JPMorgan Chase & Co could be forced to repurchase thousands of home equity loans, after a judge ruled in favor of a bond insurer that argued it could build its case based on a sampling of loans.
The ruling against EMC Mortgage Corp, once a unit of Bear Stearns Cos, comes amid many lawsuits seeking to force banks to buy back tens of billions of dollars of mortgage and other home loans that went sour. JPMorgan bought Bear Stearns in 2008.
Syncora Guarantee Inc now can pursue claims concerning the entire 9,871-loan pool that backed a securities issue, according to the ruling late Friday from U.S. District Judge Paul Crotty in Manhattan.
The ruling lowers the hurdle for insurers trying to prove they were deceived by banks, and increases the potential that banks could be forced to buy back more loans.
Crotty rejected EMC's claim that Syncora be forced to show breaches related to individual loans.
Syncora had insured the interest and principal payments on part of a $666 million mortgage bond backed by the loans.
EMC is reviewing the ruling, said John Callagy, a lawyer for the company. A lawyer for Syncora, Philip Forlenza, declined to comment.
Syncora said it was misled before agreeing to insure investors who bought pieces of the bond, which was created in March 2007 by EMC and backed by the 9,871 home loans.
Once known as XL Capital Assurance Inc, Syncora contended that EMC breached its representations on 85 percent of the loan pool, based on a random sample of about 400 loans.
It said this prevented it from evaluating how risky it would be to insure the securities.
Crotty concluded that Syncora has especially broad rights because it bears the greatest loss if the loans underperform and the other parties break their contractual obligations.
The judge also chided EMC for the speed with which it appeared to fix problem loans. He said EMC had remedied only 20 of the 1,300 loans Syncora had submitted for repurchase.
EMC cannot reasonably expect the court to examine each of the 9,871 transactions to determine whether there has been a breach, with the sole remedy of putting them back one by one, Crotty wrote in a footnote.
The case is Syncora Guarantee Inc v. EMC Mortgage Corp, U.S. District Court, Southern District of New York, No. 09-3106.
(Reporting by Jonathan Stempel and Clare Baldwin, editing by Gerald E. McCormick)