Bank of America Corp. lost a ruling in a court fight against MBIA Inc. that will help the bond insurer as it tries to recover losses on home loans made by the bank’s Countrywide Financial unit.
MBIA, which says it was duped into guaranteeing payment on Countrywide mortgage bonds, need only show Countrywide made misrepresentations about the loans backing the bonds, instead of having to prove they caused the losses the insurer is seeking to recover, New York state Judge Eileen Bransten said in a decision issued Tuesday.
“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” she wrote.
The ruling is among legal disputes with bond insurers and investors that “could significantly impact” the potential costs from loans made before the collapse of the U.S. housing market in 2008, Bank of America said in a regulatory filing in August.
Defeats on such matters may add as much as $9 billion to what Charlotte-based Bank of America owes bond insurers, according to an August estimate by hedge fund Branch Hill Capital, which has bet against the lender’s stock and has invested in MBIA.
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 Countrywide promised, and as they defaulted, MBIA was forced to make payments. Through September 2010, Armonk, N.Y.-based MBIA had paid out $2.5 billion on mortgage securities sponsored by Countrywide, Chief Executive Officer Jay Brown told a New York State Assembly committee in February.
Lawrence Grayson, a spokesman for Bank of America, declined to immediately comment on Tuesday’s ruling.
Brown said in an emailed statement that MBIA is “very pleased” by the decision.
Countrywide, acquired by Bank of America in 2008, had argued that MBIA must establish that payments it made on the financial guaranty policies were caused by Countrywide’s misrepresentations and not the collapse of the housing market.
MBIA agreed to take on the risk of a downturn in the housing market and now must meet its obligations under the insurance policies, Mark Holland, a Countrywide attorney, argued at a court hearing in October on the dispute.
“Their bets turned out wrong,” he told Bransten.
MBIA countered that Countrywide is trying to escape liability by blaming the real estate bust.
A loss for Bank of America on the causation issue may by itself add $8 billion to $9 billion of liabilities from bond insurers for the lender, Manal Mehta, a partner at Branch Hill Capital in San Francisco, said in August.
Grayson, the Bank of America spokesman, said in August that Branch Hill’s estimates were wrong and that the hedge fund has “consistently overstated” the bank’s exposure to representation and warranty claims.
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