As a result of a ruling by a New York state court judge, it will be much easier for the bond insurer MBIA Inc. to pursue its $1.4 billion lawsuit accusing Bank of America Corp.’s Countrywide Financial unit of fraudulently inducing it to insure risky mortgage-backed securities. New York State Supreme Court Justice Eileen Bransten ruled last month that in order to show fraud, MBIA need only show Countrywide misled it about the $20 billion of securities it insured, not that the misrepresentations caused its losses.

MBIA accused Countrywide of misrepresenting the quality of underwriting for about 368,000 loans backing 15 financings it insured between 2005 and 2007, while the housing market was booming. MBIA said it would not have provided insurance on the agreed terms had it known how the loans were made. While not ruling on the merits, Judge Bransten lowered the burden of proof on MBIA to show Countrywide committed fraud and breached its insurance policies. Judge Bransten wrote that:

No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy.

Judge Bransten also said MBIA may try to prove financial damages, while agreeing with Countrywide that it “will not be an easy task.” The judge rejected Countrywide’s argument, however, that MBIA’s only remedy was to void its insurance policies. MBIA had said that would be unfair to investors. Bank of America has lost one of its key defenses in the ongoing litigation over mortgage putbacks by the monoline insurers. Judge Bransten issued a similar ruling last month against Countrywide in a case brought by another insurer, Syncora Holdings Ltd’s Syncora Guarantee unit.

Bank of America has had lots of mortgage–related problems since it bought Countrywide in 2008. In a November regulatory filing, Bank of America said unresolved litigation could “significantly” boost costs and materially impact future results. It also said that, through Sept. 30, it had resolved about half of the $6 billion of fraud and warranties claims tied to monoline-insured transactions, including $2 billion in an April settlement with Assured Guaranty Ltd. MBIA meanwhile was restructured by New York’s insurance department in 2009 after the company, which traditionally insured municipal bonds, incurred big losses from insuring mortgage debt. Bank of America and some other banks are challenging that restructuring.

Source: Insurance Journal