The Real Deal Miami

Banks fear class actions over roles in mortgage-backed securities collapse

September 09, 2011 12:49PM

Banks including JPMorgan Chase and Bank of America may be forced to pay more to settle claims over their alleged part in the collapse of a $2.3 trillion mortgage backed securities market if individual claimants are allowed to team up with more sophisticated investors to form a class action suit, Bloomberg News reported.

“Class certification raises the stakes tremendously,” said Alan White, a law professor at Valparaiso University in Indiana. “The damages are going be greater in a class action than a series of individual cases.”

Mortgage bond deals involved with the class action suits originally held $204.6 billion of loans, but that figure has dropped to $89 billion as a result of defaults, borrower refinancing and home sales, according to data compiled by Bloomberg.

The banks, however, are relying on the class action being disallowed as a result of previous rulings stating that some investors may be too sophisticated to take part in the action, including banking institutions.

“It is possible to be both an alleged perpetrator and victim at the same time,” said Jacob Frenkel, a former U.S. Securities and Exchange Commission attorney. “It’s unprecedented that you have the most sophisticated institutions as victims, for them to be in a position where their losses are so great that they have sued.” [Bloomberg]