Mortgage Backed Securities
In 2007 and 2008, the combination of falling home prices, lax credit in the mortgage markets, disruptions in the credit markets, and gross misconduct by financial institutions led to tremendous losses in mortgage-backed securities, collateralized debt obligations and related securities. While sub-prime mortgage losses fueled problems initially, these problems soon engulfed virtually the entire mortgage securities market.
Sub-prime mortgages were offered to individuals with modest income and poor credit so that they could become homebuyers. Such mortgage loans often had below market teaser rates that rose to above market levels after the introductory period. Such mortgages became extremely difficult to refinance. Often the homeowners could no longer afford the mortgage payment once the interest rate increased to market rates or if the homeowner lost his job. Consequently, such mortgages had high rates of default.
Homebuyers were not the only ones to suffer from the collapse of the mortgage markets. These mortgages were sold to Wall Street investment banks that then “securitized” the mortgages by pooling the income stream from many such mortgages into bonds known as collateralized mortgage obligations (“CMOs”), mortgage-backed securities (“MBS”) and asset backed securities (“ABS”).
Starting in the late 1990s, investment banks began creating mortgage-backed securities out of mortgage loans by pooling loans and slicing them into various classes having different benefits and risks. Pooling the loans purportedly created a cushion against default by diversifying risk, and the higher interest rates gave such bonds the high yield that investors favored. Many of these classes or tranches were sold as “AAA” or “AA” rated.
The investment banks then created what are known as Collateralized Debt Obligations or “CDOs.” The CDO entities bought and bundled different kinds of debt – often ranging from mortgage-backed securities to corporate bonds to debt backed by credit card payments. The CDOs were then cut into different slices (also called tranches) and sold to investors in the form of bonds. While these slices contained the same debt, they differed in terms of preference, interest payments, and risk. Slices that paid the least interest were the safest if there were defaults in the debts pooled in the CDO. Slices that paid the most interest were the first to go bust in the event of defaults. Many of these tranches were also highly rated.
Because of the CDO structure and the diversification gained by bundling different debts, underwriters tried to package these high-risk debt instruments in a manner to receive investment grade ratings. The CDOs often used borrowed money or leverage to increase returns.
The CDOs were sold to investors, including hedge funds, pension plans, and mutual funds. Because they were illiquid and did not trade regularly, it was difficult to value the CDOs accurately. As the defaults increased, there was significant evidence that these instruments were not properly valued.
During the process, many investment banks became enamored with the profits generated by these mortgage securities. They began ignoring standards that had been previously established, they failed to conduct and/or ignored adequate due diligence, and, in certain cases, actually bet on the failure of mortgage investments that they created and recommended to investors. Our research has established that beginning as early as 2005 and continuing thereafter, the investment banks knew that problems were developing in the mortgage securities markets and yet failed to disclose these specific risks to the investors that they were urging to buy the securities.
Attorneys at Page Perry are actively involved in this situation and are assisting investors who have losses because of these complex sub-prime mortgage investments. Page Perry attorneys have successfully handled cases involving complex CMOs and mortgage backed securities for the past 20 years.
If you have investment losses or problems involving mortgage backed securities, call the lawyers at Page Perry for experienced representation at (404) 567-4400 or (877) 673-0047 (toll free).