Caveat

DEFINITION of 'Caveat'

Caveat is a Latin term that means "let him beware." There are many types of caveats in law and finance, with the most common being "caveat emptor," meaning "let the buyer beware," and "caveat venditor," meaning "let the seller beware." The legal applicability of these concepts can determine civil and criminal liability.

BREAKING DOWN 'Caveat'

Caveat is a warning or caution to an individual or entity to use care before proceeding. The term has a range of usages.

Examples

The most common usage is "caveat emptor," which means that the buyer of goods or services is expected to exert caution and cannot recover damages for an inferior product. In some jurisdictions, consumer protection laws provide for refunds or exchanges for consumers that purchase goods that do not do what they're supposed to do. Many transactions between businesses treat the two as equals with no protection to the buyer unless fraud can be demonstrated.

"Caveat venditor" puts the burden on the seller to investigate potential flaws in the goods or services to be sold and to meet all legal requirements related to the transaction. Failure to do so can make a contract unenforceable.

"Caveat lector" warns the reader to beware of what may be written, while "caveat auditor" warns the listener to beware of what he may hear.

Mortgage-Backed Securities

Among the factors that fueled the 2008 market crisis was the widespread sale of securities that were backed by pools of mortgages that were bundled and sold by investment banks. The securities were backed by multiple tranches of residential mortgages of differing credit quality, and the securities were known to include sub-prime mortgages. Many of the securities quickly became worthless as the housing market collapsed.

The U.S. Securities and Exchange Commission and the Department of Justice have charged many of the country's largest financial institutions with defrauding investors because they lied about the quality of the underlying mortgages. They have had only limited success in criminal prosecutions but have reached civil settlements in the billions of dollars with Goldman Sachs, Citigroup, Bank of America and JPMorgan Chase.

The packaging of the securities, which were given investment-grade ratings by the credit rating agencies, was done under the caveat emptor concept. The concept was central to the business model as the purchasers of the securities were considered sophisticated investors who should be able to evaluate their worth. While that has made successful criminal prosecutions difficult, it has not been a protection against civil charges.

RELATED TERMS
  1. Purchase-Money Mortgage

    A mortgage issued to the borrower by the seller of the home as ...
  2. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  3. Primary Mortgage Market

    The market where borrowers and mortgage originators come together ...
  4. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  5. Fail

    In common trading terms, if a seller does not deliver securities ...
  6. Mortgage Company

    A company engaged in the business of originating and/or funding ...
Related Articles
  1. Personal Finance

    The Ins And Outs Of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  2. Investing

    Why Are Mortgage Rates Increasing?

    Learn how the secondary mortgage market and investor demand affect the cost of home ownership.
  3. Personal Finance

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  4. Trading

    The Fall Of The Market In The Fall Of 2008

    How did America's strong economy tumble so quickly? Find out here.
  5. Investing

    Exploring Real Estate Investments: Buying And Owning Real Estate

    By Ian Woychuk, CFA In Chapter 2, we presented the investment selection matrix, which outlines your alternatives when choosing the kind of real estate investment to make. You can choose to invest ...
  6. Markets

    Goldman Sachs Agrees to $5 Billion Settlement (GS)

    The Department of Justice announced Monday that Goldman Sachs Group Inc. (GS) will pay $5 billion to settle state and federal claims related to its handling of mortgage-backed securities in the ...
  7. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  8. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  9. Markets

    The Debt Ratings Debate

    Lack of competition and potential conflicts of interest have called the value of these ratings into question.
  10. Retirement

    Should Retirees Still Have Mortgages?

    Identify the pros and cons of keeping a mortgage into retirement, and understand in which situations it is beneficial not to pay off a mortgage.
RELATED FAQS
  1. Does private school tuition figure into our monthly debt when calculating our DTI?

    We spend about $1,000/month on private school for our kids. ... Read Answer >>
  2. What is the process to take over a mortgage through a loan assumption?

    My landlord wants me to take over her mortgage.  ... Read Answer >>
  3. How long will it take for me to receive the money that I profited from the stock ...

    What I'm trying to say is that if I place in an order into the market, and either profit or lose the money, how long ... Read Answer >>
  4. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  5. What role did securitization play in the U.S. subprime mortgage crisis?

    Learn how the securitization of sub-prime mortgages into asset-backed securities fueled the real estate market crash in 2 ... Read Answer >>
  6. How much risk is associated with subprime mortgages?

    Discover the risks associated with subprime mortgages. Find out whether taking out a subprime mortgage on your home is really ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center