FEB 6, 2013 11:22am ET

Judge Sides with Insurer in Rep and Warranty Dispute

FEB 6, 2013 11:22am ET
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A U.S. judge sided with a bond insurer in a closely watched case over representation and warranty putbacks in residential mortgage-backed securities.

U.S. District Judge Jed Rakoff ruled that Flagstar Bancorp violated agreements with Assured Guaranty Municipal to follow its own underwriting guidelines in making home equity lines of credit. He ordered Flagstar to reimburse $90 million that Assured paid out when home equity loans underlying two mortgage-backed securities defaulted.

“The court finds that the loans underlying the trusts here at issue pervasively breached Flagstar’s contractual representations and warranties,” Rakoff said in an opinion filed Tuesday.

The judge also awarded Assured interest and attorneys’ fees to be determined, according to statements released by the two companies.

Assured president and chief executive Dominic Frederico said that Rakoff’s decision establishes “clear liability as it relates to originators and securitizers of RMBS transactions.”

Frederico said the case was the first related to RMBS rep and warranty putbacks that has come to a final court ruling.

“His decision establishes clear liability as it relates to originators and securitizers of RMBS transactions and strengthens Assured Guaranty’s resolve to seek full recovery from R&W providers that refuse to recognize this liability,” the CEO added.

Flagstar said it “strongly disagrees” with the court's ruling and intends to “vigorously contest” the outcome on appeal.