Losses on insurance contracts covering mortgage bonds continue to spawn billion-dollar legal battles in U.S. courts. 

Bond insurer Financial Guaranty Insurance Co. is the latest participant, filing suit against Ally Financial Inc. (GJM) and Residential Capital Corp. in District Court of the Southern District of New York. 

FGIC claims Ally, formerly GMAC, and affiliated parties obtained insurance on more than $1.14 billion in residential mortgage-backed securities by making material misrepresentations and omissions about loans backing the bonds. 

Ally Financial responded to the suit, saying, “We believe there are substantial legal and factual defenses related to the FGIC claims against ResCap, and we intend to defend that position aggressively. While Ally Financial is also named in the claim, the transactions referenced are those of ResCap, which is a separate legal entity. There is no merit to Ally being named in the claim.”

FGIC claims it insured the bonds on misrepresentations made about the quality and structure of the mortgages.

The firm said it was assured no more than 7.61% of the aggregate principal amount of those loans would be balloon mortgage products. However, FGIC alleges in court records that more than 26% of the aggregate principal amount of the initial mortgage loans — or 4,300 mortgages with a balance of $226 million — were balloon mortgages.

FGIC says the financial firms obtained insurance on misrepresented data, which eventually led to a high level of poor performing loans and $82.9 million in insurance claims for FGIC.

The insurer suggests in its lawsuit that Ally and GMAC breached various representations and warranties on the mortgage loans, while fraudulently inducing the insurer to back the deal.

FGIC is suing for damages and fees related to the lawsuit.

It is not the first insurer to take aim at financial firms, claiming they were induced to insure mortgage bonds on misrepresented or omitted data. 

Assured Guaranty (AGO) launched its own suit against Swiss banking giant UBS (UBS) this month over three residential mortgage-backed securities deals.


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