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Most Litigious States

Most Litigious StatesGuy Carpenter Subprime E&O Litigation Index

December 11, 2007


A new report has identified the states where mortgage companies are most likely to be sued.

With the collapse of the subprime mortgage sector, a rash of lawsuits can be expected by mortgage lenders, according to What’s the State of Your State? E&O Risk Uneven across the Country authored by Guy Carpenter & Co. LLC. The risk and reinsurance firm is part of the Marsh & McLennan Companies.

The report analyzed which states are the riskiest for errors and omissions coverage and consolidated the findings into the Guy Carpenter Subprime E&O Litigation Index.

The index factored in the foreclosure rate, subprime delinquency rate and number of litigation attorneys per mortgage industry professional by state, according to the report. In addition, the frequency of Truth In Lending and banking related lawsuits was also considered. Another factor was the extent to which a state is plaintiff-friendly according to the American Tort Reform Association.

“The subprime mortgage crisis does not treat every state equally,” the authors wrote. “Some simply are riskier than others.”

Among the 10 states that ranked “Very High” on the index, Michigan had the highest foreclosure rate, at 2.2 percent compared to the U.S. average of 1.3 percent. Georgia’s foreclosure rate was 1.9 percent, while Connecticut and Tennessee each had a rate of 1.3 percent.

Michigan’s subprime delinquency rate of 20.8 percent was well above the U.S. average of 14.5 percent and highest among the top 10 states. West Virginia was No. 2 at 18.1 percent, followed by Louisiana with 17.7 percent.

At 0.34 litigation attorneys per mortgage professional, Louisiana and West Virginia were the worst. The U.S. average was 0.19 attorneys per mortgage professional. Alabama held the No. 3 ranking in this category with 0.32 litigation attorneys per mortgage professional.

When considering TIL litigation, Rhode Island was worst, with 33.5 cases per million households, compared to the U.S. average of 4.3 per million households. Next was Illinois, with 17.5 per million, followed by Alabama, at 11.1 per million.

Rhode Island also had the worst ratio of bank litigation, with 24.5 cases per million households compared to the U.S. average of 2.9 per million. Illinois also held the second spot in this category, at 11.9 cases per million households, trailed by Connecticut’s 6.0 cases per million.

Based on the American Tort Reform Association, the states deemed to be a “Judicial Hellhole” were Illinois and West Virginia, with “Very High” rankings as litigation-friendly states, the report indicated. Louisiana and Pennsylvania both ranked “High” in this category.

Also making the top 10 worst states was Massachusetts, the report said.

While it was not currently ranked among the worst 10 states, the report indicated Mississippi is likely to take a turn for the worse, with a high subprime delinquency rate of 21.5 percent and a foreclosure rate that has yet to jump.

“This may indicate that lenders are not ready to foreclose on homes … yet,” the authors wrote. “A shift from delinquency to foreclosure may also lead to increases in banking and Truth in Lending lawsuits which would affect an overall change in the state’s risk profile. If delinquencies lead to foreclosures, the chain of events that could follow may push Mississippi to ‘High’ or ‘Very High’ on the Guy Carpenter Subprime E&O Litigation Index.”

Among states ranking “Very Low” on the index were Kansas, Maine, North Dakota, Vermont and Wyoming — each with no TIL litigation. Hawaii, Kansas, Maine, South Dakota, Vermont and Wyoming each had no banking litigation.

Other states that ranked among the 10 with the lowest risk on the index were Arizona, Iowa, Oklahoma, and Oregon.

“Nevada, Colorado and California seem to have run their respective courses,” the authors added. “The fact that these states have low subprime mortgage delinquency rates may mean that the crisis has passed. The delinquencies, it seems, have led to all the foreclosures that are likely to occur.

“Quite simply, it looks like there may not to be much more action here.”

One law firm is now specializing in making more states more litigious for subprime lenders.

Bernstein Litowitz Berger & Grossmann LLP announced Monday it is targeting subprime lenders with a new practice group that will represent borrowers and investors.

“With the recent announcements of major write-downs being taken by leading financial institutions as a result of exposure to subprime and other mortgage-backed investments, and the revelation that respected institutional investment managers were gambling their clients’ retirement savings on investments in exotic instruments, it has become clear that the collapse of numerous subprime lenders earlier this year marked just the tip of the iceberg,” partner Gerald Silk said in the statement.

Among lenders currently being sued by the firm in securities class actions are Accredited Home Lenders Holding Co., Fremont General Corp. and New Century Financial Corp., according to the announcement. The New York-based firm claims to have recovered $410 million from Freddie Mac on behalf of the Ohio Public Employees Retirement System and the State Teachers Retirement System

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