MBIA Inc. (MBI:US), the bond insurer suing Bank of America Corp (BAC:US). to recover losses tied to mortgage loans, won an appeals court ruling that the lender could be required to repurchase securitized loans even if they aren’t in default.
MBIA is entitled to have Bank of America buy back a performing loan that it can prove “materially and adversely” affected its interest, the New York state appeals panel said in a decision yesterday, reversing part of a ruling by a lower court. The panel also reversed a decision that MBIA could seek so-called rescissory damages.
“Plaintiff is entitled to a finding that the loan need not be in default to trigger defendants’ obligation to repurchase it,” the court said. “There is simply nothing in the contractual language which limits defendants’ repurchase obligations in such a manner.”
The decision stems from MBIA’s lawsuit against Bank of America and its Countrywide Financial unit. MBIA, which sued Countrywide in 2008, guarantees payments to investors that bought securities backed by pools of the lender’s loans. The insurer says the loans were riskier than represented by Countrywide, and as the loans went into default, the Armonk, New York-based company was forced to pay investors.
New York State Supreme Court Justice Eileen Bransten denied a pre-trial ruling in MBIA’s favor last year on the repurchase issue saying there were varying interpretations of contract language at issue in the case.
Kevin Brown, a spokesman for MBIA, said rulings in the appeals court’s decision “conclusively resolve any lingering questions over the strength of MBIA’s legal positions on the most significant issues in this case.”
Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, said the lender was reviewing the decision and had no further comment.
The appeals panel also upheld the lower court’s decision in MBIA’s favor that the insurer doesn’t need to establish a “direct causal link” between alleged misrepresentations by Countrywide about the loans and claim payments made by MBIA. Bank of America had argued that MBIA must prove its payments were directly caused by any misrepresentations.
The ruling is “bad news” for Bank of America, Mark Palmer, an analyst for BTIG LLC, said in a blog post. Palmer has a “buy” rating on MBIA shares, no rating on Bank of America and said he doesn’t own stock in either company.
“The bank in its SEC filings has acknowledged that its current reserve against mortgage putback-related losses may be insufficient if the courts uphold the loss causation argument,” Palmer said. “And now we have an appellate court ruling that is binding on lower New York state courts.”
Bank of America said in an annual report (BAC:US) filed Feb. 28 with the U.S. Securities and Exchange Commission that its estimates of potential future losses on putbacks on mortgages not sold to government-supported Fannie Mae and Freddie Mac were based on a belief that “repurchase claimants must prove that the alleged representations and warranties breach was the cause of the loss.”
When making that assumption and others, lender said that it estimated its reserves could only need to grow by as much as $4 billion over time. That figure could be too low, though, depending on how courts rule, Bank of America said.
“For example, if courts, in the context of claims brought by private-label securitization trustees, were to disagree with our interpretation that the underlying agreements require a claimant to prove that the representations and warranties breach was the cause of the loss, it could significantly impact the estimated range of possible loss,” Bank of America said.
The appeals panel reversed Bransten’s ruling that MBIA could seek rescissory damages, or the amount it has been required to pay less premiums it has received.
Brown, the MBIA spokesman, said the ruling on damages “does not limit our ability to achieve or change our expectation of a full recovery of all our losses.”
The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court, New York County (Manhattan).
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