Insurers Sue Banks for Mortgage Losses

Lita Epstein

Ever wish mortgage lenders could get a dose of the same bitter medicine they doled out to homeowners? Well, your dreams may soon be reality.

Bond insurers, who guaranteed loan payments for mortgage-backed asset pools of home equity lines and loans, are seeking billions of dollars from Bank of America because of loans made by Countrywide, which BofA purchased in 2007. Other targets for lawsuits filed by MBIA include GMAC, Residential Funding Corp. and the FDIC, because of loans made by now defunct IndyMac Bank.

The claims by the insurers allege that the loans included in the mortgage-backed securities did not meet stated underwriting guidelines; therefore the loans included in the securities should be replaced, or the insurer should be reimbursed for losses.

Kevin Brown, a representative for MBIA, indicated that the bond insurer already paid more than $4.2 billion in losses on securities for which they gave guarantees. These guarantees were sought by the bond issuers to "provide credit enhancement," so the bonds would be rated higher and could be sold for more.

Each securitization includes pools of mortgages between approximately 8,000 and 48,000 mortgage loans. The bond insurer guarantees the monthly payments and must pay any shortfall to those investors that hold the security.

While Bank of America tried to have the case against it dismissed, an April 29 ruling allowed MBIA's lawsuit to proceed. It alleges fraud and breach of implied covenant of good faith and fair dealing. Bank of America also tried to get itself removed from liability, but the court denied the motion.

Will America's leading mortgage originator get pinned to the mat for fraudulent loans?