Manal Mehta Sunesis Capital

BAC and GSE Putbacks: A big problem and cause of concern — This line from a court ruling can cause big headaches for BAC: “not required to establish a direct causal connection between proven warranty breaches by [Countrywide] and…claims payments made”

BAC’S claim that “hey, it doesn’t matter that there was a violation of rep + warranties because the loan performed for longer than x years after origination” simply does not make sense. Courts have upheld that counterparties are “not required to establish a direct causal connection between proven warranty breaches by [Countrywide] and…claims payments made.” If BAC gets away with its logic, basically they can conduct fraud, forge W2s, have missing appraisals, etc. just so long as it’s discovered 2 years after origination. Time does not/should not give a get out of jail free card.

A direct quote from a court decision:

“not required to establish a direct causal connection between proven warranty breaches by [Countrywide] and MBIA’s claims payments made”

From the decision:
Accordingly, it is hereby:

ORDERED that MBIA Insurance Corporation’s motion for partial summary judgment is granted to the extent that MBIA Insurance Corporation (“MBIA”) must establish for its claim of fraud that misrepresentations by the defendant(s) induced MBIA to issue insurance policies on terms to which it otherwise would not have agreed and that MBIA is not required to establish a direct causal link between defendant(s) misrepresentations and MBIA’s claims payments made pursuant to the insurance policies at issue; and it is further

ORDERED that MBIA Insurance Corporation’s motion for partial summary judgment is granted to the extent that MBIA must establish for its claim for breach of the Insurance Agreement against Countrywide Home Loans, Inc. (“CHL”) that CHL’s breach of warranties in the issued insurance policies; transaction documents increased the risk profile of the issued insurance policies and MBIA is not required to establish a direct causal connection between proven warranty breaches by CHL and MBIA’s claims payments made pursuant to the insurance policies at issue; and it is further

ORDERED that MBIA Insurance Corporation’s motion for partial summary judgment is granted to the extent that MBIA Insurance Corporation may seek rescissory damages upon proving all elements of its claims for fraud and breach of representation and/or warranty


Very important Paragraph from Jay Brown’s testimony to the NY State assembly standing committee on insurance that relates to whether MBIA would have issued these policies had the misrepresentations been known:

“These reps and warranties were critical to us, as these criteria were a key determinant of the quality of loans eligible to be included in the loan pool – and consequently, how the pool could be expected to perform. Interestingly, during this same time period, we insured several billion dollars’ worth of subprime mortgage securitizations. We required overcollateralization consistent with subprime loans because the pools were accurately represented to us, and we understood that they posed a higher risk than securitizations of prime loans. Ironically, these subprime transactions have performed with virtually no losses. Our losses have actually come from securitizations of what were represented to us as pools of prime loans – which, as a result, were structured with less overcollateralization. But because the quality of the loans was misrepresented, and they turned out to be anything but prime, the performance of the securitizations has been abysmal.

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