* U.S. judge orders Flagstar to pay Assured Guaranty $90.1
* Lawsuit focused on quality of loans in mortgage-backed
* Assured had sought $116 million
* Flagstar says will appeal the ruling
By Nate Raymond
NEW YORK, Feb 5 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
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
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
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,