The lawsuit against Flagstar Bancorp Inc of Troy, Michigan, is one of
the first to go to trial over claims that a lender misrepresented loans
pooled into mortgage-backed offerings.
Flagstar was sued in 2011 by bond insurer Assured Guaranty Ltd, which
had guaranteed $900 million of securities and was on the hook to pay
investors when the investment plummeted in value in the housing market
meltdown.
While Assured is seeking only $108 million in its breach-of-contract
case -- a relatively small sum in financial industry litigation -- Wall
Street will be watching the Manhattan federal court trial closely.
Assured has also sued UBS AG, Credit Suisse Group AG, Deutsche Bank AG
and JPMorgan Chase & Co over similar allegations.
Leading up to the lawsuit, Assured had demanded Flagstar repurchase some
of the loans, and Flagstar refused, according to the insurer's
complaint. Flagstar has countered that Assured is a sophisticated party
that extensively reviewed the securities before agreeing to insure them.
During a September 5 insurance industry conference hosted by brokerage
firm Keefe, Bruyette & Woods, Assured Chief Executive Dominic
Frederico referred to the potential impact of a "big win" in the
Flagstar case.
The other defendants "will all of a sudden get really interested in getting a settlement achieved," he said.
Ashweeta Durani, a spokeswoman for Assured, and Susan Bergesen, a
spokeswoman for Flagstar, declined to comment for this story.
FIRST TO TRIAL
The Flagstar lawsuit is one of many cases over mortgage practices when the housing market was booming.
In February, Flagstar agreed to a $132.8 million settlement to resolve
civil fraud claims by the U.S. Department of Justice that the bank had
improperly approved thousands of home mortgages for government
insurance.
The Justice Department on Tuesday sued Wells Fargo, also on allegations
of falsely certifying mortgages that were federally insured.
In another case, the New York attorney general sued JPMorgan earlier
this month over the quality of the loans in mortgage securities sold by
Bear Stearns.
Other bond insurers, including MBIA Inc and Ambac Financial Group Inc,
have also brought lawsuits similar to Assured's over repackaged
mortgages. One of the biggest pending cases is MBIA's $3 billion lawsuit
against Bank of America Corp's Countrywide Financial unit in New York
State Supreme Court. A trial date in that case has not been set.
The Flagstar case has progressed swiftly to trial thanks in part to the
presiding judge, Jed Rakoff, who is known for trying to get cases to
move along quickly. A settlement is still possible ahead of the trial,
but neither side would comment on whether any settlement discussions
were underway.
Rakoff, who is hearing the case without a jury, is well known in the
financial industry. He is the same judge who last year rejected
Citigroup Inc's $285 million settlement with the U.S. Securities and
Exchange Commission over the sale of toxic mortgage debt. He criticized
the SEC for allowing the bank to settle without admitting or denying the
allegations.
The Flagstar trial is expected to focus heavily on why certain loans
were included in mortgage-backed securities, an issue at the heart of
the lawsuits brought by the bond insurers.
The question is whether lenders misrepresented details of the loans, such as homeowners' credit scores
and their debt-to-income ratios, painting a false picture of the
default risks of mortgages underlying the securities. The insurers point
to underwriting guidelines that required all the loans in the
securities to meet standards.
Assured has accused Flagstar of falsely representing the quality and
characteristics of loans packaged into two offerings issued in 2005 and
2006. An analysis of 800 loans found 610 instances of
misrepresentations, according to Assured's lawsuit.
The trial could also test bond insurers' ability to recover damages
using evidence from so-called "statistical sampling." Insurers say they
should be able to rely on a sample of the multitude of loans underlying a
mortgage pool, rather than have to go loan by loan to prove their case
as the defendants have sought.
Flagstar has denied misrepresenting the loans, and has said Assured's case is based on "faulty statistical hypotheses."
The case is Assured Guaranty Municipal Corp v Flagstar Bank, FSB in U.S.
District Court for the Southern District of New York, No. 11-2375
source: nytimes.com
