Sell Side

Assured Vs. Credit Suisse

Assured Guaranty has followed in the footsteps of bond insurers MBIA Inc. and Ambac Financial Group in suing Credit Suisse over soured mortgage-backed securities.

Assured Monday afternoon filed a lawsuit against Credit Suisse’s DLJ Mortgage Capital, claiming breach of contract over $1.8 billion of mortgage-backed securities it insured.

In the complaint filed in New York State Supreme Court, Assured’s lawyers Quinn Emanuel Urquhart & Sullivan LLP said DLJ “materially and pervasively” breached its mortgage representations, overstating the quality of mortgage loans and understating the risk to Assured.

The lawsuit is one of many complaints bond insurers have filed against banks over failed mortgage-backed securities.

Assured, MBIA, and Ambac are all in the midst of lawsuits with a half-dozen banks claiming they were induced to wrap mortgages whose risks were understated.

Assured is also in the midst of legal disputes with JPMorgan Chase & Co., Deutsche Bank, and Flagstar Bank over breaches of contract. Assured settled with Bank of America Merrill Lynch for $1.6 billion in April.

At the time of the settlement, Dominic Frederico, president and chief executive of Assured, said: “We hope that this settlement — negotiated outside of litigation — encourages other [representation and warranty] providers including JPMorgan Chase, Deutsche Bank, and Flagstar Bank to accelerate the R&W claims settlement process.”

In the complaint against DLJ, Assured said it reviewed 7,918 mortgage loans worth $1.9 billion in original principal amount of mortgage loans on six securitizations, and found 7,338 defective mortgage loans, or $1.8 billion — a 93% breach rate.

“The results of this review demonstrate that DLJ repeatedly and pervasively breached the mortgage representations,” Assured wrote in the complaint.

As of June 30, Assured had submitted approximately $1.1 billion in original principal amount of loan requests for repurchases to Credit Suisse, and submitted an additional $700 million in the third quarter.

Credit Suisse has not repurchased any loans.

“Credit Suisse, through its subsidiaries, has not lived up to its contractual obligations in connection with six residential mortgage securitization transactions,” a spokeswoman for Assured said in a statement.

“Credit Suisse has breached numerous representations and warranties relating to the mortgage loans included in the securitizations and has failed to repurchase any loans after being notified of their breaches. As a result, we are pursuing our legal rights in New York State court.”

A spokeswoman for Credit Suisse did not return calls seeking comment.

The Switzerland-based financial services company has been a target for similar lawsuits.

Besides getting hit with lawsuits from bond insurers themselves, an association representing them wrote a letter in August to Credit Suisse chief executive Brady Dougan over representation and warranty claims involving residential mortgage-backed securities.

In the letter, Teresa Casey, executive director of the Association of Financial Guaranty Insurers, wrote: “To date, we count 18 pending lawsuits against Credit Suisse with respect to [residential mortgage-backed securities] by the Federal Home Loan Banks, monoline insurers, and holders.

“While Credit Suisse has failed to acknowledge all but a small fraction of its liabilities with respect to troubled RMBS, AFGI submits that this defensive posture will soon prove ineffective in shielding Credit Suisse from the financial, accounting, legal, reputational, and other implications of its multibillion dollar obligations.”

Further, Casey added that each of AFGI’s industry members has performed a sampling of the loans Credit Suisse underwrote and found that more than half of the 2005, 2006 and 2007 vintage loans were ineligible for securitization. Based on the analysis, “we estimate that Credit Suisse’s obligations in respect of the securities insured by AFGI members aggregate billions of U.S. dollars.”

At the end of the second quarter, Credit Suisse reported $1.63 billion in outstanding repurchase claims, up from $504 million at the end of the first quarter.

“We find the reported provisions difficult to reconcile with total repurchase claims, and note the dramatic quarter-to- quarter increase in claims,” Casey wrote, adding that AFGI believes Credit Suisse’s reported claims to repurchase obligations are “materially understated.”


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