(Adds AIG comment in final paragraph)
By Martha Graybow
NEW YORK, March 20 An AIG unit and Countrywide
Financial Corp, now part of Bank of America Corp (BAC.N), have
sued each other, alleging breach of contract, in a dispute over
insurance losses for subprime mortgage loans now in default.
American International Group Inc's (AIG.N) United Guaranty
Mortgage Indemnity Co sued Countrywide on Thursday in a
California federal court, contending that the lender had
misrepresented risks tied to more than $1 billion of mortgage
loans that United Guaranty insured.
The case was filed a day after Countrywide sued United
Guaranty in California state court in Los Angeles. Countrywide
said United Guaranty was trying to get out of its obligations
to provide insurance coverage.
United Guaranty provides mortgage insurance, which covers
lenders in case a borrower defaults on a loan.
United Guaranty said in its court papers that unlike the
traditional use of mortgage insurance, used to facilitate home
purchases by responsible borrowers, Countrywide wanted coverage
to increase the credit rating of its mortgage-backed securities
It said Countrywide traded on a long-standing relationship
between the two companies to induce it to insure loans it says
were too risky and not issued according to proper underwriting
standards. It says it has already paid out insurance claims of
more than $30 million tied to the Countrywide loans and is
exposed to additional claims of "several hundred million
In its lawsuit, Countrywide said United Guaranty "reaped
hundreds of millions of dollars" when the real estate market
was hot but was now refusing to pay losses on borrowers' loans
United Guaranty now "faces the reality of steep financial
losses because of a significant economic downturn and has
announced its unilateral refusal to pay on much of the
insurance it sold because it believes it has already paid too
much," the Countrywide lawsuit said.
AIG has received $180 billion in government aid after
racking up large losses on a financial product unit's bets on
toxic mortgage assets that triggered credit rating cuts and
collateral demands that the insurer could not meet.
AIG is at the center of a political storm over
controversial bonuses paid to executives amid the bailout.
In its lawsuit, the AIG division also sued the Bank of New
York Trust Co, a trustee for the mortgage-backed securities
formed by Countrywide.
A Bank of America spokeswoman declined to comment on the
litigation on Friday. The bank bought Countrywide, once the
largest U.S. mortgage lender, for about $4 billion in stock
last July as the lender's risky subprime mortgage loan business
began to fail.
A spokesman for Bank of New York Trust, part of Bank of New
York Mellon Corp (BK.N), also declined to comment.
An AIG spokesman said Countrywide made misrepresentations
and did not follow appropriate underwriting standards, and as a
result "exposed us to claims we would not have had to pay out.
Now we want the court to order them to make us whole."
(Reporting by Martha Graybow, editing by Gerald E. McCormick
and Tim Dobbyn)