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BofA Loses Court Ruling in $2.5Bn MBIA Case
January 4, 2012
[ by Melanie Gretchen ]
Bank of America lost a court ruling against MBIA, which makes it easier for the bond insurer to pursue its large lawsuit against BofA's Countrywide Financial unit.
What Happened. MBIA agreed to insure the mortgage backed securities issued by Countrywide Financial, guaranteeing payments to investors of those securities. However, in 2008, MBIA had to begin making payments on the loans. The insurer filed a lawsuit against Countrywide, charging the financial company with having misrepresented - i.e., understated - the risk of the mortgage loans backing the securities. Through 9/30/10, MBIA had paid out $2.5 billion on mortgage securities sponsored by Countrywide, CEO Jay Brown told a NY State Assembly committee in February.
Arguments. At a court hearing in October, Countrywide attorney Mark Holland said MBIA agreed to take on the risk of a downturn in the housing market and now must meet its obligations under the insurance policies.
MBIA countered that it was misled into guaranteeing payment on those securities, and discounted the lender's excuse which blamed the real estate bust for failed mortgages. An attorney for the insurer compared Countrywide to a builder that constructs homes that don’t meet specifications and then tries to blame a hurricane when they’re destroyed.
The insurer said it's enough to show that there were material misrepresentations about the loans and that it wouldn’t have agreed to provide insurance if it knew the loans didn’t live up to their promised quality.
Ruling Eases Burden of Proof That MBIA Must Demonstrate. New York state Judge Eileen Bransten ruled that, going forward, MBIA only has to show that Countrywide made misrepresentations that were material to the insurer's decision to guarantee payment of the mortgages backing the bonds. Without this ruling, MBIA would have had to establish that Countrywise caused the losses the insurer now seek to recover. In her ruling, the Judge wrote that the insurer must prove the alleged misrepresentations “materially increased” its risk of loss and that it had been damaged as a direct result.
Why It's Significant. Legal disputes with bond insurers and investors "could significantly impact" the potential costs from loans made before the collapse of the U.S. housing market in 2008, Bank of America said in a regulatory filing in August.
By lessening the burden of proof for MBIA to establish its position, MBIA now has a better likelihood of winning the case. If that happens, other insurers that previously filed similar suits against Countrywide will be able to use MBIA's ruling as a precedent in their cases - which, in turn, would strengthen their arguments and increase the likelihood of winning their respective cases - amounting to some $9 billion, in the aggregate.
Case in Point: In a similar lawsuit filed by Syncora Guarantee, against Countrywide, Judge Bransten also ruled today that Syncora doesn’t have to show that misrepresentations by Countrywide caused claims payments by Syncora.
Needless to say, $9 billion is a huge figure that BofA CEO Brian Moynihan may not have figured on. The case: MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court (Manhattan). For further details, go to [Bloomberg, 1/4/12].Related Stories: Archive
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