MBIA sues Countrywide Financial
By Saskia Scholtes in New York
Published: October 1 2008 23:55 | Last updated: October 1 2008 23:55
MBIA Insurance is suing Countrywide Financial, alleging that the mortgage lender fraudulently induced MBIA to guarantee billions of dollars of Countrywide mortgage bonds that have cost the embattled bond insurer more than $459m.
The suit, filed in New York state?s supreme court, raises fresh questions over the extent of Bank of America?s exposure to potential legal and regulatory liabilities incurred by Countrywide, which it acquired this year.
The California mortgage lender is already facing litigation filed by borrowers and states? attorneys-general that claim Countrywide engaged in unfair and deceptive lending practices. BofA declined to comment.
MBIA said in its complaint that Countrywide had ?falsely represented? to both MBIA and investors that mortgage loans packaged into the guaranteed bonds had been originated in strict compliance with its underwriting standards.
MBIA said that as Countrywide battled for market share during the mortgage boom, the lender had developed ?a systematic pattern and practice of abandoning its own guidelines for loan origination: knowingly lending to borrowers who could not afford to repay the loans, or who committed fraud in loan applications?.
The bond insurer is suing over guarantees it provided for $14bn of Countrywide mortgage bonds that packaged home equity loans and second lien mortgages originated between 2005 and 2007.
Such loans have shown some of highest levels of late payment and default as house prices have fallen.
MBIA said in the complaint that it had paid out more than $459m on its guarantees for these bonds and that it was ?exposed to claims in excess of several hundred million dollars more?.
Bond insurers promise to make good on payments of interest and principal if an insured bond suffers losses.
The bond insurer asked the court to determine damages, including lost profits and opportunities, legal fees and payments on current and future claims under the bond guarantees.
MBIA lost its triple A credit rating this year after it was hobbled by multi-billion dollar losses on a variety of complex structured securities it guaranteed during the credit boom.
For years, bond insurers used their triple A credit ratings to guarantee payments on bonds issued by municipal and other relatively safe issuers. A move in recent years to guarantee riskier structured credit securities and mortgage debt led to a huge increase in expected losses.
source: ft