Subprime Insurance Claims Signal the Start of Backstabbing

This is our mid-August focus on mortgage blues. Higher interest rates and falling property prices have contributed to rising delinquencies on subprime mortgages, which are offered to less creditworthy borrowers. This, coupled with increased relaxation of underwriting standards, has led to the bankruptcy of more than 50 mortgage lenders, the collapse of hedge funds, increased regulatory scrutiny and ratings downgrades, Marsh, a unit of Marsh & McLennan, said recently. So which group of financiers is rushing to protect themselves?

Executives and board members are checking their insurance policies that protect them against claims. So-called D&O policies protect executives and members of a company’s board from liability in the event of a lawsuit against them claiming wrongdoing in connection with their firm’s business. Mortage companies are checking on mortgage insurance, filing claims wherever possible. Meanwhile insurance companies are trying to say some bad mortgages were fraudulent, thus refusing to pay.

It almost sounds like many cases of Hurricane Katrina claims where insurers and common sense often never met. “Was it rain damage, wind damage, or flood damage?” Only in this case insurers will ask if mortgages were subprime or actual cases of mortgage fraud. Let the backstabbing begin.