MANHATTAN (CN) – Countrywide Home Loans lied about more than 97 percent of the mortgages and home equity lines of credit it aggregated and securitized, and Ambac Assurance has had to pay $466 million in claims because of this “systemic fraud,” the insurer claims in New York County Court. Ambac also sued Bank of America, which bought Countrywide when the company collapsed.
Ambac claims Countrywide fraudulently induced it to insure the securitized financial instruments in 12 transactions that contain more than 268,000 loans, “which serve as collateral for a total of approximately $16.7 billion in securities. Certain classes of these securities are insured by Ambac, a monoline insurance company.”
Countrywide became the nation’s leading mortgage lender before the financial collapse “by abandoning its underwriting standards and condoning fraud by its employees, business partners, and many of its borrowers,” Ambac says in its 82-page complaint.
Countrywide began securitizing most of its loans in 2003, by aggregating the mortgages into pools, and selling the pools to a trust it created for the securitization. “The trust, in turn, issued securities – certificates or notes – that were to be paid down from the pooled mortgage loans,” according to the complaint.
The complaint continues: “Countrywide’s ability to execute these securitization hinged on its assurances that it was a prudent lender that stood behind the loans it originated. … Because Countrywide was the nation’s leading mortgage originator, its many public pronouncements that its underwriting practices were the industry’s gold standard carried significant weight. Countrywide repeatedly asserted that the loans in its portfolio, from which the loans in the transactions at issue were drawn, were originated pursuant to Countrywide’s strict underwriting standards that allowed ‘exceptions’ only if compensating factors were present. But what Countrywide concealed is that, contrary to its representations, approval of ‘exceptions’ became the rule. Countrywide failed to disclose that its business model was premised on the perpetual origination and refinancing of loans to borrowers who did not have the ability to make the required payments.”
It worked so long as property values kept rising and buyers could refinance or flip properties. But Countrywide’s “duplicity” undid it in 2007, when the real estate market collapsed, and “Countrywide could no longer conceal its systemic underwriting abuses and misrepresentations,” Ambac says.
Ambac says Countrywide fraudulently induced it to insure its securities. “Over the last two years, the loans in the transactions have defaulted at extraordinary rates. To date, over 35,000 loans with an aggregate principal balance, as of the date of default or charge-off, of more than $1.95 have defaulted or been charged off. As a result, Ambac has been forced to make more than $466 million in claim payments.”
Ambac says it reviewed the defaulted loans “for conformance with Countrywide’s loan-level representations and warranties.” It says it found that 6,362 of 6,533 – more than 97 percent of the loans – with an aggregate initial principal balance of $658 million “materially breached Countrywide’s loan-level representations or warranties.”
Ambac says it demanded that Countrywide cure the breaches or repurchase the loans, as it promised, and Countrywide refused, using a “delay-and-defer strategy.”
Ambac demands damages for “Countrywide’s massive fraud and material breaches, including damages sufficient to place Ambac in the same position it would have been in had it never insured the transactions.”
Ambac is represented by Philip Forlenze with Patterson, Belknap, Webb & Tyler.