September 6, 2009
Bondi on Arbitration of Mortgage-Backed Securities Suitability Claims
Securities Arbitrations Involving Mortgage-Backed Securities and Collateralized Mortgage Obligations: Suitable for Unsuitability Claims, by Bradley J Bondi, Counsel to SEC Commissioner; Adjunct Professor of Law, was recently posted on SSRN. Here is an abbreviated version of the abstract:
Over the past two years, the world has witnessed the unfolding of the 'subprime mortgage crisis.' A steep rise in home foreclosures beginning in late 2006 caused a ripple effect throughout the economy, resulting in a dearth of liquidity across the lending sector. The largest rise in defaults occurred on so-called 'subprime' and other adjustable rate mortgages (ARMs). These types of mortgages were offered initially during a time of rising housing prices, often to unqualified borrowers, who thought that they would later have the opportunity to refinance at more favorable terms. As housing prices declined, however, refinancing became more difficult; defaults increased sharply as interest rates reset at higher rates on many of the mortgages. These events contributed to approximately 1.3 million foreclosures in 2007, an increase of approximately 75% from 2006. Foreclosures increased to 2.3 million in 2008, an increase of approximately 80% from 2007. Some experts have estimated that subprime defaults ultimately will reach between $200 billion and $300 billion before the crisis ends.
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This short Article explores the unsuitability claim from its inception to its modern application. It then discusses unsuitability claims in the context of MBSs and CMOs and in the forum of arbitration. Finally, this Article briefly highlights some of the basic considerations of whether a safe harbor for recommendations of brokers to certain institutional customers would be appropriate to consider.
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