MBIA Sues Flagstar Unit for Losses on Mortgage Securities

MBIA Inc. sued Flagstar ABS LLC claiming it made misrepresentations to induce the bond insurer to issue policies for two mortgage-backed securitizations that defaulted, leading to more than $165 million in claims payments.

MBIA, based in Armonk, New York, alleges that Flagstar sponsored two securitizations known as 2006-1 and 2007-1 and avowed that it had originated or acquired all of the loans and each complied with underwriting guidelines, according to the complaint filed today in U.S. District Court in Manhattan.

Flagstar “pierced the heart of the parties’ bargain by selling the trusts collateral pools replete with breaching loans,” MBIA said in the complaint. “Flagstar’s warranties were false,” with more than 90 percent of the loans reviewed in samples violating them, MBIA alleged.

The 2006 transaction, which had a principal balance of about $400 million, defaulted, resulting in losses totaling about $51 million and claim payments of more than $32 million, MBIA said. The 2007 transaction, with a principal balance of about $625 million, also defaulted, leading to losses of more than $174 million and resulting in $133 million in loan payments, the bond insurer claims.

In each transaction, the unit of Troy, Michigan-based Flagstar Bancorp Inc. sold a pool of mortgage loans to trusts, which issued securities backed by cash flows from the loans and MBIA’s financial guaranty policy.

Relief Sought

Flagstar has refused to buy back any defective loans, MBIA said. The bond insurer seeks relief “sufficient to place MBIA in the position it would be in had it not entered into the insurance agreements and issued the policies.”

Flagstar doesn’t comment on pending litigation, Susan Cherry-Bergesen, a company spokeswoman, said in an e-mail.

Flagstar Bancorp last February agreed to pay $132.8 million to settle a U.S. lawsuit accusing it of improperly approving home mortgage loans for government insurance. Flagstar delegated key underwriting functions to unqualified employees and submitted false documents to the government, inducing the Federal Housing Administration to insure ineligible mortgage loans, the U.S. said.

The bank set a daily quota for underwriters processing loans, Manhattan U.S. Attorney Preet Bharara said at the time the U.S. suit was filed.

The case is MBIA Insurance Corp. v. Flagstar ABS LLC, 13-0262, U.S. District Court, Southern District of New York (Manhattan).

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