MBIA Inc.’s muni-only insurer, National Public Finance Guarantee, is one step closer to getting back into the bond insurance game following the company’s $110 million settlement with Michigan-based Flagstar Bank.
MBIA Inc. announced the settlement on Thursday, saying MBIA Insurance Corp. would use the cash to repay an intercompany loan.
“The key to MBIA’s effort to preserve the value of its equity is having MBIA Insurance Corp., its structured-product insurance unit, cobble together $1.65 billion in [representations and warranties] recoveries so that it can repay its intercompany loan from National Public Finance Guarantee Corp. in that amount,” said BTIG analyst Mark Palmer.
MBIA is seeking R&W recoveries in lawsuits against firms including Credit Suisse, Residential Funding Company, JPMorgan, and Bank of America Corp.
In the BAC lawsuit, which has lasted almost five years and is close to going to trial, MBIA is seeking recoveries of almost $5 billion on claims it paid on mortgage-backed securities, saying the bank misrepresented the quality of the underlying loans.
Palmer said that while the $110 million settlement amount equates to just 6.7% of the intercompany loan balance, MBIA’s “magic number” -- the amount that it must receive from BAC and its other R&W targets in order to repay the loan and protect its equity -- will now drop to $1.54 billion. The repayment of the intercompany loan is one of three hurdles that MBIA has said National must overcome in order to reenter the bond insurance marketplace. These hurdles also included overcoming litigation over the 2009 restructuring that created National, and achieving high, stable ratings.
The company cleared the first hurdle in early March when the New York Supreme Court dismissed the lawsuit brought by a group of banks, which protested the creation of National and the transfer of $5 billion to the unit from MBIA Corp. Jay Brown, MBIA chief executive officer, said the amount the company will receive in the settlement is consistent with the company’srecovery expectations.
“We will continue to focus on resolving our remaining litigation with other parties so that National Public Finance Guarantee Corp., our U.S. muni-only insurer, can resume its role as a leader in the U.S. public finance insurance market,” Brown said.
MBIA’s lawsuit, which was settled just 111 days after it was filed, claimed Flagstar made “pervasive breach of warranties and contractual covenants” to induce MBIA to issue two financial guaranty insurance policies.
In total, MBIA Corp. paid $165 million in claims on defaulted loans.
In addition to the timely settlement, Palmer said the outcome was notable for the amount which MBIA was able to recover. The company was seeking recovery for $165 million and received $110 million — an amount equal to approximately 67 cents on the dollar.
Flagstar said the settlement will not have any significant financial impact on the company, given the level of its current reserve for pending and threatened litigation.
“[Thursday’s] announcement represents another major milestone in putting legacy challenges behind us,” said Michael Tierney, Flagstar’s president and CEO. “We can now focus more time and attention on our national mortgage business and and our community banking operations in Michigan.”
Following the announcement of the settlement, MBIA shares were up 9.8% at $9.97 Friday afternoon.
The case is MBIA Insurance Corporation v. Flagstar ABS, LLC, U.S. District Court, Southern District of New York, 13-0262.