Subprime Lending

The subprime mortgage crisis has only just begun. Bloomberg estimates that the ballooning crisis may ultimately result in $300-$400 billion in losses. Even more daunting is how widespread these losses will be, well beyond the homeowners who lose their homes, but directly affecting everything from banks and insurance companies to pension funds and blue chip stocks (not to mention the far-reaching effects on the housing market). The profound effects on both Wall Street and Main Street could easily place the subprime mortgage crisis in the same league as the savings and loan crisis, both in dollar figures and human costs.

The Wall Street Journal has reported that officials at the Federal Reserve have estimated that 150,000 mortgages are resetting each month. The subsequent increases in monthly payments will force many homeowners into foreclosure, placing depreciating assets back on the balance sheets of already struggling lenders. The problems continue as the delinquencies mean a halt to the cash coming into the conduits securitizing the pools of mortgages, impairing the values of these financial assets.

As the subprime mortgage mess deepens and the subsequent turmoil in the financial markets becomes more widespread, litigation is only beginning. The complexity of the transactions inherent to securitization and of the relationships of the many parties involved will require seasoned experts to assist law firms in navigating the litigation environment. The securitization process alone is complex; understanding the accounting for these transactions requires specialized expertise in much smaller supply.

Assertions in litigation to date include, among other things:

• Inadequate internal controls over loan origination and underwriting
• Improper valuation of CDOs and other asset-backed securities, including mark-to-market issues, repurchase obligations and residual interests
• Inadequate loan loss reserves and disclosures and the effects of improper appraisals and uncertainty of insurance coverages
• Failures to disclose concentration risks

In addition, the ability of insurers to make good on policies designed to protect against losses on loans that became impaired is now in doubt with the billions in “insured” losses that lenders and investors have realized.

The professionals at Veris have specialized expertise in accounting, financial reporting and internal controls, particularly in the financial services marketplace. During the savings and loan crisis, we conducted evaluations of the financial reporting and lending controls of several failed institutions on behalf of the Resolution Trust Corporation, created by the Financial Institutions Reform Recovery and Enforcement Act to respond to the large number of savings and loan insolvencies. Over the past few decades, we have provided expert testimony and forensic accounting services in connection with similar issues involving some of the largest U.S. insurance insolvencies on record, including:

• Executive Life
• Baldwin United
• Kentucky Central
• Fidelity Mutual
• Corporate Life

Further evidence of the quality of our professionals and our expertise is demonstrated by the nature of some of the other expert services we have provided, which have ranged from Enron and other corporate financial reporting matters, to finite reinsurance investigations, to services for the Securities and Exchange Commission, Department of Justice, and Public Companies Accounting Oversight Board. Our professionals have been, and continue to be, active in the accounting standards setting process, with leadership on the committees that have been the source of authoritative guidance on many major accounting and financial reporting issues.

As counsel and others sort through the morass of subprime lending issues, they will be exposed to firms of experts who range from those who claim to know “all about all” to those who have recently discovered the world of forensic accounting. For expertise specific to accounting, financial reporting and internal controls, Veris has no peer. Our references will confirm that.