Everyone wants to know who is to blame for the losses paining Wall Street and homeowners.
A wave of lawsuits is beginning to wash over the troubled mortgage market and the rest of the financial world. Homeowners are suing mortgage lenders. Mortgage lenders are suing Wall Street banks. Wall Street banks are suing loan specialists. And investors are suing every-one.
The legal and regulatory wrangles could dwarf the ones that followed the technology-stock bust and the Enron and WorldCom debacles. But the size and complexity of the modern mortgage market will make untangling the latest mess even trickier. Some cases stretch across continents. Others are likely to involve state and federal regulators.
"It will be a multi-ring circus," said Joseph A. Grundfest, a professor of law and business and co-director of the Rock Center for Corporate Governance at Stanford University. "This particular species of litigation will be manifest in many different types of lawsuits in many different jurisdictions."
The legal battles stretch from Main Street to Wall Street and beyond.
Homeowners and subprime mort-
gage lenders are squaring off in scores of cases that claim that some lenders engaged in predatory lending practices and other wrong-doing. Cleveland and Baltimore are pursuing cases against Wall Street banks, saying residents are suffering because the banks fostered the proliferation of high-risk home loans.
Two questions lie at the heart of many of the cases. The first is whether lenders and investment banks alerted borrowers and investors to the risks posed by subprime loans or securities backed by them. The second is how much they were legally obliged to disclose.
"Those are the two issues that are frequently raised," said Jayant W. Tambe, a partner at the law firm Jones Day.
As defaults and foreclosures rise, the players in the housing market are pointing fingers at each other. State prosecutors such as Andrew M. Cuomo, the attorney general of New York, are investigating whether investment banks that packaged mortgages into securities disclosed the risks to investors and credit rating agencies. Investment banks, in turn, are accusing lenders and mortgage brokers of shoddy business practices.
"What strikes me here is that this is a tainted system from A to Z," said Tamar Frankel, a law professor at Boston University. "Everybody blames everybody else. If you look at what is being said, there isn't one who doesn't blame another and there is half-truth in everything."
Wall Street banks that sold mortgage investments around the world face legal complaints from as far away as Australia and Norway. Lehman Brothers, the Wall Street bank with the biggest mortgage business, is being sued by towns in Australia that say a division of the firm improperly sold them risky mortgage-linked investments. Lehman has denied the charges and said the unit, formerly known as Grange Securities, acted properly.
Closer to home, members of a New Jersey family have sued Lehman for $4.14 billion, saying the firm steered them into complex securities that have become difficult to sell, Bloomberg News reported Feb. 1.
In the United States, Lehman is suing at least six mortgage lenders and brokers, claiming they sold Lehman dubious loans. Lehman claims that borrowers' incomes were overstated, appraisals were inflated and the homes were in poor condition. In most cases, the lenders are fighting the allegations and Lehman's demand that they buy back defaulted or otherwise problematic loans.
In another case, the PMI Group, a mortgage insurer, sued WMC Mortgage, a subprime lender that has stopped making loans, and its corporate parent, General Electric, in California Superior Court.
PMI is trying to force the companies to buy back or replace loans the firm was hired to insure, which it says were made fraudulently or in violation of the standards the lender said it was using.
Securities lawyers say cases involving mortgage-backed securities, which generally were sold privately to sophisticated institutional investors, are far more complicated than those involving stocks, which were sold publicly to everyday investors.
Class-action lawsuits will be employed less than they were after the plunge in technology stocks because mortgage securities tend to vary in composition and disclosure.
"This is going to be much more complicated to prove, and it's going to be case by case as opposed to class actions," said David J. Grais, who is a partner at the Grais & Ellsworth law firm in New York and an author of a recent paper on the legal liabilities of credit rating firms. "This resembles the S&L crisis in the '80s much more than it does the tech bubble in the '90s."