Bank of America hit with setback in MBIA Insurance mortgage liability lawsuit

Washington Post Staff Writer
Friday, December 31, 2010; 4:24 PM

Bank of America's hangover from the housing bubble could be harder to shake in the new year as a result of a recent court decision.

The bank lost a major procedural ruling in a lawsuit over its liability for allegedly toxic mortgages. The ruling will make it harder for the bank to defend itself in that case, and it could set a standard for similar disputes.

Bank of America had tried to set a high bar for plaintiff MBIA Insurance by requiring that the files for each of 368,000 or more disputed loans be evaluated individually. That process would have cost MBIA $75 million, and it would have taken a team of 24 people more than four years, MBIA estimated.

For the bank, it was "the next best thing to avoiding trial altogether," MBIA argued.

Instead, the New York State Supreme Court in late December declared that MBIA can pursue its case by focusing on a statistical sample of 6,000 disputed loans. That could pave the way for a trial to proceed as scheduled in 2011.

"It's a big setback" for Bank of America's "scorched-earth strategy," said David J. Grais, a lawyer involved in other suits against the bank.

MBIA still must prove its case, and "this we believe it cannot do," Bank of America spokesman Jerome F. Dubrowski said in a statement.

The MBIA case is at the forefront of a widening battle over troubled mortgages.

Lenders that issued mortgages during the nation's housing binge typically sold the loans to investors on Wall Street and around the globe. But those deals did not completely rid the banks of the risks. Many of the transactions included money-back guarantees.

Now, Bank of America and other lenders are confronting demands that they buy back billions of dollars of loans from investors because the loans are alleged to never have complied with the lenders' quality assurances, known as "representations and warranties."

For banks, such claims could impose a costly new toll.

MBIA's suit is a variation on the theme. It focuses on loans issued by Countrywide Financial, a big mortgage lender that was taken over by Bank of America. When Countrywide pooled loans into securities and sold them to investors, MBIA provided insurance, promising to cover the principal and interest payments to investors if the borrowers defaulted.

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