Bloomberg News

Ambac Sues Bank of America Over Mortgage-Based Securities

April 16, 2012

Ambac Assurance Corp. sued Bank of America Corp. (BAC:US) in New York state court, accusing the company of breach of contract over a mortgage-backed securitization sponsored by its Merrill Lynch unit.

First Franklin Financial Corp. and Merrill Lynch units “acted in concert” to induce Ambac to issue an insurance policy covering payments due on securities issued in the transaction, the bond insurer said in the complaint.

Ambac claimed fraudulent inducement and breach of contract in the suit, filed today in Manhattan. Lawrence Grayson, a spokesman for Charlotte-based Bank of America, declined to comment on the lawsuit.

The insurer asked for unspecified punitive and compensatory damages and an order directing the defendants to repurchase loans. First Franklin was a subprime-mortgage originator acquired in 2006 by Merrill Lynch, which was acquired by Bank of America in 2008.

Ambac Assurance was the second-largest bond insurer before the 2008 financial crisis, when defaults on mortgages swamped the company with claims. It guaranteed about $256 billion of $1.4 trillion in insured municipal debt, according to data compiled by Bloomberg.

Plan Approved

A U.S. bankruptcy judge in Manhattan on March 15 approved a plan to reorganize the $1.7 billion in debt of New York-based Ambac Financial Group Inc. (ABKFQ:US), the bankrupt holding company for Ambac Assurance.

The mortgage loans securitized in the transaction began to default at an “extraordinary rate” shortly after closing and loans accounting for about 74 percent of the original principal balance of the trust have defaulted, lawyers for Ambac said in the complaint.

About 15,812 subprime, second-lien fixed-rate mortgages with an aggregate principal balance of about $856 million were securitized in the transaction, lawyers for Ambac said in the lawsuit.

A consultant found “breaches of representations and warranties” in about 94 percent of 1,750 loans in the trust, including misrepresentations of borrowers’ income and employment, inflated appraisals and violations of underwriting guidelines.

‘Enormous Damages’

Ambac has made “hundreds of millions of dollars” in claim payments to cover the defaults and has suffered “enormous damages” from the investment, according to the lawsuit.

Ambac has also filed similar lawsuits in the same court against JPMorgan Chase & Co. (JPM:US) and Credit Suisse Group AG over mortgage-backed securities, pools of home loans securitized into bonds that were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s.

The case is Ambac Assurance Corp. v. First Franklin Financial Corp., 651217/2012, New York State Supreme Court, New York County (Manhattan).

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net.

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


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