Flagstar Ordered to Pay $90.1 Million to Bond Insurer

Flagstar Bancorp Inc. must reimburse Assured Guaranty Municipal Corp. $90.1 million the bond insurer paid when home-equity loans underlying two Flagstar mortgage- backed securities defaulted, a federal judge ruled.

U.S. District Judge Jed Rakoff, who presided over a 12-day non-jury trial in Manhattan, found that Flagstar violated agreements with Assured by failing to follow its own underwriting guidelines in making home-equity line of credit loans to homeowners. As a result, Assured was forced to pay the money to holders of the securities, Rakoff said.

“The court finds that the loans underlying the trusts here at issue pervasively breached Flagstar’s contractual representations and warranties,” Rakoff said yesterday in a 103-page opinion.

Rakoff also awarded interest and attorneys’ fees and costs to be determined, Troy, Michigan-based Flagstar said yesterday in a statement. “Flagstar strongly disagrees with the court’s ruling and intends to vigorously contest the outcome on appeal,” the company said.

Assured said yesterday in a statement that the ruling sets a strong precedent in support of its rights in these cases involving breaches of representations and warranties.

“The court recognized and clearly articulated the responsibility of an R&W provider to honor its contractual obligations to purchase defective mortgage loans,” Assured said in the statement.

“This ruling is a significant milestone in forcing the banks to honor the contractual commitments they made and have long sought to avoid,” said Jacob Buchdahl, a lawyer for Assured.

Rakoff’s opinion, a copy of which was provided by Buchdahl, couldn’t immediately be confirmed in court records. Rakoff sometimes provides rulings to attorneys representing litigants before they are made publicly available.

The case is Assured Guaranty Municipal Corp. v. Flagstar Bank, 11-cv-02375, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in Manhattan federal court at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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