LOS ANGELES (CN) – Countrywide Home Loans demands $111 million from Triad Guaranty Insurance, claiming Triad is trying to blame mortgage lenders for the insurer’s role in the housing bubble and collapse.
In a somewhat brazen complaint, Countrywide claims Triad “encouraged lenders to develop new and more risky mortgage products” before the worldwide financial crisis, and now wants to rescind coverage for many of Countrywide’s 60,000 outstanding mortgage loans, worth more than $9 billion.
Countrywide, which many view as the poster boy for the mortgage lending catastrophe, objects that Triad is trying to rescind coverage for thousands of outstanding mortgage loans, by alleging infractions such as overstating of income and misrepresentation of appraisals.
“In more prosperous times, Triad reaped huge rewards for its participation in the home mortgage market, selling mortgage insurance policies to insure that the borrowers of certain residential mortgage loans made payment of principal and interest,” Countrywide says in its complaint in Superior Court.
“Triad now, however, faces the reality of steep financial losses because of a significant economic downturn and is refusing to honor the mortgage insurance that it issued and for which it received substantial premiums.”
Countrywide claims Triad is canceling thousands of policies for loans the Countrywide purchased from American Home Mortgage Corp. It claims Triad’s actions are based on “generalized arguments regarding the failure to comply with underwriting guidelines.”
Rather than examining each loan individually, Triad is trying to “rescind coverage on a blanket basis” for all American Home loans, Countrywide says.
“In order to avoid paying claims for exactly the type of risk it agreed to insure, Triad is attempting to blame mortgage lenders, rather than the collapse of the real estate market or its own expanded appetite for risk, for the present problems with the mortgage business,” Countrywide says.
Countrywide seeks declaratory judgment on the legality of Triad’s alleged blanket cancellation scheme. It also wants the court to establish standards for evaluating denial of coverage. Countrywide claims that Triad should not be allowed to rescind coverage for high-risk practices that it encouraged.
“In order to increase their market share in the highly competitive and lucrative mortgage insurance industry, Triad and other mortgage insurers encouraged lenders to develop new and more risky mortgage products in order to increase the market for mortgage loans and with it the market for mortgage insurance,” Countrywide says.
Countrywide services more than 3,000 outstanding American Home loans, with an unpaid principal balance of more than $500 million, according to the complaint.
Countrywide claims it has more than 60,000 outstanding loans insured by Triad, and so far 975 loans worth a total of more than $60 million have been “wrongfully denied.” Countrywide says it will likely lose more than $100 million if Triad’s practices continue.
It seeks $111 million in damages, alleging breach of contract and bad faith.
Bank of America, successor in interest to Countrywide Bank, is also a plaintiff, as is BAC Home Loans Servicing LP and Countrywide Financial Corp. They are represented by David Halbreich with Reed Smith.