“Bank of America Corp. may face billions of dollars more in liability for faulty mortgages if a judge agrees with insurer MBIA Inc. that the lender must buy back loans even if the errors didn’t cause a borrower’s default…If New York Supreme Court Justice Eileen Bransten and judges in similar cases across the country rule that the issue of “causation” doesn’t apply — meaning it’s enough to show that the loan was improperly made — it “could significantly impact” Bank of America’s potential costs, the bank said in a regulatory filing this month…
Such court defeats may add as much as $9 billion to what Bank of America owes bond insurers, according to hedge fund Branch Hill Capital, which is betting against its stock and has invested in MBIA. A victory for Armonk, New York-based MBIA may also strengthen claims by mortgage-securities investors…“You don’t have to wait until you’re in a severe accident before you return the car with bad brakes,” said David Grais…
The decision may intensify settlement talks between bond insurers like MBIA and other banks that issued securities based on faulty mortgages, according to the head of insurer Assured Guaranty Ltd., which is demanding money from lenders including UBS AG and Credit Suisse Group AG…
“If they lose that case, then our certainty of getting reimbursed becomes a lot higher,” Dominic Frederico, Assured’s chief executive officer, said in an interview…
Since the start of 2010, Bank of America’s cushion for future losses on repurchases of mortgages that never matched their promised quality has ballooned from $4 billion to $17.8 billion even as it made payments in settlements with debt guarantors such as Fannie Mae and Freddie Mac, the government- supported mortgage giants…
Its reserves and guidance on how much more it may need are based on several assumptions, though, including the company’s view that losses will only have to be reimbursed if it can be proven “that the alleged representations and warranties breach was the cause of the loss,” the bank said in the Aug. 4 filing with the Securities and Exchange Commission. If courts disagree, “it could significantly impact” the estimate of as much as $5 billion in additional liabilities…
“It could change the playing field,” MBIA Chief Executive Officer Jay Brown said on an Aug. 10 conference call with analysts and investors when asked about the causation issue. It could “have a very significant effect on the ability to rescind or obtain recessionary damages,” he said. “So, it can affect the view of both parties as to the likely outcome of the trial.”…
In December, Justice Bransten denied Bank of America’s bid to prevent MBIA from using reviews of samples of loans in the case, rather than requiring reviews of every individual mortgage in dispute. The ruling may add to the threats facing Bank of America by encouraging suits, according to the SEC filing…
Bank of America needs to set aside between $10.6 billion and $44.4 billion more to cover losses on soured mortgages sold to or insured by others, said Chris Gamaitoni, a Compass Point Research and Trading LLC analyst…
MBIA’s lawyers at Quinn Emanuel Urquhart & Sullivan LLP are also arguing that insurance law should allow it to win against Bank of America on breach-of-contract and fraud claims without proving causation…The causation issue alone may add $8 billion to $9 billion of liabilities from bond insurers, said Manal Mehta, a partner at Branch Hill Capital in San Francisco…
“That is probably as important as the statistical sampling ruling,” Mehta said. “It would take away one of Countrywide’s key defenses and significantly accelerate the timetable for litigation.”…Bank of America, in its talks with 22 of the world’s largest debt investors, argued that any loan repurchase would require loss causation be proven, according to a filing in New York state court of an expert opinion by Brian Lin, a managing director at RRMS Advisors. Those negotiations led to the proposed $8.5 billion settlement…
Lin said a settlement between $8.8 billion and $11 billion would be reasonable, relying in part on an assumption that investors would be successful in getting Bank of America to repurchase only 40 percent of misrepresented loans…
Lin was hired by Bank of New York Mellon Corp., the bonds’ trustee that is seeking approval for the accord.”
