PNC May Have Case Over Mortgage Insurance

(CN) - A mortgage insurer cannot dismiss claims that it wrongfully canceled PNC Bank policies during the 2008-09 mortgage crisis, a federal judge ruled.

Republic Mortgage Insurance sold "flow" and "pool" mortgage insurance policies, effective Dec. 1, 1989, and Jan. 1, 2005, to PNC and its predecessor, National City Corp. The "flow" policy insures against the risk of borrower default on an individual loan, even if it is sold by PNC in the secondary market. A "pool" policy meanwhile protects pooled loan lenders against the risk of exposure to investors in the event of adverse economic conditions or increased borrower defaults.

In an October 2012 federal complaint, PNC said it has been forced to repurchase loans and "stands the prospect of having to repurchase loans worth millions of dollars more in the near future."

The bank said Republic did not object to its underwriting practices, including "stated income" and "no income" loans, until after the real estate market collapsed and default rates soared. Republic has allegedly tried to escape its coverage obligations with wrongful rescissions or cancelations, based largely on post-loss underwriting of 248 loans.

PNC said Republic justified canceling or rescinding coverage based on the bank's alleged misrepresentations of: (1) borrower information; (2) information that was not required to be disclosed; (3) appraised property value; (4) borrower liabilities/debts; (5) missing documents; and (6) other miscellaneous grounds based on alleged improper interpretation of the insurance policies.

U.S. District Judge Terrence McVerry refused to dismiss the complaint on May 23, tossing aside the claim that each loan must be considered separately.

"The interpretation of the rights and duties of parties under an insurance contract is a classic example for which declaratory relief is appropriate," McVerry wrote. "The court declines to exercise its discretion, at this stage of the case, to dismiss count I. The court appreciates the contention of Republic that paragraphs (a), (b) and (i) of the prayer for relief may seek declarations that are overbroad and/or inappropriate. However, those matters will be better resolved on a more fully-developed record."

PNC's "short and plain" breach of contract and bad faith claims also survived.

"The 'short and plain statement' required by Rule 8 does not require detailed allegations as to each individual loan," McVerry wrote. "It is sufficient that Republic has fair notice of the generalized conduct which PNC alleges was in bad faith."

Republic must respond by Thursday, the ruling states.

"This appears to be a significant case between two sophisticated parties," McVerry wrote. "The 42-page amended complaint is sufficient to put Republic on notice of PNC's claims and is not subject to dismissal at the pleading stage. Republic will have ample opportunity to re-assert its contentions, if warranted, at the summary judgment stage."

At the end of the fiscal year 2011, PNC Bank had total assets of $271.205 billion.

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