Investor Protections (of a Legal Variety) in the Aftermath of a Meltdown

In a recent journal article available here, mortgage guru Mark Adelson has compiled another of his terrific analyses of the mortgage meltdown, and some of the letdowns of post-crisis legislation.

You have to read the piece in its entirety, but here are just some of his analytical gems and opinions to give you a flavor for what’s inside:

• “The mortgage meltdown produced $1 trillion (±20%) of losses from 2007 through 2016. The losses were borne primarily by investors in non-agency mortgage-backed securities (MBS).”
• “Investors around the world invest in the US markets because they have integrity and there are multiple checks in place to ensure that misrepresentations are remedied.”
• “Nonetheless, the Mortgage Meltdown of the late 2000s left many investors reeling. They suffered huge losses on non-agency mortgage-backed securities (MBS) issued from roughly 2005 through 2007. Those losses came from a wave of defaults and foreclosures on mortgage loans originated during those years. During that time, there was a broad deterioration of practices across the mortgage lending and securitization industry.”
• “The full extent of the breakdown in practices started to come to light in 2013, when the US Department of Justice (DOJ) began settling lawsuits against the major banks.”
• “Common types of defects included (i) defective appraisals that overstated the value of homes, (ii) exceptions allowed without sufficient compensating factors, (iii) missing or inaccurate documentation of borrower income or assets, and (iv) misstated occupancy status. When the loans were included in MBS deals, the offering materials did not disclose the defects.”
• “By the time this mounting evidence came to light, it was too late for most investors to sue under the federal securities laws to recover their losses.”
• “The legislative response to the mortgage meltdown and the broader financial crisis did not address the time limits issue. The time limit under the 1933 Act remains a critical piece of unfinished business. If it is not addressed, America’s capital markets will remain vulnerable to a repeat of the mortgage meltdown experience. We propose extending the 1933 Act’s maximum time limit to 12 years for actions based on misstatements or omissions in connection with the sale of non-agency MBS (i.e., actions under 1933 Act §§ 11 and 12(a)(2)).”
• “Issuance of non-agency MBS fell off sharply following the mortgage meltdown. […] Attempts to revive the non-agency MBS market have been unsuccessful.”
• “The aftermath of the mortgage meltdown offers potential lessons for lawyers, business professionals, and policy makers. The episode was arguably the largest failure of legal protections for investors since the Great Depression. Investors have recovered only a small percentage of their total losses.”

That’s just a taste – for more, download the paper by clicking here.