Lawsuit deals setback to Bank of America as it tries to put mortgage woes in past

By David S. Hilzenrath
Washington Post / January 1, 2011

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WASHINGTON — Bank of America’s hangover from the housing bubble could be harder to shake in the new year as a result of a recent court decision.

The bank lost a major procedural ruling in a lawsuit over its liability for allegedly toxic mortgages. The ruling will make it harder for the bank to defend itself in that case, and it could set a standard for similar disputes.

Bank of America had tried to set a high bar for plaintiff MBIA Insurance Corp. by requiring that the files for each of 368,000 or more disputed loans be evaluated individually. That process would have cost MBIA $75 million, and it would have taken more than four years, MBIA estimated.

Instead, the New York State Supreme Court in late December declared that MBIA can pursue its case by focusing on a statistical sample of 6,000 disputed loans. That could pave the way for a trial to proceed as scheduled in 2011.

“It’s a big setback’’ for Bank of America’s “scorched-earth strategy,’’ said David Grais, a lawyer involved in other suits against the bank.

MBIA still must prove its case, and “this we believe it cannot do,’’ Bank of America said.

Lenders that issued mortgages during the nation’s housing binge typically sold the loans to investors. But those deals did not completely rid the banks of the risks. Many of the transactions included money-back guarantees.

Now, lenders are confronting demands that they buy back billions of dollars of loans from investors because the loans are alleged never to have complied with the lenders’ quality assurances, known as “representations and warranties.’’

MBIA’s suit focuses on loans issued by Countrywide Financial, a mortgage lender that was taken over by Bank of America. When Countrywide pooled loans into securities and sold them, MBIA provided insurance.

In the suit, MBIA is trying to recoup money it has lost to make good on its insurance policies.