Ambac Assurance Corp. (ABK) filed a lawsuit against Bank of America (BAC), First Franklin Financial and Merrill Lynch this week after finding flaws in mortgages it guaranteed for the big banks. 

The insurer claims in a complaint filed with a New York state court that the defendants induced Ambac to guarantee payments underlying RMBS bonds by making "numerous fraudulent misrepresentations" about "the characteristics of the loans pooled for the transaction" and on underwriting guidelines used to evaluate the soundness of the deal. 

A Bank of America spokesperson said the company is still reviewing the complaint and does not have a comment at this time. 

Merrill Lynch originally sponsored the RMBS deal, while First Franklin originated some of the mortgages. All of the loans were eventually placed in the First Franklin Mortgage Loan Trust Series, 2007-FFC. BofA ended up a party to the case since it acquired Merrill Lynch and its assets in 2009.

The suit says approximately 15,812 subprime, second-lien fixed-rate mortgages with a principal balance of $856 million were securitized in the deal.

Ambac conducted a loan level review of 1,750 loans in the pool and discovered nearly 94% of the loans surveyed had breaches of representations and warranties made about the quality of the underlying mortgages.

Ambac is suing for fraudulent inducement, breach of representations and warranties, material breach of a contract and is asking the parties for indemnification on any losses as well as reimbursement on any related claims that have already been paid out. 

kpanchuk@housingwire.com