MBIA Sues Morgan Stanley Over Mortgage-Backed Debt

MBIA Insurance Corp. sued Morgan Stanley over allegations the securities firm “fraudulently induced” the insurer to issue policies covering $223.2 million in mortgage-backed securities.

The bond-insuring unit of MBIA Inc. claims Morgan Stanley and one of its units failed to disclose that most of the 5,000 underlying loans didn’t meet the underwriting guidelines of the firm or the originators, according to a complaint filed yesterday in New York state court in White Plains.

“A vast number of the mortgage loans were made to borrowers who could not reasonably have been expected to repay their mortgage debt,” MBIA’s attorneys alleged in the complaint.

MBIA’s subsidiary is the biggest insurer of bonds and mortgage-backed debt instruments. In a 2008 complaint, it claimed the Countrywide Financial unit of Charlotte, North Carolina-based Bank of America Corp. misrepresented its underwriting standards, causing the insurer cover more than $459 million in losses.

“We believe the suit is without merit and we intend to defend ourselves vigorously,” Morgan Stanley spokesman Mark Lake said in a telephone interview today.

MBIA, based in Armonk, New York, seeks unspecified money damages and a court order directing New York-based Morgan Stanley and its subsidiary to indemnify it for all loses.

The case is MBIA Insurance Corp. v. Morgan Stanley, 29951- 2010, Supreme Court of the State of New York, County of Westchester (White Plains).

To contact the reporter on this story: Andrew M. Harris in Chicago at aharris16@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.