Bank of America Corp., the second-biggest U.S. bank by assets, was sued by CIFG Assurance North America Inc. for fraud and breach of contract over insurance policies tied to residential mortgage-backed securities.
The suit was filed yesterday in New York state Supreme Court in Manhattan in connection with five financial guaranty insurance policies issued by CIFG. The policies relate to two structured transactions arranged by Bank of America and backed by 22 mortgage-backed securities, according to court filings.
“Bank of America had these securities in its inventory because it had been unable to sell them when it served as underwriter on the original RMBS offerings,” CIFG said in the lawsuit. “Bank of America knew of the poor quality of the mortgage loans, and knew the original unsold RMBS were a ticking time bomb on the bank’s books.”
The bank, unable to sell the securities in pieces, then “hatched a new plan of financial engineering,” repackaged the bonds, and induced New York-based CIFG to provide more than $150 million in insurance to make them marketable to investors, the insurer said in the suit.
Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to immediately comment on the lawsuit in an e-mail.
The insurer said Bank of America gave it “garbage data” that made the loans and the certificates they backed appear less risky than they actually were, including the percentage of the mortgages where the property would be occupied by the borrowers.
“Had CIFG known the truth, it never would have issued the policies,” the insurer said in the complaint. “And as a direct result of this fraudulent scheme, CIFG has paid or will have to pay in the future over $170 million in claims on policies that it would never have issued had it known the truth concerning the underwriting, characteristics and servicing of the mortgage loans and original RMBS backing the certificates.”
CIFG, based in New York, has taken similar actions in the same court over the past three years, including a $277 million suit against GreenPoint Mortgage Funding Inc. filed last month and a $275 million complaint against Goldman Sachs Group Inc. filed last year.
Justice O. Peter Sherwood in May granted Goldman Sachs’s motion to dismiss three counts in the suit, including one for fraudulent inducement. He refused to dismiss three other claims for breach of contract.
CIFG and Goldman Sachs have both appealed the decision. Sherwood in July ordered the two sides to engage in mediation, which was scheduled for Oct. 26, according to a Sept. 13 court filing. A status conference in the case scheduled for earlier this month was postponed until December.
CIFG originally sued GreenPoint in New York state Supreme Court in Manhattan in 2009, accusing the company of violating its mortgage-underwriting guidelines. Justice Bernard Fried threw out that lawsuit in 2010. Capital One Financial Corp. shut Novato, California-based GreenPoint in August 2007, less than a year after acquiring its parent company, Long Island’s North Fork Bancorp.
In February, Fried denied a motion by CIFG and fellow bond insurer Syncora Guarantee Inc. to bring new claims against GreenPoint in a lawsuit over the quality of $1.8 billion of home loans they guaranteed. CIFG in April also asked a judge to let it add GreenPoint to the Goldman Sachs lawsuit.
CIFG is also one of a group of intervenors seeking more information on Bank of America’s proposed $8.5 billion settlement with investors in mortgage bonds issued by Countrywide, which the lender bought in 2008. The settlement is awaiting approval in New York state Supreme Court in Manhattan.
Bank of America Chief Executive Officer Brian T. Moynihan, 53, has spent more than $40 billion to clean up defective mortgages and improper foreclosures.
The lender said in a regulatory filing in September that it could have as much as $2.8 billion in legal costs as of Sept. 30 beyond what it has already set aside. That’s a decline from the $4.1 billion estimated three months earlier because of a settlement of a class-action suit tied to the 2009 takeover of Merrill Lynch & Co., said Jerry Dubrowski, a Bank of America spokesman.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.
The case is CIFG Assurance North America Inc., 654028/2012, New York state Supreme Court, New York County (Manhattan).