No joy for MBS investors in NY judge’s bond insurer rulings

January 4, 2012

Tuesday’s parallel rulings by Manhattan State Supreme Justice Eileen Bransten in MBIA and Syncora suits against Countrywide were a big win for the bond insurers. The judge concluded that MBIA and Syncora need only show that Countrywide materially misled them at the time they agreed to write insurance on Countrywide mortgage-backed notes, not that the alleged misrepresentations led directly to MBS defaults and subsequent insurance payouts. Bransten is considered a leading judge on MBS issues, so her grant of summary judgment on the insurance fraud and contract issues should be a boon to all of the monolines engaged in do-or-die litigation with MBS issuers.

But for MBS investors hoping Bransten would set a low bar for claims that Countrywide breached mortgage-backed securitization agreements, the rulings have to be considered a disappointment. Both Syncora’s lawyers at Debevoise & Plimpton and MBIA’s counsel at Quinn Emanuel Urquhart & Sullivan had moved for summary judgment on a baseline question: could they demand that Countrywide repurchase any underlying mortgage loan that materially breached the MBS issuer’s representations and warranties in securitization agreements?

If Bransten had agreed with the Syncora and MBIA interpretations of the agreements’ put-back clauses, the bond insurers would have had to show only that an underlying loan was deficient, not that the alleged deficiency contributed to the mortgage’s default — or, for that matter, that the underlying loan even was in default. The insurers wanted the judge to rule that as a matter of contract, Countrywide was required to repurchase every flawed mortgage in underlying pools.

Had Bransten adopted that reading of the contracts, she could have swung untold billions in MBS liability from investors to issuers. As you surely recall, the embattled BofA $8.5 billion settlement with Countrywide MBS investors was the result of put-back claims of an institutional investor group led by Black Rock and Pimco and represented by Gibbs & Bruns. The same investors have since asserted put-back claims against Morgan Stanley (based on notes with a face value of $6 billion) and JPMorgan Chase (based on $95 billion in MBS). Other investors, publicly and anonymously, have called upon MBS trustees to act on their put-back claims; most recently, U.S. Bank, as trustee in some Bear Stearns MBS trusts, filed a $95 million summons against JPMorgan Chase in New York state court. A ruling from a leading judge that set a low bar for put-backs would have given the investors asserting reps and warranties claims huge leverage over MBS issuers.

But Bransten denied the MBIA and Syncora summary judgment motions on Countrywide’s put-back liability. Specifically, she found that the securitization contracts were ambiguous on several points so the bond insurers’ contract-related claims couldn’t be decided on summary judgment. That doesn’t necessarily mean that after considering the two sides’ interpretations of the contract, as well as industry practice, an ultimate fact-finder won’t agree with Syncora and MBIA on put-backs; Bransten said, in fact, that MBIA had “posited a strong argument” for its view of one securitization contract. Moreover, MBIA and Syncora have alternate routes to the same recovery they’re claiming from alleged reps and warranties breaches.

Nevertheless, the implication of Bransten’s rulings is that put-backs will remain a loan-by-loan slugfest, at least until another judge considers the issue. That’s good news for BofA — which has signaled in regulatory filings that an adverse ruling on put-back loss causation would significantly change its reported liability — and for other MBS issuers as well. Bank disclosure of put-back liability has become a heated topic, and several banks beefed up disclosures in third-quarter 2011 filings. But MBS issuers escaped calamity thanks to Bransten’s refusal to endorse the bond insurers’ liberal reading of securitization agreements.

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