A legal battle between MBIA Inc. and Bank of America Corp. over billions of dollars in failed mortgages is nearing a crucial hearing that will likely also carry implications for other mortgage-repurchasing lawsuits involving each party.
Armonk-based MBIA through June 30 had paid $4.6 billion in claims relating to faulty mortgages that were packaged into securities it had insured. At least $2.5 billion stemmed from transactions sponsored by Countrywide Home Loans, now owned by Bank of America.
In what was one of the first legal challenges mounted against a major lender in the wake of the subprime mortgage crisis, MBIA sued Countrywide in 2008 to recover all of its losses resulting from faulty loans originated by Countrywide. In court documents, the Armonk insurer accused Countrywide of fraud, breach of contract and of misleading MBIA as to the quality of the mortgages that were subsequently packaged into securities and insured.
Representatives of both companies will appear in New York State Supreme Court Oct. 5 for a hearing that will determine whether the issue of “causation” applies.
Attorneys for MBIA will argue that, if and when the case goes to trial, they should only need to show that the company would not have insured the securities if not for the allegedly fraudulent actions of Countryside.
Bank of America, on the other hand, said in an Aug. 4 filing with the Securities and Exchange Commission that it believes the losses should only have to be reimbursed if it can be proved “the alleged representations and warranties breach was the cause of the loss.”
If state Supreme Court Justice Eileen Bransten decides in favor of MBIA in the October hearing, that decision could have far-reaching effects on other mortgage-repurchasing lawsuits that Bank of America and MBIA respectively are involved in, with San Francisco-based hedge fund Branch Hill Capital projecting such court setbacks could cost Bank of America an additional $9 billion on top of the $14 billion already set aside by the bank to cover claims.
Bank of America wrote in its August SEC filing that if the courts find in favor of companies such as MBIA in Countrywide”™s ongoing legal battles over residential mortgage repurchasing, “it could significantly impact” the bank”™s estimate of what it could owe.
Joseph W. Brown, CEO of MBIA, said in an Aug. 10 conference call with investors that the hearing could have a “very significant effect on the ability to rescind or obtain rescissionary damages” and that “it can affect the view of both parties as to the likely outcome of the trial so we think it is an important hearing.”
Brown said the case could have a major impact on the four other lawsuits in which MBIA is plaintiff, including lawsuits against Credit Suisse, Morgan Stanley and Ally Bank, which owns GMAC Mortgage L.L.C.
“It could change the playing field,” Brown said, speaking in regard to the upcoming hearing and how it will impact the case.
“Obviously this hearing, as we”™ve found with most things with Countrywide since that”™s the case that”™s furthest along, will also affect the other four cases that we have running in tandem.”
Bank of America representatives declined to comment on the allegations.
BofA”™s legal challenges
While the MBIA-Countrywide lawsuit carries major implications for both parties involved, individuals close to the proceedings have said the outcome of the upcoming hearing and of any subsequent trial or settlement will carry greater weight for Bank of America.
The country”™s largest bank, which last Monday announced it would cut 30,000 employees and trim $5 billion in annual costs by the end of 2013 as part of a major restructuring plan, is in the midst of numerous legal battles with tens of billions of dollars potentially at stake.
Bank of America”™s legal woes stemming from its Countrywide acquisition include: a recent $8.5 billion settlement with a pool of investors over mortgage-backed securities repurchasing claims that is still awaiting court approval; a $10 billion lawsuit filed against the bank by American International Group Inc. in August; a $1.6 billion settlement reached earlier this summer with bond insurance provider Assured Guaranty Ltd.; and now a sweeping lawsuit filed against the bank by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.
Since the beginning of 2011, the bank”™s stock has fallen by more than 45 percent.
George Strayton, the recently retired CEO of Provident Bank and member of the board of directors of the Federal Home Loan Bank of New York, said Bank of America is paying dearly for its acquisition of Countrywide.
“To some degree, Bank of America is paying for the sins of some other entity,” Strayton said. “When they took over Countrywide, they took over all the obligations that came with it.”
He said the wave of legal action aimed at Bank of America will take its toll on the bank”™s reputation among consumers and investors. “Clearly it does impact it,” he said. “They”™re paying for the sins of Countrywide ”¦ They bought it, they own it, and they”™re paying for it.”
The collective extent of the legal action against Bank of America will have a long-lasting effect on how the company operates and is perceived, said David O. Beim, professor of finance and economics at the Columbia University Business School.
“They obviously have a big financial stake. They are being attacked on all sides, including by the government. They have already had a lot of losses in securitizations, and they probably deserve to.”
He said in the run-up to the subprime mortgage crisis, there was a complete lack of documentation and analysis on the part of the loan originators, leading to the faulty loans.
“The documentation was poor, financial analysis was often nonexistent,” Beim said, adding that for the bank, the legal challenges pose both a “reputational risk and also financial risk.”
