Court Eases Insurer’s Burden In Mortgage Backed Securities Case

A typical pre-Fiscal Crisis mortgage-backed securitization began with a group of mortgage loans originated or acquired by a lender that were sold to a trust. The trust, in turn, issued notes and certificates backed by the loans to investors. Investors were promised a return of principal with interest that depended on an ongoing stream of principal and interest payments on the mortgage loans held by the trusts. Importantly, insurance policies guaranteed that the payments to the investors would be made. 

After the Fiscal Crisis, investors asserted claims under various insurance policies seeking to be paid. The MBIA Insurance Corporation subsequently brought suit against Countrywide Home Loans and related companies for fraud.
 
Now, a New York state court has issued an important decision in the MBIA case against Countrywide that significantly eases the burden on MBIA to win its fraud claim.
 
MBIA argued that it had to establish only that Countrywide’s alleged fraudulent misrepresentations had induced MBIA to issue insurance policies on terms it would not have agreed to had MBIA known of the alleged misrepresentations, and that MBIA did not have to show a causal connection between Countrywide’s alleged misrepresentations and the payments MBIA made to investors pursuant to MBIA’s insurance policies. 
 
Countrywide argued, in response, that MBIA had to prove that payments to investors were directly and proximately caused by Countrywide’s alleged misrepresentations.
 
The court agreed with MBIA, finding that “no basis in law” existed to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy. Instead, the court declared, all that MBIA must prove for its fraud claim was that it issued the policies on representations made in the policies’ applications, and that it would not have done so or would have issued the policies on different terms had the alleged misrepresentations not been made.
 
As a result of the court ruling – that MBIA must establish for its claim of fraud that misrepresentations by the defendant(s) induced MBIA to issue insurance policies on terms to which it otherwise would not have agreed; MBIA is not required to establish a direct causal link between defendant(s) misrepresentations and MBIA’s claims payments made pursuant to the insurance policies – MBIA’s claims against Countrywide will be substantially easier for it to prove. This is not to say that MBIA will succeed in its litigation, but its case just took a major step forward.
 
The case is MBIA Ins. Corp. v. Countrywide Home Loans, Inc., No.: 602825/08 (Sup. Ct. N.Y. Co. Jan. 3, 2012).