January 11, 2013 / 6:30 PM / 5 years ago

MBIA sues Flagstar over more than $1 bln in mortgage deals

NEW YORK, Jan 11 (Reuters) - Bond insurer MBIA Inc sued Flagstar Bancorp Inc on Friday, accusing the bank of making false representations about the quality of loans underlying $1.02 billion in mortgage-backed securities.

The lawsuit, filed in U.S. District Court in Manhattan, was the latest in a string of cases pitting bond insurers and investors against banks that packaged the mortgage-backed offerings at the heart of the 2008 financial crisis.

MBIA, based in Armonk, New York, said in its court papers that it had agreed to insure two mortgage-backed transactions by Flagstar in 2006 and 2007.

But as a result of defaults of mortgages underlying the transactions and charge-offs, MBIA said in the complaint, it has had to pay out $165 million.

MBIA, which has filed similar cases against other banks, said a review of a sample of loans in each of the two transactions found that more than 90 percent breached contractual warranties Flagstar made about the securitized loans.

“Flagstar’s warranties were false,” MBIA said in the complaint.

Susan Cherry-Bergesen, a spokeswoman for Flagstar, declined to comment.

Kevin Brown, a spokesman for MBIA, said the bond insurer was forced to bring the lawsuit after Flagstar “refused to honor its contractual obligations to repurchase the ineligible mortgage loans it placed into securitizations insured by MBIA.”

Flagstar, a Troy, Michigan-based lender, has already been sued in a similar complaint by another bond insurer, Assured Guaranty Ltd, which is seeking $116 million.

A trial in federal court in Manhattan in that case ended in November. U.S. District Judge Jed Rakoff, who heard the case without a jury, has said he planned to issue a ruling by the end of January.

MBIA is citing both the case by Assured and a separate case brought by the U.S. Department of Justice over the approval of mortgages as evidence that its “experience with Flagstar’s misrepresentations is not unique.”

In the Justice Department cSE, Flagstar agreed in February 2012 to pay $132.8 million to settle civil fraud claims that the bank improperly approved mortgages for government insurance.

The case is MBIA Insurance Corporation v. Flagstar ABS, LLC, U.S. District Court, Southern District of New York, 13-0262.

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