AMBAC SUES BANK OF AMERICA FOR MASSIVE FRAUD: $16.7 billion
Neil Garfield | September 30, 2010 at 5:44 am | Tags: AIG, Ambac Financial Group Inc., Bank of America, BOA, fraud, insurable interest, insurance, Jonathen Stempel, Peter Tomlinson, Reuters | Categories: CDO, CORRUPTION, Eviction, GTC | Honor, Investor, Mortgage, bubble, currency, foreclosure, securities fraud | URL: http://wp.me/p7SnH-2ps
Somebody get me the complaint so I can post it here.
Editor’s Note: AMBAC is one of the insurers of loan portfolios, like AIG. The insurance paid off when the Master Servicer declared the portfolio had “failed,” based upon standards that were set by the Master Servicer and Underwriter. The insurer had waived its right to challenge that assessment and waived subrogation. It is through this mechanism that many loans that are still performing, many loans that are in current foreclosure proceedings, and many loans that were foreclosed were either paid off or the delinquency was paid by the carrier. In the contract of insurance the insurer expressly waives any right of subrogation. Thus the receiver of the proceeds of insurance gets to keep the money and the portfolio too which was largely performing.
This is why we have said that the defenses of payment and denial of default are entirely meritorious defenses and claims along with claims for slander of title (preventing people from refinancing) and wrongful foreclosure. The fact is that upon delivery of a proper accounting from the creditor side (rather than the debtor/borrower side) you will discover that the notices of default are fatally defective and even fraudulent. The fact that the borrower did not make a payment was used as an excuse to invoke a contractual right to receive payment on the entire portfolio based upon a formula that was determined solely in the discretion of the underwriter and Master Servicer. This overpayment was hotly contested by the insurers and the U.S. government although eventually they gave in and paid 100 cents on the dollar.
The investors were kept ignorant of the receipt of these payments by the underwriter and the borrower got the same treatment of non-disclosure. Thus the distribution report to the investor never mentioned receipt of the insurance money and the borrower’s end of month statement never mentioned the credit against the obligation due. No allocation was ever made in favor of either the investor or the borrower. This was an instant replay of the fact that no disclosure or allocation was made to the benefit of either the investor or the borrower for the tier 2 yield spread premium: the money that was taken out of the funds advanced by the lenders before actually applying it to funding loans.
What was missed completely by AMBAC, AIG and other insurers is that the party who received the proceeds of insurance lacked an insurable interest and therefore had nothing to insure. The fraud they cite is correct but they are missing the forest for the trees. It’s true the loans were improperly described and that no underwriting process was used in accordance with industry standards. That was a lie. But the bigger lie was that the insured had any asset to insure. If they kept the money, which they did, then the insurance company has a claim to recapture at least some of that money. Or, more likely, the investors should have been given the money which would have reduced the obligations, which should have been credited to the borrowers.
2010-09-29 19:00 (UTC)
By Jonathan Stempel
NEW YORK, Sept 29 (Reuters) – Ambac Financial Group Inc sued Bank of America Corp, alleging a ‘massive fraud’ that caused it several hundred million dollars of losses from insuring mortgage securities that went sour.
In a complaint filed Tuesday in the New York State Supreme Court in Manhattan, Ambac said the bank’s Countrywide mortgage unit misled it about loan quality and underwriting guidelines when sponsoring $16.7 billion of residential mortgage-backed securitizations between 2004 and 2006.
According to the complaint, the transactions concerned home equity loans, and contained more than 268,000 loans that backed the $16.7 billion of securities, some of which Ambac insured.
Ambac said it has paid $466 million on claims after an ‘extraordinary’ $2 billion of the loans went into default or were written off.
It also said that 97 percent of the 6,533 loans it has reviewed did not meet Countrywide’s underwriting guidelines, and that Countrywide has refused to meet its obligation to buy back some of these loans or bring them into compliance.
‘Countrywide’s pervasive misrepresentations and breaches pierce the very heart — and amount to a total repudiation — of the bargain struck by the parties,’ the complaint said.
Ambac is ‘entitled to redress for Countrywide’s massive fraud,’ it added.
Bank of America bought Countrywide in July 2008. A spokeswoman, Shirley Norton, said the Charlotte, North Carolina-based bank had no comment. Peter Tomlinson, a lawyer for Ambac, had no immediate comment.
Based in New York, Ambac had been the second-largest U.S. bond insurer before losses on risky debt, including mortgages, caused it in 2008 to lose the ‘triple-A’ credit ratings on which it had depended to insure bonds, mostly municipal debt.
Earlier this year, Ambac said its liquidity might run out before the second quarter of 2011, and said it might try to restructure its debt through a prepackaged bankruptcy.
In March its primary regulator, Wisconsin Insurance Commissioner Sean Dilweg, seized $64 billion of its worst assets and put them into a segregated account.
Bank of America has faced many lawsuits over Countrywide’s lending and disclosures. Late Tuesday, a Manhattan federal judge dismissed a lawsuit by two investment funds accusing Countrywide of misleading it about risk..
An Oct. 19 trial is scheduled in a U.S. Securities and Exchange Commission civil fraud lawsuit over Countrywide.
The SEC accused onetime Chief Executive Angelo Mozilo and two other executives of hiding Countrywide’s worsening loan portfolio. Mozilo also faced an insider-trading charge. The defendants have denied wrongdoing.
In afternoon trading on the New York Stock Exchange, Bank of America shares fell 9 cents to $13.18, and Ambac fell 1 cent to 56 cents.
The case is Ambac Assurance Corp et al v. Countrywide Home Loans Inc et al, New York State Supreme Court, New York County, No. 651612/2010.
(Reporting by Jonathan Stempel; Editing by Lisa Von Ahn and Gerald E. McCormick) Keywords: BANKOFAMERICA/AMBAC LAWSUIT
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