| NEW YORK
NEW YORK Lawyers delivered closing arguments in a closely watched U.S. case brought by Assured Guaranty Ltd (AGO.N) against Flagstar Bancorp Inc (FBC.N) over claims the quality of loans underlying $900 million in mortgage-backed securities were misrepresented.
More than three-fourths of 800 loans the bond insurer examined failed to comply with Flagstar's underwriting guidelines, Assured counsel Jacob Buchdahl told the judge during closing arguments in a federal court in Manhattan on Monday.
Assured is seeking $116 million in damages.
Similar lawsuits by insurers including Assured, MBIA Inc.(MBI.N) and Ambac Financial Group IncABKFQ.PK are pending against banks such as JPMorgan Chase & Co(JPM.N), Credit Suisse Group AGCSGN.VX and Bank of America Corp's(BAC.N) Countrywide Financial unit.
The case against Flagstar was the first of those lawsuits to reach trial.
Veronica Rendon, a lawyer for Flagstar, called Assured's approach to establishing liability "cavalier," and attacked a core expert witness for Assured as being "nothing more than a talking head."
U.S. Judge Jed Rakoff in Manhattan, who is presiding over the non-jury trial, said he expects to issue a final decision by the end of January.
Filed in April 2011, the lawsuit accused the Troy, Michigan-based lender of misrepresenting the quality and characteristics of loans underlying two mortgage securitizations issued in 2005 and 2006 valued at more than $900 million.
Buchdahl described 25 loans that he said contained evidence of fraud by borrowers that should have been spotted by Flagstar, such as inflated incomes or undisclosed debts.
Rendon said Assured had failed to establish that Flagstar was aware of various loan breaches that required repurchasing.
For example, online search tools such as Salary.com were used to determine expected incomes for the careers of various borrowers in the securitizations.
But Rendon said the websites had only contemporaneous data, not salaries for the period when the loans were originated more than six years ago.
Stewart Aaron, another lawyer for Flagstar, also criticized Assured's method of estimating damages.
Assured relied on a statistical analysis of a handful of the 16,000 loans underlying the two transactions. But Aaron said Assured relied on an "insufficient sample size."
Flagstar said in its earning announcement October 23 that it was increasing its litigation reserves by $40 million to address its exposure to "pending and threatened litigation."
Paul Borja, Flagstar's chief financial officer, declined on an analyst conference call the next day to say whether the reserve increase was attributable to Assured's lawsuit.
Shares in Assured Guaranty closed down 3.13 percent at $13.28 on the New York Stock Exchange. Flagstar shares closed up 2.11 percent at $16.41.
The case is Assured Guaranty Municipal Corp v Flagstar Bank, FSB in U.S. District Court for the Southern District of New York, No. 11-2375.
(Reporting By Nate Raymond in New York; Editing by Jeremy Laurence)