Subprime Investors Fight Back: Here come the Lawsuits!

Well we had an interesting development overnight ladies and gentleman. It appears that the investors who bought certain types of subprime AAA rated securities want their money back!

The Wall St. Journal reported this bomb today ,and the effect of this development is far reaching and very bad news for the lenders. Folks, the lawsuits from this housing bust are going to go on for years.

Here are the highlights from the article. First, take a look at the Countrywide graph from the article showing the rapid rise in bad loans that Countrywide has been forced to eat because the lending standards were so bad.

Some highlights from the WSJ:

"Already burned by bad mortgages on their books, lenders now are feeling rising heat from loans they sold to investors.

Unhappy buyers of subprime mortgages, home-equity loans and other real-estate loans are trying to force banks and mortgage companies to repurchase a growing pile of troubled loans. The pressure is the result of provisions in many loan sales that require lenders to take back loans that default unusually fast or contained mistakes or fraud.

Countrywide Financial Corp., the largest mortgage lender in the U.S., said in a securities filing this month that its estimated liability for such claims climbed to $935 million as of March 31 from $365 million a year earlier. Countrywide also took a first-quarter charge of $133 million for claims that already have been paid.

The fight over mortgages that lenders thought they had largely offloaded is another reminder of the deterioration of lending standards that helped contribute to the worst housing bust in decades.

Such disputes began to emerge publicly in 2006 as large numbers of subprime mortgages began going bad shortly after origination.

Repurchase demands are coming from a wide variety of loan buyers. In a recent conference call with analysts, Fannie Mae said it is reviewing every loan that defaults -- and seeking to force lenders to buy back loans that failed to meet promised quality standards. Freddie Mac also has seen an increase in such claims, a spokeswoman says, adding that most are resolved easily.

Additional pressure is coming from bond insurers such as Ambac Financial Group Inc. and MBIA Inc., which guaranteed investment-grade securities backed by pools of home-equity loans and lines of credit. In January, Armonk, N.Y.-based MBIA began working with forensic experts to scrutinize pools it insured that contained home-equity loans and credit lines to borrowers with good credit. "There are a significant number of loans that should not have been in these pools to begin with," says Mitch Sonkin, MBIA's head of insured portfolio management.

In a lawsuit filed in December in Superior Court in Los Angeles, units of PMI Group Inc. alleged that WMC Mortgage Corp. breached the "representations and warranties" it made for a pool of subprime loans that were insured by PMI in 2007. Within eight months, the delinquency rate for the pool of loans had climbed to 30%, according to the suit. The suit also alleges that detailed scrutiny of 120 loans that PMI asked WMC to repurchase found evidence of "fraud, errors [and] misrepresentations."

PMI wants WMC, which was General Electric Co.'s subprime-mortgage unit, to buy back the loans or pay damages. Both companies declined to comment on the pending suit."

Final Take:

We are in the beginning stages of seeing the fallout from this housing bust, and the buyers of the AAA subprime crap sandwiches want blood. As you can see above, the investors are now going through these securities loan by loan looking for anything such as: Fraud, loans that didn't belong in a certian securitization due to risk, and an overall lack of quality standards.

Notice the one pool of loans with WMC had a 30% default rate within 8 months! This is called lending to anyone with a pulse!!!

Of course now the monolines like MBIA and Ambac believe they may have now found an "out", and are climbing over each other to jump aboard this legal train.

The monolines see this as an opportunity to get out of many of the contracts that they made with the lenders to insure this AAA crappola. The liability of insuring these securities has threatened their AAA ratings as well as their survival.

PMI is suing for the same reasons. To get out from the liability.

Expect every investor that got stuck with these AAA subprime mortgage pools to look over every loan with a fine tooth comb looking for away to get paid back. They realize that at the peak of the market, the lenders made many bad loans that should have never been done, and then stuck them into AAA securities where they never belonged.

Countrywide already has $1 billion in estimated liability on loans that are so bad, they will be forced to take them back from the investors that they sold them too and eat them. Imagine how many more are on the way?

Notice how the court battles are also spreading into home equity loans and other real estate loans. Its only going to get worse. Many subprime loans haven't even reset yet!

The amount of greed and fraud that resulted in this housing bust runs far and wide, and the courts will be tied up with this for years trying work this all out.

Anyone that still thinks Bank of America wants any part of Countrywide needs to get their head examined!

Countrywide will end up being the poster child for all that was wrong in the housing market the past 10 years.