The New York Supreme Court last week ruled that MBIA Insurance Corp. did not have any way to discover if GMAC Mortgage intentionally misrepresented the true nature of MBS that MBIA insured.
"It is not clear whether MBIA could have discovered the alleged misrepresentations concerning the loan characteristics before entering into the insurance agreements," Judge Bernard Fried wrote in his 15-page decision.
MBIA is a structured-finance bond insurer owned by MBIA Inc. The holding company has been unable to write new policies since 2008 because ABS it insured wrecked its balance sheet, causing rating downgrades. The case against GMAC is one of 11 cases in which MBIA alleges various financial institutions induced it to wrap asset-backed securities that didn't live up to stated underwriting standards.
MBIA filed a complaint in April alleging that GMAC, one of the largest mortgage lenders in the country, "affirmatively misrepresented the quality of tens of thousands of mortgage loans" with a principal balance of $4.4 billion—loans that were then packaged into RMBS and insured by MBIA.
GMAC, in its motion to dismiss in June, called MBIA's complaint "dubious," noting the guarantor is claiming to have been defrauded in an attempt to avoid losses from risks it voluntarily chose to insure.
But Fried said that even if MBIA had conducted an investigation into the loan files, the transaction allowed GMAC to populate the mortgage pools with additional loans for three months after the closing date—in other words, probing the loans could be futile, as GMAC could potentially add faulty loans to the mortgage pool after the investigation.
In April, Fried dismissed five of the six complaints MBIA made against Merrill Lynch regarding credit default swaps on certain bonds. He allowed a breach-of-contract claim to be pursued, but dismissed the idea that Merrill concocted a scheme to offload its deteriorating subprime mortgage portfolio to MBIA as "a classic case of buyer's remorse."
Earlier this month, MBIA Inc. sued Morgan Stanley, claiming the bank defrauded it into insuring $223 million of mortgage-backed securities that went bust during the financial crisis. MBIA anticipates recovering at least $2.2 billion from the 11 cases, according to its third-quarter earnings statement.
