Subprime crisis provokes wave of lawsuits

Subprime crisis provokes wave of lawsuits

By Joanna Chung in New York

Published: April 23 2008 22:20 | Last updated: April 23 2008 22:20

Plaintiffs have filed approximately two private lawsuits a day related to subprime mortgages in the US this year, setting case volumes on course to exceed levels not seen since the aftermath of the savings-and-loan ­crisis, a study has found.

During the first quarter of this year, 170 new civil cases were filed in federal courts, approaching the 181 filings made during the final six months of 2007, according to a review by Navigant Consulting, published on Wednesday. They were overwhelmingly dominated by class-action lawsuits, which accounted for 76 per cent of new cases.

“Like the credit crunch itself, the litigation is unrelenting,” said Jeff Nielsen, managing director at Navigant Consulting. “What we saw in 2007 was a mild breaking wave compared to the tsunami we’re witnessing now.”

He said the pace of subprime mortgage and related filings – now totalling 448 cases over 15 months to the end of March – suggests levels could soon surpass the 559 savings-and-loan cases of the early 1990s, which is seen by some as a historically high watermark in terms of a litigation fallout from a financial crisis.

The civil lawsuits will take many years to resolve, not least because of the complex nature of many cases. “Like the S&L cases, this is a process that will likely take years to play out,” said Mr Nielsen.

More than three-quarters of the civil cases filed last year are still active. But only 10 of the total 191 class actions filed in 2007 have been class certified, according to the report. Only 15 per cent of the cases have received a ruling on a motion to dismiss. The new cases from this quarter are “greener still”, the report says.

But the latest data, which exclude lawsuits filed at the state level, reflects the widespread nature of the credit crisis, which has spread far beyond the subprime mortgage sector. Eight of the most recent class-action securities lawsuits involved claims related to auction-rate securities, which are the subject of regulatory probes.

Many of the new suits, half of which were filed in courts in California and New York, alleged inadequate disclosure in connection with the loan origination process or claimed securities fraud. Some municipalities, including Baltimore and Cleveland, have filed suits against firms involved in the origination, servicing and securitisation of subprime mortgages.

The report notes that the number of suits targeting lenders over mortgage origination practices is likely to diminish, given the reduction in subprime mortgage activity. But other types of filings will continue to be sensitive to the state of the credit markets, and events, such as the collapse of Bear Stearns last month. “Intra-industry disputes appear likely to expand as financial institutions shun traditional mores and pursue remedies from one another through litigation,” it said.