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Paul Kiesel
Paul Kiesel
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Bear Stearns — The First Wave Mortgage Failure

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Mortgage loan industry facing continued crisis

Having filed 15 Federal Class Action law suits in the last two weeks against financial institutions that have sold Option ARM Loans to hundreds of thousands of consumers in California we continue to watch with keen interest where the financial markets are going. The financial markets are certainly beginning to feel the impact of these “shaky” loans. Bear Stearns agreed to inject $3.2 billion of their own money to stabilize one of two hedge funds threatened with collapse by escalating default rates among mortgage holders. Bear Stearns larger of their two hedge funds is as yet unprotected.

Bear Stearns averted a meltdown this time, but if delinquencies and defaults on subprime loans surge, Wall Street firms, hedge funds and pension funds could be left holding billions of dollars in bonds and securities backed by loans that are quickly losing their value.

Bear Stearns acted yesterday after the hedge fund and a related fund had suffered millions in losses and after shocked investors had begun asking for their money back. The firm agreed to buy out several Wall Street banks that had lent the fund money, which managers hoped would avoid a broader sell-off without causing a meltdown in the once-booming market for mortgage securities.

The subprime market is the first to feel the full impact of adjustable rate mortgage increases but, without a doubt, the next shock wave will be felt by the Option ARM loan market. The class action instituted by Kiesel Boucher Larson LLP against the 15 largest lenders in the California marketplace seeks to provide “rescission” (essentially unwinding the mortgages consumers purchased and returning the funds they contributed) to place them back where they had been before these risky loans were marketed and sold to them.