Are Failed Mortgage Backed Securities Defective Products?

Posted On November 19th, 2010 By CSSFIRM.COM

Many banks in the U.S. face serious legal problems following the subprime mortgage crisis. They find themselves swimming in a sea of lawsuits over failed mortgage backed securities.  Some banks may be forced to repay investors for their investment losses on the basis that the securities were essentially defective products.

Bundles of Defective Loans Make Defective Bonds

So many mortgages have failed that one J.P. Morgan Chase analyst said that some banks may be forced to buy between $55 billion and $120 billion of more than $3 trillion in risky mortgage backed securities sold. [1] Investors argue that the loans themselves were defective. Therefore, the securities comprised of bundles of these loans were also defective.

Lawsuits against Bank of America

Lawsuits are mounting against companies like Bank of America, alleging that the mortgage-backed securities are defective products. Because Bank of America bought Countrywide, the giant has taken on the monumental liabilities now faced by the now defunct Countrywide. Among the plaintiffs filing suits against Bank of America are Pacific Investment Management, Freddie Mac and now the FDIC on behalf of Bear Sterns and AIG[2]. Readers will recall that these two entities were bought out by the federal government in an effort to prevent financial disaster.

False Advertising

The lawsuit arguments rest on the allegations that the securities were marketed under false claims. The loans bundled into the bonds were described as healthy and financially viable. Yet much of the loan approval process done by Countrywide was allegedly faulty. The bonds were made of mortgages that were much more risky than advertised.

Defective Loan Servicing

Banks have also allegedly failed in servicing the loans to maximum profitability by not modifying loans in a timely basis, or failing to modify them at all. Some investors argue that they stand to lose significant sums if banks fail to modify loans and sell homes under foreclosure at substantially below market values instead. Other investors say that they should be reimbursed for any loans that banks decide to modify.

Material Misrepresentation and Defective Products

To be successful, these lawsuits must show that any misrepresentations made by financial institutions selling the securities were material. That is, the statements must be issues of fact. These facts are only material misrepresentations if the buyer would not have invested in the securities had the facts been known.

Hedge Fund Managers Seek to Profit

Some hedge fund managers have started purchasing mortgage-backed securities at the current depressed prices, betting that the lawsuits will result in huge returns. Such a high level of uncertainty exists on the premise of these lawsuits that banks may settle just to have a secure position to report to board members.

Contact Us

If you have any questions about the lawsuits surrounding mortgage-backed securities, contact our attorneys.  Will we do our best to provide you with the information you need to know if you have a claim.


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