MBIA Wins Judgment Ruling Against Countrywide

By David McLaughlin and Shannon D. Harrington - Jan 4, 2012 6:38 AM GMT+0700

Bank of America Corp. (BAC) lost a ruling in a court fight against MBIA Inc. (MBI) that will help the bond insurer as it tries to recover losses on home loans made by the bank’s Countrywide Financial unit.

MBIA, which says it was duped into guaranteeing payment on Countrywide mortgage bonds, need only show the lender made misrepresentations about the loans backing the bonds, instead of having to prove they caused the losses the insurer is seeking to recover, New York state Judge Eileen Bransten said in a decision issued today.

“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” she wrote.

The ruling is among legal disputes with bond insurers and investors that “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.

Defeats on such matters may add as much as $9 billion to what Bank of America owes bond insurers, according to an August estimate by hedge fund Branch Hill Capital, which has bet against the lender’s stock and has invested in MBIA.

Payments to Investors

MBIA, which sued Countrywide in 2008, guarantees payments to investors that bought securities backed by pools of the lender’s loans. The insurer says the loans were riskier than Countrywide promised, and as they defaulted, the Armonk, New York-based company was forced to make payments. Through September 2010, MBIA had paid out $2.5 billion on mortgage securities sponsored by Countrywide, Chief Executive Officer Jay Brown told a New York State Assembly committee in February.

Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to immediately comment on today’s ruling.

Brown said in an e-mailed statement that the company is “very pleased” by the decision.

“The ruling provides us with a straightforward path to recovery of our losses,” he said.

Countrywide, acquired by Bank of America in 2008, had argued that MBIA must establish that payments it made on the financial guaranty policies were caused by Countrywide’s misrepresentations and not the collapse of the housing market.

Housing Market

MBIA agreed to take on the risk of a downturn in the housing market and now must meet its obligations under the insurance policies, Mark Holland, a Countrywide attorney, argued at a court hearing in October on the dispute.

“Their bets turned out wrong,” he told Bransten.

MBIA countered that Countrywide is trying to escape liability by blaming the real estate bust. MBIA lawyer Philippe Selendy likened Countrywide to a builder that constructs homes that don’t meet specifications and then tries to blame a hurricane when they’re destroyed.

“Countrywide is trying to blame everything on the housing crisis,” he said at the court hearing.

MBIA argued that 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.

Alleged Misrepresentations

Bransten wrote in her decision that MBIA must prove Countrywide made misrepresentations that were material to its decision to issues the insurance policies. It also must prove the alleged misrepresentations “materially increased” MBIA’s risk of loss and that it was damaged as a direct result, she wrote.

“As has been aptly pointed out by Countrywide, this will not be an easy task,” the judge said.

Credit default swaps protecting against MBIA Insurance Corp.’s default for five years fell 3.8 percentage points to 28 percent upfront as of 4:33 p.m. in New York, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $2.8 million initially and $500,000 annually to protect $10 million of MBIA Insurance’s debt. The credit default swaps are down from 53 percent upfront on Oct. 4.

Contracts on Bank of America pared an earlier decline, easing to 86.5 basis points, according to CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.

Causation Issues

A loss for Bank of America on the so-called causation issue may by itself add $8 billion to $9 billion of liabilities from bond insurers for the lender, Manal Mehta, a partner at Branch Hill Capital in San Francisco, said in August. The matter, he said, is probably as important as another dispute within the case in which a judge sided with MBIA that it could review samples of loans rather than review every individual mortgage in dispute.

Grayson, the Bank of America spokesman, said in August that Branch Hill’s estimates were wrong and that the hedge fund has “consistently overstated” the bank’s exposure to representation and warranty claims.

The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court (Manhattan).

To contact the reporter on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net