Bond insurer Ambac Financial filed its second mortgage bond suit against Bear, Stearns & Co. and EMC Mortgage, which are now part of JPMorgan Chase (JPM). All three entities are accused of packaging, underwriting and selling poorly underwritten loans for securitization, leaving Ambac on the hook for insuring the losses.

The suit, filed in a New York state court, claims employees of EMC have since come forward admitting they were forced to approve high volumes of loans for Bear Stearns securitizations at the expense of quality underwriting. 

Ambac alleges it already has lost $200 million on insurance claims tied to poorly underwritten mortgages that were sold by into trusts. Bear Stearns is accused of handling every part of the complex securitization process. 

As insurer of the trust, Ambac alleged it discovered defective loans that contained underwriting errors packed into the securitizations.
In its lawsuit, the bond insurer claims 62% of the securitized loans it evaluated in its coverage portfolio had already failed, leaving the insurer on the hook for $200 million in claims.

Ambac says Bear Stearns misrepresented the quality of the underlying mortgages when trying to obtain insurance coverage for the securities. Insurers like Ambac provide insurance that provides payment coverage when a mortgage within an RMBS portfolio fails.

The suit says, "Bear Stearns imposed strict requirements on EMC’s underwriters to review a minimum number of loan files each day that far exceeded what was reasonable in order to adequately underwrite a loan file. The pressure to maintain loan volume resulted in the increasing approval of defective loans without regard to quality or compliance with underwriting guidelines."

The plaintiff further claims underwriters who did not push forward, producing high volumes of loans – despite the quality of those loans – were eventually given poor reviews and fired.

Ambac had no comment on the case, and JPMorgan could not be immediately reached for comment.

Other testimony presented in the suit claims Bear Stearns avoided clear warning signs of troubled mortgages. 

The complaint reads, "As a Bear Stearns quality-control manager has testified, even as of late 2007 Bear Stearns had 'no protocols in place' for reviewing and repurchasing breaching loans out of securitizations, including the transactions. Recent disclosures have also confirmed that to the extent Bear Stearns did perform a quality-control review of loans, it identified serious issues."

The lawsuit accuses the defendants of fraudulent inducement and breach of contract. JPMorgan, meanwhile, is accused of successor liability in its role as the bank that acquired EMC.  

kpanchuk@housingwire.com