New York-based Locke Lord Bissell & Liddell law firm said today it has formed a new unit to answer the needs of bond insurers needing guidance on the legal complexities associated with the collapse of the subprime home mortgage lending market.
The firm said it has tracked several hundred lawsuits related to the mortgage market slump and has created a Financial Guaranty Insurers Section to help financial guaranty insurers who face “mounting legal challenges from financial and insurance regulators and investors among others.”
Financial guaranty insurers, also referred to as bond insurers or monoline insurers, the firm said, now face a wide range of business and legal challenges sparked by the subprime mortgage crisis.
Financial guaranty insurers’ credit ratings, it noted, are being reassessed due to the concerns of Fitch Ratings, Moody’s Investors Service and Standard & Poor’s that the companies don’t have enough capital to cover losses stemming from financial downgrades on securities they guaranty.
The financial guaranty insurers industry is in need of a massive rescue plan to preserve the insurers’ critical “triple-A” ratings. The largest of the financial guaranty insurers may stand to lose several billion dollars on guarantees of some issues of residential mortgage securities and collateralized debt obligations, the firm said.
Greg Casamento, Financial Guaranty Insurers section leader in LLB&L’s New York office, said: “Like many companies, our clients have been affected by the financial markets’ stress from the subprime loan fallout, and they frequently seek our advice and representation on a wide range of issues related to those events.
“This new practice area allows us to draw upon our wealth of expertise in different disciplines and serve our clients in an integrated and coordinated fashion.”
Another Financial Guaranty Insurers section leader with the firm, Brian Casey, said: “The housing downturn is threatening to cripple some bond insurers that wrote billions of dollars of guarantees in the past few years on securities backed by risky subprime mortgage debt because they entered into contracts known as credit-default swaps.
“These events are also forcing the National Association of Insurance Commissioners (NAIC) and its constituent insurance regulators to reconsider how bond insurers should be regulated, particularly with respect to the insurer’s backing of derivative financial instruments.”
Tom Cunningham, LLB&L’s Class Actions Practice group leader noted, “We are currently following over 200 active lawsuits in the United States directly resulting from the collapse of the subprime market, and we have only seen the tip of the iceberg.”
He noted that lawsuits have been filed by consumers, investors, underwriters and others across the country, with heavy concentrations in New York, Illinois, Florida and California.
“Many of these lawsuits threaten the very existence of the RMBS trusts into which mortgages have been deposited,” said Mr. Cunningham. “Some defendants will face certain bankruptcy if liability is imposed upon them in these cases.”