended growing amounts of credit to low- and middle-income Americans enticed to enter a market when home prices appeared headed nowhere but up.
Lenders wrote $625 billion in subprime mortgages in 2005, nearly four times the total in 2001 http://payday-nofax.com. The boom brought in big fees to mortgage brokers, lenders, banks and ratings agencies.
But now that prices are dropping, those players are hurting. Global banks have written off nearly $150 billion since mortgage securities began collapsing last summer.
Given the losses, "It’s doubtful some of these entities will repeat their performance," said Massachusetts Secretary of State William Galvin. "But I think there needs to be an understanding of how we got where we are, whether that is through regulatory action, or through Congress."
States have responded by tightening rules governing how lenders and brokers arrange mortgages and are compensated. But lawsuits and administrative complaints are the main tools regulators use to seek fines against companies accused of wrongdoing, or to set examples to deter bad behavior.
Already, the 278 subprime-related cases filed in 2007 in federal courts is outpacing the rate of litigation that emerged from the savings and loan meltdown in the late 1980s and early ’90s, according to a study released Thursday.
"What they can’t enforce through regulation, they will try to accomplish through suing," said David Bizar, a Hartford, Conn.-based attorney with the firm McCarter & English who defends against subprime mortgage lawsuits brought by consumers and regulators.