* U.S. judge orders Flagstar to pay Assured Guaranty $90.1 million
* Lawsuit focused on quality of loans in mortgage-backed securities
* Assured had sought $116 million
* Flagstar says will appeal the ruling
By Nate Raymond
NEW YORK, Feb 5 (Reuters) - Flagstar Bancorp Inc was ordered on Tuesday to pay $90.1 million to bond insurer Assured Guaranty Ltd in a contract dispute over loans underlying $900 million in mortgage-backed securities.
U.S. District Judge Jed Rakoff in Manhattan ruled that Flagstar had materially breached contracts specifying the quality and characteristics of loans to be packaged into the securities.
The closely watched lawsuit has been seen as a test of the ability of bond insurers to hold banks accountable for losses incurred insuring securities at the heart of the financial crisis.
A number of other suits have been filed against banks by Assured and fellow insurers, but have yet to reach trial.
"This ruling is a significant milestone in forcing the banks to honor the contractual commitments they made and have long sought to avoid," Jacob Buchdahl, a lawyer for Assured at Susman Godfrey, said in a statement.
The ruling followed a bench trial last year. Assured had at the close of trial sought $116 million.
In a statement late on Tuesday, Flagstar Bancorp said it "strongly disagrees with the court's ruling and intends to vigorously contest the outcome on appeal."
The lawsuit, filed in April 2011, accused Troy, Michigan-based Flagstar of misrepresenting the quality and traits of loans packaged into two mortgage securitizations issued in 2005 and 2006, valued at more than $900 million.
Assured had guaranteed the Flagstar securities. When the housing meltdown hit, it was forced to pay millions in claims.
Rakoff said the loans in the securitizations "pervasively breached Flagstar's contractual representations and warranties."
The decision was another reminder of the continued litigation fallout from the subprime meltdown of 2007 and the financial crisis that followed.
The ruling came a day after the U.S. Department of Justice launched a civil fraud lawsuit against credit ratings agency Standard & Poor's, a unit of The McGraw-Hill Companies Inc , over its mortgage bond ratings.
The Flagstar case mirrors other lawsuits by insurers such as MBIA Inc and Ambac Financial Group Inc. Defendants have included JPMorgan Chase & Co, Credit Suisse Group AG and Bank of America Corp's Countrywide Financial unit.
Assured's lawsuit against Flagstar was the first by the insurers to reach trial. Assured CEO Dominic Frederico, whose company is pursuing other lawsuits, in a statement said the ruling "sets a strong precedent in support of the rights of Assured Guaranty in these cases."
Flagstar, which had net income of $223.7 million for 2012, said Jan. 23 that it had reserved $82.7 million for pending and threatened litigation, including Assured's lawsuit.
The litigation reserves also cover another bondholder lawsuit launched earlier this month by MBIA, which sued after paying out $165 million on claims related to two mortgage-backed transactions it insured.
Flagstar had separately agreed in February 2012 to pay $132.8 million to settle claims by the U.S. Department of Justice that it improperly approved mortgages for government insurance.
The Assured case amounted to what Rakoff called a "war of experts." Expert witnesses for Assured used a statistical sample of 800 of the 15,000 loans at issue. Of the 800, 606 were defective, an expert for Assured testified.
Flagstar challenged the experts' methodologies and the insurer's ability to prove liability on a sample. But Rakoff said sampling was a "widely accepted method of proof" and largely accepted the experts' testimony.
The case is Assured Guaranty Municipal Corp v Flagstar Bank, FSB in U.S. District Court, Southern District of New York, 11-2375.