Insurance coverage available for the subprime mortgage collapse: current developments

This article originally appeared in Coverage (May/June 2008).

When facing a loss, the first rule of insurance recovery is "think insurance." Daily headlines describe the collapse of the subprime mortgage market, the impact on the financial markets and investment community, as well as the hardships of individual borrowers. Investments in mortgage-backed securities, particularly subprime mortgages, have dominated the financial news because of the: (1) stunning losses reported by institutional investers; (2) growing multitude of lawsuits filed by borrowers alleging predatory lending and shareholders alleging securities fraud; (3) government investigations, and (4) collapse of Bear Stearns. In recent months, Merrill Lynch, UBS, and Citigroup each has reported losses of more than $3 billion, while Morgan Stanley and JPMorgan have reported losses of more than $2 billion. According to Standard & Poor's, the estimated losses and write-downs related to investments in mortgage securities and subprime-related investments amounts to $285 billion. Other analysts estimate that the total losses tied to subprime mortgages are as high as $400 billion.