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Subprime Mortgages and D&O Coverage: Will Insurers Pay and for What?

By Brian J. Osias, Craig W. Davis and Jason M. Alexander
April 30, 2008

Part One of a Two-Part Article

The specter of a subprime mortgage crisis has gone from a background murmur in the recently quieted real estate boom to attain official 'meltdown' status in the media, and the reverberations are being felt in all corners of the corporate and financial world. Recently, the city of Cleveland, OH, brought an action against 21 banks and other financial institutions, alleging that predatory lending practices related to subprime mortgages have led to more than 14,000 foreclosures in the city in the last two years, resulting in pandemic urban blight. See Christopher Maag, Cleveland Sues 21 Lenders over Subprime Mortgages, N.Y. Times, Jan. 12, 2008, available at www.nytimes.com/2008/01/12/us/12cleveland.html?_r=1&emc=eta1&oref=slogin. The Cleveland action was actually brought under public nuisance laws, and it names as defendants the financial institutions that securitized and sold the loans in the financial markets. Id.

In 2007, four Norwegian towns near the arctic circle were plunged into financial gloom when their substantial investments in mortgage-backed securities created by Citigroup lost more than half of their value as a result of the troubles in the United States mortgage and housing markets. See Julia Werdigier, Subprime Woes Hit Norwegian Brokerage, N.Y. Times, Nov. 29, 2007, available at www.nytimes.com/2007/11/29/business/worldbusiness/29bank.html?emc=eta1. Indeed, the crisis in the housing and mortgage markets is not confined to obscure villages and downtrodden cities. See Michael Jackson Late on Family's House Payments, cnn.com (Feb. 29, 2008), at www.cnn.com/2008/SHOWBIZ/Music/02/29/michael.jackson.ap/.

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