Credit Crisis Spurs 'Unprecedented' Litigation Volume, Firm Says
An unprecedented escalation in the number of subprime-related lawsuits continued unabated during the third quarter, as worsening economic conditions promise to drive litigation volume ever higher in months to come. A study released Thursday by Navigant Consulting, Inc. (NCI) found that the number of subprime mortgage and related cases filed in federal court during just the first nine months of 2008 already exceeds by more than 50 percent the total for all of 2007 -- 448 to 294. Filing volume in the third quarter of 2008 was the third-highest on record, with 131 new matters, while the total number of cases filed reached 742 for a full 21-month period ending Sept. 30, a level Navigant characterized as "astounding" in a press statement. Subprime-led legal cases are further outstripping the 559 U.S. savings-and-loan cases of the early 1990s, as well, even if the number of financial failures has yet to approach the same level (yet). The S&L crisis had been the previous high-water mark for litigation fallout from a major financial crisis, Navigant said. "The bottom line is that new cases continue to be filed much more rapidly than existing cases are being disposed," said Jeff Nielsen, who leads Navigant Consulting's Financial Services Disputes & Investigations group. "We are looking at a traffic jam that will take many years to untangle." Nielsen also emphasized that the disastrous market conditions of late 2008 mean that new cases will continue to roll off the assembly line through year-end. For example, the Chapter 11 bankruptcy filing by Lehman Brothers in Sept. 2008 -- the largest such filing in U.S. history, and perhaps the defining moment in the current credit crisis -- has spawned its own cottage industry of litigation. The report also notes that while the volume of new case filings continues unabated, the litigation is at least showing signs of maturing based on the breakdown of new cases filed. For example, borrower class action filings -- which lead all categories over the seven quarters tracked by Navigant -- fell precipitously in the third quarter, as the underlying loan transactions become more remote in time. Meanwhile, the number of securities lawsuits and contract disputes increased sharply, registering their highest quarterly totals to date. "What we're seeing is a relative increase in the number of cases brought by investors and institutions," said Nielsen, "as affected parties take stock of their losses and the recriminations follow from there." HousingWire has covered two high-profile lawsuits in this area in the past few weeks: one suit involves an investor claim over loss mitigation efforts at Countrywide Financial, while the other involves alleged misrepresentation by Goldman Sachs (GS) in MBS deals it issued during 2007. Navigant's study suggests market participants should expect much more to come. Write to Paul Jackson at firstname.lastname@example.org. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.