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HomeNational MortgageBofA goes to trial over 'worst of the worst' 2008 subprime loans

BofA goes to trial over ‘worst of the worst’ 2008 subprime loans


Financial institution of America is dealing with off in courtroom with the bond insurer Ambac Monetary Group in a $2.7 billion case that is considered one of its final authorized hangovers from the subprime disaster.

Countrywide Monetary, which Financial institution of America acquired amid the mortgage lender’s 2008 collapse, was the “worst of the worst” in underwriting securities backed by dangerous loans within the years main as much as the disaster, a lawyer for Ambac mentioned Wednesday in opening arguments in New York state courtroom. The insurer is looking for to recuperate billions of {dollars} it paid out on these bonds.

“Blinded by sheer greed, it ran a manufacturing unit the place it actually churned out billions and billions of {dollars} in dangerous mortgage loans,” Ambac lawyer Michael Carlinsky mentioned of Countrywide. “It did not care in regards to the high quality of these mortgage loans as a result of it was passing the chance on to others.”

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Financial institution of America has already paid greater than $50 billion to resolve regulatory probes and litigation stemming from its $4 billion buy of Countrywide. The Ambac go well with, which was first filed in 2010, is among the many final the financial institution remains to be dealing with from the monetary meltdown, however the stakes are probably a lot larger for the insurer.

“A restoration within the $2 billion vary (out of $2.7 billion sought) could be significant for a corporation like Ambac whose market cap of $675 million is a fraction of that,” Bloomberg Intelligence senior litigation analyst Elliott Stein mentioned. 

‘Everybody knew’

The trial earlier than Manhattan Supreme Court docket Justice Robert Reed is predicted to final practically two months. Ambac claims Countrywide violated contracts governing 17 securitizations of dwelling loans between 2004 and 2006 by flouting underwriting pointers and passing on dangers to the insurer. In response to Ambac, Countrywide’s management, together with Chief Government Angelo Mozilo, knew the vast majority of its mortgages had been questionable however pushed workers to approve them as a part of a purpose to originate one out of each three dwelling loans within the U.S. 

“The corporate had a technique from the highest right down to the underside, and the parents on the bottom had been implementing this technique to originate as many loans as they may with out regard to high quality and get them out as rapidly as they may,” Carlinsky mentioned.

However attorneys for Countrywide mentioned Wednesday that Ambac carried out its personal threat evaluation when it agreed to insure the bonds for $25 million a 12 months in premiums.

“What did Ambac find out about these loans? The reply is, from the get-go, everybody, together with Ambac, knew the loans in these securitizations had vital fee dangers,” Enu Mainigi, a lawyer for Countrywide, mentioned in opening statements.

‘100-year flood’

“They had been rated by the rankings guys as junk or near-junk,” she mentioned. “This was identified to everyone earlier than Ambac signed on these securitizations. Ambac’s position in these contracts was to be the credit score enhancer — to make it much less dangerous to the traders as a result of Ambac was standing behind it with its insurance coverage.”

Mainigi additionally argued that Ambac’s losses had been brought on by the broader monetary disaster and ensuing financial downturn, not any motion by Countrywide or its administration. Many owners who wouldn’t have in any other case defaulted did so due to the deep recession, and subprime loans had been a few of the first to cease paying, she mentioned.

“Ambac needed to cowl the losses it promised to cowl and it was paid to cowl,” Mainigi mentioned. “It isn’t due to something Countrywide did. They stopped paying as a result of the equal of a 100-year flood got here to the economic system.”

Federal prosecutors launched of prison investigation of Mozilo in 2008 however dropped it with out convey expenses a couple of years later. The Justice Division additionally informed him in June 2016 that they had deserted a civil case in opposition to him. The previous CEO paid a $67.5 million penalty to the Securities and Change Fee in 2010 with out admitted or denying wrongdoing.

Stein mentioned Ambac is prone to win the trial, partially based mostly on a precedent set in the same go well with filed by the bond insurer MBIA in 2009 in opposition to Credit score Suisse Group. A choose final 12 months ordered Credit score Suisse to pay $604 million and the financial institution later agreed to pay that quantity to resolve the dispute. However Stein mentioned Countrywide could have good arguments on enchantment based mostly on broad nature of Ambac’s arguments.

The case is Ambac v. Countrywide, 651612/2010, New York State Supreme Court docket, New York County (Manhattan.)





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