Friday, October 1, 2010

Insurer of Mortgage Backed Securities Sues Countrywide

A recent case provides some insight into the world of insurance obtained by subprime mortgage companies to back their mortgage backed securities. The insurance was purchased by the mortgage companies to enhance the credit worthiness of the mortgage-backed securities.

reported yesterday about the civil action filed on September 28, 2010 in the New York state trial court, by Ambac, the insurer of mortgage backed securities issued by Countrywide entities. The insurer, Ambac Assurance Corp. alleges that Countrywide fraudulently induced Ambac to insure bonds backed by improperly made loan. Ambac alleges that the "secret of Countrywide's short-term success-and long-term demise-has become clear," - it abandoned its underwriting standards and condoned fraud by its employees and others.

Its reported that Ambac's division that wrote the policies was placed in rehabilitation in March, 2010 by Wisconsin's insurance commissioner.


The lawsuit involves twelve Countrywide sponsored residential mortgage securitization transactions that closed between 2004 and 2006, involving second mortgages. The twelve transaction contained 268,000 loan that served as collateral for about $16.7 billion in securities. Certain of the classes of securities were insured by Ambac. Ambac alleges that to date, over 35,000 loans with an aggregate principal balance of more than $1.95 billion has defaulted or been charged off and as a result, Ambac has been forced to make more than $466 million in claim payments to Countrywide.

Ambac alleges that its review of the defaulted mortgage shows that over 97% of the loans reviewed breached Countrywide's representations regarding the quality of the mortgages and conformance to Countrywide's purported underwriting guidelines. Pursuant to the agreement, Ambac demanded that Countrywide cure the breaches or substitute or repurchase the "breaching loans." Countrywide is alleged to have refused to do so.

Predatory Lending

Ambac further alleges that Countrywide engaged in "predatory and abusive lending practice in marketing its products to borrowers who could not afford them." It alleges that "Countrywide enticed borrowers to borrow beyond their means by promoting loans with low introductory 'teaser' interest rates while obfuscating the steep increase in monthly payments that would occur when these teaser rates reset at higher levels."

Vicarious Liability

Ambac alleges that Bank of America is liable for its damages as Countrywide's successor. Bank of America acquired all of Countrywide's assets through an all-stock merger on Ju
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