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. Caveat Emptor

    A neo-Latin phrase meaning "let the buyer beware." It is a principle ...
  2. Purchase-Money Mortgage

    A mortgage issued to the borrower by the seller of the home as ...
  3. Mortgage Company

    A company engaged in the business of originating and/or funding ...
  4. Mortgage Originator

    An institution or individual that works with a borrower to complete ...
  5. Mortgage Rate

    The rate of interest charged on a mortgage. Mortgage rates are ...
  6. Mortgage Bond

    A bond secured by a mortgage on one or more assets. These bonds ...
Related Articles
  1. Markets

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  2. 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.
  3. ETFs & Mutual Funds

    Who Is To Blame For The Subprime Crisis?

    From lenders to buyers to hedge funds, it appears everyone has blood on their hands.
  4. Markets

    5 Secrets You Didn't Know About Mortgages

    Being savvy about the ins and outs of mortgages can mean big savings in the long term.
  5. Retirement

    Protect Yourself Against Reverse Mortgage Scams

    You could lose not only money, but also your home, if you fall for these schemes.
  6. Trading

    The Fall Of The Market In The Fall Of 2008

    How did America's strong economy tumble so quickly? Find out here.
  7. Markets

    Credit Crisis: What Caused The Crisis?

    By Brian PerryIn this chapter, we'll examine the causes of the credit crisis, starting with the decline in the housing market that eventually led to increased levels of mortgage defaults. These ...
  8. 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 ...
  9. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  10. Retirement

    How to Avoid Outliving Your Reverse Mortgage

    Running out of proceeds sooner than you expected to is one of the major risks of taking out a reverse mortgage.
RELATED FAQS
  1. 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 will ... Read Answer >>
  2. 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 >>
  3. If a company takes out more loans, do interest rates affect their stock price more ...

    With the news on the fed deciding when to raise interest rates, I'm trying to understand the effect of hikes on the price ... Read Answer >>
  4. 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 >>
  5. What is the difference between legal liability and public liability?

    Discover the differences between a general legal liability, a specific public liability and a professional indemnity in the ... 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. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center