On February 6, Judge Rakoff of the Southern District of New York ruled in favor of monoline insurer Assured Guarantee Municipal Corp. against Flagstar Bank FSB after presiding over a bench trial seeking damages for breach of loan-level representations and warranties. Flagstar, a loan originator and RMBS sponsor, contracted for Assured to provide bond insurance on two securitizations of home equity loans totaling approximately $900 million. Flagstar represented to Assured that at the time of origination the loans complied with Flagstar’s underwriting guidelines, but Judge Rakoff concluded in his findings of fact and conclusions of law, based in large part on expert testimony describing the re-underwriting of loan samples, that Flagstar breached certain of its representations. Judge Rakoff awarded Assured $90 million in damages. Findings & Conclusions.
Flagstar Bank FSB
Federal Court Rules that Insurer May Prevail on its Representation and Warranty Claims Without Proving that the Breaches Caused Loans to Default
On September 25, Judge Jed S. Rakoff of the Southern District of New York issued a written opinion denying summary judgment in Assured Guaranty Municipal Corp.’s contract dispute with Flagstar Bank FSB over its insurance policies on nearly $1 billion in mortgage-backed securities backed by home equity loans. Assured initiated this action in April 2011, alleging that Flagstar breached representations and warranties concerning the underwriting guidelines used to originate the mortgages, the credit characteristics of the loans, and the absence of negligence or fraud in the origination process. Assured alleges that many of the loans have defaulted, resulting in $82.4 million in claims paid to date. In denying Flagstar’s summary judgment motion, Judge Rakoff found that Assured need not demonstrate loss causation – that is, that the representation and warranty breach caused the loan to default and caused Assured to suffer damages – but rather that Assured could prevail if it proves that the representation and warranty breach materially increased the risk of loss to Assured. Trial in this matter is scheduled for October 9. Judge Rakoff’s ruling is similar to that of Judge Paul Crotty in Syncora Guarantee Inc. v. EMC Mortgage Corp., a decision covered in the June 25 issue of the Week in Review. Order.