MBIA Settlement

Posted by kevin on May 9, 2013 under Foreclosure Blog | Comments are off for this article

Historically, MBIA wrote insurance on municipal bonds. It made good, but not spectacular, money for years. In the early 2000’s, however, it saw how much $ AIG was making on insuring mortgage backed securities (“MBS’s”), and wanted in. To induce investment in MBS’s, the sponsor would offer insurance or credit default swaps to investors. MBIA would be paid a premium to issue that insurance. An easy way to make lot’s of money because the MBS’s were rated triple A by S&P, or other rating agencies. However, notwithstanding the triple A rating, the mortgages that backed the MBS’s were ticking timebombs which started to go off in 2007. The results were disasterous for companies like MBIA.

Countrywide (“CW”) was one of the leading purveyors of toxic mortgages. It sold many of its loans to securitized trusts. MBIA wrote the insurance on these MBS’s. When the proverbial s*%t hit the fan, MBIA had to pay out about $3 billion in claims. By that time, Bank of America (“BOA”) had bought out CW. MBIA sued BOA on the grounds that the representations and warranties made in the various prospectuses that securitized CW mortgages were nothing but a pack of lies. These were not safe investments made to well qualified borrowers. They were predatory loans that should never have been written in the first place. After years of litigation, BOA agreed to pay MBIA $1.7 billion the case.

A victory? For MBIA, yes. But what about the average borrower who got screwed by CW? I mean CW lied to MBIA and the investors about the quality of the loans. Borrowers were lied to or taken advantage of by CW who put the borrower in loans that the borrowers could not afford. Without the underlying bad loans, there would be no MBS’s, no investors, and no insurance or credit default swaps. So, does the borrower have a new defense that the various chancery judges in NJ will be eager to enforce?

Don’t bet on it. I am afraid that most Jersey judges will ignore the argument on the grounds that the borrowers do not have standing to raise the breach of warranty issue because the borrower is not a party to or a third party beneficiary of the Pooling & Servicing Agreement (“PSA”). That’s precious considering that the breaches of warranty and misrepresentations deal with the underlying loans made by the banks to the borrowers. Without borrowers, there would be no representations and warranties.

We have lots of laws, but who do they protect?