Southern District Judge Jed Rakoff (See Profile) last week ordered Flagstar Bancorp Inc. to pay monoline bond insurer Assured Guaranty Municipal Corp. $90.1 million plus attorney fees following a bench trial in a lawsuit accusing Flagstar of misrepresenting the risks associated with mortgage-backed securities.
The case, Assured Guaranty v. Flagstar Bank, 11-2375, is widely seen as a bellwether for a slew of similar lawsuits filed by insurers against the issuers of mortgage-backed securities. Bond insurers, which insured tens of billions’ worth of mortgage backed securities before the financial crisis, have alleged in over 30 lawsuits that the financial institutions misrepresented the securities’ risk and breached associated warranties.
In his Feb. 5 decision, Rakoff wrote that he found credible testimony offered by an expert witness for Assured Guaranty who looked at 800 mortgage loans securitized by Flagstar and found that 606 of them were "materially defective." Flagstar breached its obligation to repurchase defective loans under the warranties it gave to Assured Guaranty, he said.
"What this decision does is make it less likely that anyone else will go to trial," Jacob Buchdahl of Susman Godfrey, counsel to Assured Guaranty, told The Litigation Daily, an affiliate of the New York Law Journal. "A bank is going to have a hard time thinking they’re now going to defeat these cases."
Flagstar has said in a press release that it "strongly disagrees with the Court’s ruling and intends to vigorously contest the outcome on appeal." It was represented in the case by Veronica Rendon of Arnold & Porter.