Moody's: AGM Putback Case a Positive for Financial Guarantors

U.S. District Court Judge Jed Rakoff’s ruling last week in favor of Assured Guaranty Municipal Corp. is a credit positive for financial guarantors, Moody’s Investors Service said in a recent report.

In addition to the ruling, which found that Flagstar Bancorp Inc. had breached its contractual responsibilities by failing to repurchase materially defective loans, the judge ordered Flagstar to pay AGM $90.1 million, plus interest and expenses. Flagstar announced that it will appeal the decision.

Moody’s analysts James Eck and David Fanger said the ruling is a credit positive for financial guarantors because it “strengthens their negotiating positions in ongoing litigations against banks for alleged breaches of representations and warranties on mortgage loans within insured residential mortgage-backed securities.”

The case was the first of the mortgage putback cases brought by financial guarantors against mortgage originators to go to trial. In his ruling, Judge Rakoff called the case a “war of experts,” saying it essentially comes down to “resolution of conflicting expert testimony.”

“While Judge Rakoff found Assured’s experts to be more convincing on balance than Flagstar’s, a different judge viewing different expert testimony could come to a different conclusion,” Moody’s analysts wrote. “As a result, it remains unclear whether this ruling will set precedent for upcoming trials.”

However, the report notes the significance of the court ruling that statistical sampling on a randomly selected group of loans is an appropriate method of proving liability in mortgage putback cases. Analysts said this will make it easier for guarantors to prove their case, since they won’t have to prove R&W breach on each individual loan.

“Consequently, we believe that banks targeted by these lawsuits, including Bank of America, N.A., JPMorgan Chase Bank, NA, Credit Suisse AG and UBS AG, may now have a greater interest in reaching settlements with the guarantors,” the report said.

Multiple lawsuits seeking recovery for R&W breaches have been brought by financial guarantors in recent years, and many of the insurers have been counting on future putback recoveries.

As of third-quarter 2012, Assured had recorded $774 million of future mortgage loan putback recoveries (exclusive of settlements in place), while MBIA Insurance Corporation had recorded $3.2 billion, according to Moody’s.

“For capital constrained guarantors such as MBIA, the ability to win trial verdicts and reach settlements with banks will have a meaningful effect on their policyholders and credits,” analysts said.

AGM holds an A2 rating with a stable outlook from Moody’s, which was downgraded from Aa3 in January. MBIA has a financial strength rating of Caa2, with a developing outlook.

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