MBIA Inc won a key ruling that will sharply reduce the time and cost of gathering evidence to prove that Bank of America fraudulently induced it to insure billions of dollars of mortgage bonds.
A New York state judge ruled that MBIA can use statistical sampling to try to prove that underwriting standards on pools of about $20 billion in loans were fraudulently represented.
MBIA is seeking to recover more than $1.4 billion that it has paid out in insurance claims stemming from the bonds that pooled loans from Countrywide, a mortgage company that was bought by Bank of America.
The bond insurer had argued inspecting each of 368,000 loan files that were packaged into 15 mortgage bonds would have been extremely costly and time-consuming.
Bank of America said in a statement that the ruling is limited and procedural in nature. Nothing has been decided on the merits. As the Court notes, MBIA must prove each element of its claims -- this we believe it cannot do. We intend to continue to aggressively defend.
The ruling could give momentum to other insurers and investors who have been pressing mortgage companies to repurchase soured loans underlying mortgage bonds but have struggled with the expense of fighting on a loan-by-loan basis.
MBIA proposed using 400 loans from each of the 15 mortgage bonds as a sample that would be tested.
The use of sampling is widespread as a valid method to prove cases with large amounts of underlying data, Judge Ellen Bransten wrote in her Wednesday opinion. She added that sampling is not proof, but merely a vehicle to present evidence.
MBIA has alleged that Countrywide falsely represented that its loans strictly complied with long-standing guidelines, when in reality the loans were often made with little regard to the ability of the borrower to repay.
MBIA did not have an immediate comment.
Shares of MBIA ended down 0.4 percent at $9.86 while shares of Bank of America fell 2.4 percent to $13.06 on the New York Stock Exchange.
The case is MBIA Insurance Corp v Countrywide Home Loans and Bank of America Corp, New York State Supreme Court, New York County 602825/2008.
(Reporting by Tom Hals, editing by Matthew Lewis)