Monolines that have brought MBS lawsuits to court have used the same facts that class actions and put-back claims have made, but have used a different theory of law as a legal basis for their arguments.
These insurers have claimed that the banks defrauded them by inducing them to provide insurance on devalued RMBS loans. Since the facts presented to them about these mortgage securities were not accurate, they want to renege on the policies they have issued against these bonds. In some cases, the bond insurers have paid out of a policy to get money back that they have already paid.
The latest victory for these types of claims came in January when New York State Court Judge Eileen Bransten ruled that monoline insurers MBIA and Syncora Guarantee need not establish direct causal links between alleged misrepresentations made by Countrywide and payments made by MBIA and Syncora pursuant to insurance guarantees.
MBIA and Syncora alleged in their complaints that Countrywide made material misrepresentations to induce the insurers to wrap the securitizations. MBIA and Syncora further alleged that the mortgages comprising the securities defaulted during the 2008 financial crisis, forcing the insurers to pay out billions of dollars in insurance guarantees.
Countrywide asserted that the insurers' losses were due to the mortgage market collapse and that the insurers agreed to insure such a risk.
Relying on New York insurance and common law, Bransten found that fraud or breach of warranty occurs upon "the misrepresentation that induces action resulting in damages" and held that, at the summary judgment stage, MBIA and Syncora did not have to show "a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy," according to a note published by Lowenstein Sandler.
In other words, if there was fraud in the inducement of the deal, you don't have to prove that what you were misled about is what caused the loss.
"If you can prove that there were material misrepresentations about the loans in the pools, you don't have to show that those were the causes of the MBS losing value," noted Eric Creizman, founder of the law firm Creizman. "The ruling is important because a big defense of the bank is that the mortgage market collapsed and that is why the MBS collapsed. So they are saying that even if the loans were inaccurately described and the value of the loan and the borrower's credit rating were false, those misrepresentations weren't material because they weren't the cause of the mortgage crisis. The judge in the ruling is saying as long as there were misrepresentations then you have basically proved your case."
The decision might influence some of the other related litigation. For instance, Assured Guaranty filed a brief last month in the New York State Supreme Court against Credit Suisse's motion to dismiss.
In October last year, the financial guarantor sued DLJ Mortgage Capital, a Credit Suisse Group unit, over $1.8 billion of MBS it insured.
The plaintiff claimed that DLJ Mortgage failed to abide by its contractual obligations and that it securitized thousands of RMBS and induced investors to buy them, and insurers to insure them, by claiming that the loans met specified standards. Assured said that roughly 93% of the 7,918 mortgage loans that it reviewed breached one or more of DLJ's representations concerning credit quality and other key features.