This might not sound like a big deal, but it is because the banks have been successful to date at not paying out for any misrepresentation that were made concerning the loans backing the individual deals.
A Michigan bank accused of misstating the quality of home loans it repackaged into mortgage-backed securities is set to go to trial on Wednesday, in a case that could affect pending lawsuits against some of Wall Street's biggest firms.
The lawsuit against Flagstar Bancorp Inc of Troy, Michigan, is one of the first to go to trial over claims that a lender misrepresented loans pooled into mortgage-backed offerings.
Flagstar was sued in 2011 by bond insurer Assured Guaranty Ltd, which had guaranteed $900 million of securities and was on the hook to pay investors when the investment plummeted in value in the housing market meltdown.
While Assured is seeking only $108 million in its breach-of-contract case -- a relatively small sum in financial industry litigation -- Wall Street will be watching the Manhattan federal court trial closely. ...
Leading up to the lawsuit, Assured had demanded Flagstar repurchase some of the loans, and Flagstar refused, according to the insurer's complaint. Flagstar has countered that Assured is a sophisticated party that extensively reviewed the securities before agreeing to insure them....
The Flagstar lawsuit is one of many cases over mortgage practices when the housing market was booming.
In February, Flagstar agreed to a $132.8 million settlement to resolve civil fraud claims by the U.S. Department of Justice that the bank had improperly approved thousands of home mortgages for government insurance....
The Flagstar case has progressed swiftly to trial thanks in part to the presiding judge, Jed Rakoff, who is known for trying to get cases to move along quickly. ...
The Flagstar trial is expected to focus heavily on why certain loans were included in mortgage-backed securities, an issue at the heart of the lawsuits brought by the bond insurers.
The question is whether lenders misrepresented details of the loans, such as homeowners' credit scores and their debt-to-income ratios, painting a false picture of the default risks of mortgages underlying the securities. The insurers point to underwriting guidelines that required all the loans in the securities to meet standards.
Assured has accused Flagstar of falsely representing the quality and characteristics of loans packaged into two offerings issued in 2005 and 2006. An analysis of 800 loans found 610 instances of misrepresentations, according to Assured's lawsuit.
The trial could also test bond insurers' ability to recover damages using evidence from so-called "statistical sampling." Insurers say they should be able to rely on a sample of the multitude of loans underlying a mortgage pool, rather than have to go loan by loan to prove their case as the defendants have sought.
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