A federal judge has ruled against Flagstar Bancorp Inc. in a lawsuit involving repurchase demands on nearly $1 billion in insured loans included in residential mortgage-backed securities. The bank has vowed to appeal the judgment.
Assured Guaranty Municipal Corp. originally sued Flagstar Banks FSB in April 2011 alleging that the bank misrepresented the quality of loans included in residential mortgage-backed securities insured by Assured. The $900 million in loans at issue were securitized in 2005 and 2006.
The lawsuit, filed in federal court in Manhattan, sought $116 million in recoveries for breaches of representations and warranties.
On Tuesday, U.S. District Judge Jed S. Rakoff ruled in favor of Assured. The court granted judgment in favor of Assured’s breach-of-contract claims.
The Bermuda-based bond insurer, which was previously known as Financial Security Assurance Inc., was awarded $90.1 million plus contractual interest and attorneys’ fees and costs to be determined.
“This is the first trial related to RMBS [representations and warranties] putbacks that has come to a final court ruling, and it sets a strong precedent in support of the rights of Assured Guaranty in these cases,” Assured Guaranty Ltd. President and Chief Executive Officer Dominic Frederico said in a news release. “The court recognized and clearly articulated the responsibility of an R&W provider to honor its contractual obligations to purchase defective mortgage loans.”
Assured indicated that the judgment is consistent with preliminary rulings from other courts in similar actions involving RMBS representations and warranties.
Frederico said that the decision establishes clear liability for RMBS originators and securitizers. It also strengthens Assured’s resolve to seek full recovery from other lenders who fail to honor repurchase demands.
For its part, Flagstar vowed to fight the district court’s decision.
“Flagstar strongly disagrees with the court’s ruling and intends to vigorously contest the outcome on appeal,” the Troy, Mich.-based firm said in a statement.
