MBIA Seeks Data in $1 Billion Credit Suisse Mortgage Suit

MBIA Inc. asked a judge to order Credit Suisse Group AG to turn over internal records that the bond insurer says bolster its contention the bank lied about how it processed loans packaged into mortgage-backed securities.

MBIA said in a court filing today that Credit Suisse has withheld evidence about how the bank’s actual practices diverged from its representations -- including documents identified as exhibits in other lawsuits based on the same allegations.

The bond insurer asked Justice Shirley Werner Kornreich in New York State Supreme Court in Manhattan to force the bank to search documents and e-mails on its policies and practices including those related to loan underwriting and origination, due diligence and post-acquisition quality-control review.

MBIA, based in Armonk, New York, sued Zurich-based Credit Suisse in December 2009, saying it made “pervasive and material misrepresentations” about the loans underlying $1 billion worth of mortgage securities.

Pools of home loans securitized into bonds were central to the housing bubble that helped send the U.S. into the worst recession since the 1930s. The housing market collapsed and the market for the securities evaporated.

Drew Benson, a spokesman for Credit Suisse, declined to comment on the filing.

According to the filing, documents withheld by Credit Suisse -- and produced in other cases -- show that the bank’s sales operations dictated decisions that were supposed to ensure the quality of loans.

‘Broken’ Processes

Withheld documents also show that Credit Suisse knew its underwriting and due-diligence processes were “broken,” according to the filing. MBIA claimed the bank misrepresented the way it put protocols in place that were designed to avoid acquiring loans from “deficient originators,” and that the company didn’t correct its quality-control and repurchase practices.

One e-mail from November 2006, shown in court documents, shows that one Credit Suisse executive, former managing director John Vibert, was concerned about the company’s underwriting exceptions, mentioning the possibility of liability “down the road when loans go bad and people point out that we violated our own guidelines.”

Approval Pressure

According to Vibert’s e-mail, another executive, managing director Robert Sacco, complained about constantly being pressured to approve loans when the borrowers’ income seemed unreasonable, such as one for a gas station attendant living with his mother who claimed to make $93,000 a year and another for a data analyst who used to be a sales clerk at Nordstrom making $110,000.

In another e-mail from June 2007, Vibert called the company’s diligence process is a “joke” and that its eligibility guidelines were so broad that “any loan could, and did, get through what passed for diligence here,” according to the filings.

Another e-mail from April 2007 shows that managing director Peter Sack said that he was inclined to securitize loans that are “close calls or marginally non-compliant” and risk having to buy the loans back “rather than adding to sludge in inventory.”

Financial Crisis

Credit Suisse is one of a group of lenders sued by MBIA in the wake of the financial crisis and accused of making misrepresentations about the characteristics of loans underlying mortgage-backed securities in order to induce the insurer to guarantee the bonds.

The bank is one of the few remaining parties that haven’t settled with MBIA in so-called mortgage putback litigation, Mark Palmer, an analyst with BTIG LLC in New York, said in a June 16 note to investors.

Credit Suisse is also facing a similar suit from Assured Guaranty Ltd. as well as claims from the states of New York and New Jersey. Kornreich in February ordered Credit Suisse to face claims for some damages in the Assured Guaranty case, a ruling that may allow the insurer a larger recovery.

Credit Suisse said in February that it was putting aside more than $500 million for legal issues, including mortgage litigation, which Palmer said at the time may have been a sign it was preparing to resolve the bond insurer suits.

FHFA Lawsuits

The company said the following month that it had agreed to pay $885 million to settle lawsuits by the Federal Housing Finance Agency over mortgages sold to Fannie Mae and Freddie Mac. Credit Suisse was among 18 lenders sued by the FHFA in 2011 to recoup losses on about $200 billion in mortgage-backed securities sold to the two government-sponsored companies before the financial crisis.

Nine companies, including JPMorgan Chase & Co., Deutsche Bank AG and UBS AG, have agreed to pay more than $9.2 billion to settle similar lawsuits by the FHFA.

MBIA Chief Financial Officer Charles Chaplin said on a conference call last month that the health of one of his company’s main units could depend on recovery of its claims against Credit Suisse.

The case is MBIA Insurance Corp. v. Credit Suisse Securities (USA) LLC, 603751/2009, New York State Supreme Court, New York County (Manhattan).

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