MBIA Insurance Corp. earlier this week
MBIA has already paid out $248 million on policies it would not have insured had it known their true quality, it said in the lawsuit filed in U.S. District Court for the Southern District of New York. MBIA - one of the many bond insurers hit by its exposure to the deteriorating U.S. housing market - last month filed a similar suit against Countrywide Financial Corp. in New York Supreme Court.
"MBIA's agreement to provide the policies with respect to the securitizations was based on representations and warranties from RFC that, at best, were negligently or recklessly made and, at worst, constituted an intentional scheme to defraud MBIA into providing financial guaranty insurance in connection with the securitization transactions," the lawsuit says. "MBIA, as the financial guaranty insurer, is now exposed to the liability for the losses incurred by RFC's misrepresentations with respect to the mortgage loans."
A spokeswoman from RFC parent GMAC Financial Services said the company does not comment on pending litigation.
MBIA alleges RFC included in the securitizations loans of a "fundamentally different quality and character" than what they represented. Many of the loans broke RFC's own underwriting policies and guidelines, the lawsuit said.
A review of loans by MBIA demonstrated a number of cases in which RFC breached its representations or warranties. In one instance, RFC provided a $140,000 loan on Nov. 30, 2006, to a borrower who had no liquid assets despite claiming to make $500,000 a year as the owner of a wine and spirits store. The borrower filed for bankruptcy the next year, declaring an income of zero dollars for 2006, the lawsuit said.
MBIA found 3% of the approximately 60,000 mortgage transactions in the pools had defaulted at the end of last year, with just 7% of the defaulting loans "originated or acquired in material compliance with RFC's representations and warranties." Another 2% of the loans became delinquent in the first three months of this year, the lawsuit said.
MBIA said it relied on the RFC's representations and warranties to disclose the risks associated with the transactions, because it "was impractical and infeasible for MBIA to review the almost 60,000 mortgage loans contributed to the RFC transactions."
MBIA also said RFC failed to honor its agreement to take remedies on, repurchase, or substitute out many of the loans the insurer informed them did not comply with underwriting standards.
