Real Estate

Subprime home loans spur world of lawsuits

WASHINGTON — Lawsuits blossomed after Enron Corp.'s collapse, many targeting the energy giant's bankers. Wall Street firms could again become the bull's-eye for investors seeking recourse from the subprime mortgage debacle.

Billions of dollars are at stake, depending on how many of the mortgages — made to borrowers with shaky credit — default. Credit Suisse Group estimates losses to investors between $26 billion and $52 billion, while Deutsche Bank AG says losses could total $70 billion to $90 billion.

Investors "are going to be looking for deep pockets where they can maximize their recoveries," said Rick Antonoff, a New York-based lawyer with Pillsbury Winthrop Shaw Pittman, which has a group of lawyers assigned to subprime mortgage litigation.

Homeowners are suing lenders. Shareholders are suing collapsed mortgage companies. Investors in complex mortgage securities are starting to sue big Wall Street banks. Those investment banks are turning around and suing the mortgage companies.

Court filings show numerous recent cases related to the troubled mortgage market. The National Association for the advancement of Colored People sued a dozen mortgage lenders Wednesday in U.S. District Court in Los Angeles, claiming the companies discriminated against blacks by steering them into higher-interest subprime loans while giving more favorable rates to white borrowers.

The defendants include Ameriquest Mortgage Co., Citigroup Inc., HSBC Finance Corp. and Washington Mutual Inc. Ameriquest, Citigroup and HSBC defended their lending practices as fair. Seattle-based Washington Mutual declined comment, saying it needed to review the lawsuit.

Meanwhile, a subsidiary of Deutsche Bank filed at least 15 lawsuits in May seeking as much as $14 million from mortgage companies, alleging they failed to buy back loans with early defaults. Similar lawsuits have been filed by subsidiaries of Credit Suisse and UBS AG.

St. Petersburg, Fla.-based Bankers Life Insurance Co. filed suit in April in a Florida federal court against Credit Suisse and other defendants, alleging the risks of mortgages pooled in securities were mis-represented.

The lawsuit says Credit Suisse should have known the mortgage-backed securities contained shoddy loans likely to default, causing the insurance company to lose $1.3 million. The defendants filed a motion to dismiss the suit, countering that the risks were fully disclosed.

Florida lawyer Dale Ledbetter, the plaintiffs' lawyer, said he is working on several similar cases, adding that the subprime mortgage boom could not have happened without Wall Street's help.

"What people are not focusing on is the top of the pyramid," Ledbetter said. "They were doing almost no due diligence on those loans."

In a report last month, Banc of America Securities warned of a "broader fallout from subprime mortgage deterioration" when homeowners with about $515 billion in adjustable-rate home loans — more than 70 percent of whom are subprime borrowers — get higher monthly mortgage bills as rates reset before year-end.

Another $680 billion worth of mortgages will reset in 2008, the report said. And the two biggest credit ratings agencies on Tuesday downgraded billions of dollars worth of bonds backed by subprime mortgages.

Joseph Mason, a finance professor at Drexel University, says it could be an uphill battle for investors to prove that financial institutions were negligent or committed fraud.

Still, he agrees the housing market crisis could result in more lawsuits and a more severe financial impact than Enron and other market meltdowns.

"There are so many more investors and there are so many more levels of investment exposure to the sector," Mason said. "These are widely held investments."