A New York state appeals court in Manhattan agreed with a lower court that MBIA stated a claim for fraud, but that its claim against Countrywide for negligent misrepresentation should be dismissed.
The appeals court also reversed the lower court by throwing out MBIA's bad faith claim against Countrywide.
Thursday's ruling came one day after Bank of America, which bought Countrywide for $2.5 billion on July 1, 2008, said it would take more than $20 billion of mortgage-related charges, including to settle disputes and litigation with bond investors and to buy back troubled loans.
It also came two days after New York's highest court, the Court of Appeals, said Bank of America and 10 other financial companies may pursue a lawsuit challenging the state's 2009 restructuring of MBIA, once the nation's largest bond insurer. These companies said the restructuring siphoned $5 billion from its MBIA Insurance unit at their expense.
In Thursday's unanimous ruling, the Appellate Division said MBIA could proceed with its claim that between 2004 and 2007, Countrywide fraudulently induced it to insure 15 securitizations, each typically with one or two pools of between 8,000 and 48,000 home equity lines of credit or second mortgages.
MBIA alleged that Countrywide falsely represented that the loans were properly underwritten, having in fact lent to borrowers who could not afford the loans or committed fraud. The insurer said it had paid $1.4 billion on its guarantees as of August 2009, and could owe hundreds of millions of dollars more.
The fraud claim lists 4,689 loans that allegedly failed to comply with Countrywide's underwriting guidelines, specifies that the defective loans had debt-to-income ratios or combined loan-to-value ratios exceeding maximum guideline levels and alleges that the loans were approved on the basis of unverified borrower-stated income that was patently unreasonable, Justice Roslyn Richter wrote. These allegations are sufficient.
Bank of America spokeswoman Shirley Norton said the Charlotte, North Carolina-based bank is pleased that the negligent misrepresentation and bad faith claims were dismissed.
We continue to believe MBIA is a sophisticated counterparty that cannot sustain a fraud claim, she added.
MBIA spokesman Kevin Brown said the Armonk, New York-based company is pleased it can pursue the fraud claim, given the growing public recognition of the fraud and misrepresentations perpetrated by Countrywide and other industry participants.
The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc et al, New York State Supreme Court, Appellate Division, 1st Dep't, No. 4636A.
(Editing by Robert MacMillan)