Everyone else stands to lose. Many brokerages and lenders have gone out of business, particularly in the nonprime sector, and those that survive likely will see a decrease in business during the next several years. The biggest cash-losers, however, are wealthy investors who bought the hedge funds that invested in mortgage securities. A great number of homeowners likely will continue to lose their residences and be forced to return to rental properties.

Here is a deeper look at what each of these players could face in the next few months:

• Mortgage brokers: With so many nonprime, Alt-A and even traditional lenders disappearing, mortgage brokers are facing difficult times. Those who survive must return to basics and make loans largely within government-sponsored-enterprise guidelines to buyers who have credit scores in the mid 600s and can make 20-percent downpayments.
  
  Smart brokers will live within the system and not try to compensate by brokering risky loans, and trying to sneak them by underwriters. The best strategy is to stick to fundamentals, to try to mine prior clients who may be moving and to wait out the storm. Gradually, by the end of 2008 or mid-'09, some of the more-exotic-loan programs may return. But they will do so slowly -- and certainly not at the level where someone with a 550 FICO score can borrow $500,000 with no downpayment.
  
  
• Investors: In terms of actual losses, the investment banks that securitized the riskier nonprime loans and their hedge-fund customers will suffer the biggest financial deficits. Hedge funds may fail or their returns may disappear when the collateral is liquidated and the return is much less than principal. Investors will take huge losses, but the large players will survive.
  
  
• Homeowners: Of the market players, individual homeowners likely will face the severest disruption. Foreclosure rates continue to rise. The high rates are putting more downward pressure on home prices and paradoxically, upward pressure on rents because many foreclosed homeowners are returning to rentals.
  
  This may be partly mitigated if some foreclosed-upon homes are put on the rental market. In terms of direct financial losses, buyers who put little or nothing down will lose only what they invested in their properties. For them, the biggest loss will occur when they try to re-enter the market and discover that mention of a foreclosure on their credit reports may preclude them from certain kinds of loans. Perhaps we will soon see a growing number of loan products and vehicles specifically designed for foreclosed-upon buyers.

Possible solutions

It seems like not a day goes by without an elected official coming up with an idea as to how to prevent foreclosures. But few, if any, of these schemes likely will work.

Much of housing-related legislation proposed in the past year suffers from the same problem -- trying to distinguish between those who were playing the market and knew that their ability to repay depended on rapid market appreciation, and those who were induced to take out loans they could not afford.

We have also seen a plethora of individual and class-action lawsuits seeking to remedy the plight of borrowers and investors. Mortgage originators, ratings companies and even investors have faced class-action lawsuits seeking to rescind or otherwise modify risky loans. There are certainly instances where such lawsuits are well-directed, particularly when predatory lending is involved. But in general, litigation cannot make someone who is unable to repay a loan suddenly able to do so.

It appears that legislation and litigation will have only a limited effect on the crisis. Only time, and some measurable financial pain, will cause this dislocation to work its way through our economy so that in a year to 18 months, we can return to a stable real estate market.

Paul L. "Buddy" Warner, a magna cum laude graduate from Harvard Law School, is a partner at Jeffer, Mangels, Butler & Marmaro LLP in the firm's San Francisco office. Warner has represented mortgage originators and brokers in lawsuits involving claims of fraud and breach of contract. JMBM, a full-service law firm, has offices in Los Angeles, San Francisco and Orange County, Calif. For more information, visit JMBM.com. Reach Warner at (415) 398-8080 or PWarner@jmbm.com.

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