The coming months will likely bring an unprecedented amount of new litigation concerning asset-backed securities (ABS) and mortgage-backed securities (MBS) issued over the past two years. Disappointed investors are likely to pursue remedies on the strength of a variety of legal theories. Two concepts appear to be the most interesting at this point: (1) deficient disclosure about the trend of deteriorating loan quality and (2) deficient disclosure about the release of excess spread.
Over the summer it became clear that during 2006 the quality of subprime mortgage loans that got packaged into securitizations was steadily declining. Starting in late 2005 and extending into this year, the quality of subprime mortgage loans that underpinned MBS deals deteriorated with each successive quarter.