In a move that might be funny fifty years from now when people look back on our current economic situation from a distance, United Guaranty Mortgage Indemnity Co., a division of AIG, and Countrywide Financial Corp, now part of Bank of America Corp, have sued each other, alleging breach of contract, in a dispute over insurance losses from subprime mortgages now in default.
Countrywide sued United Guaranty in California state court in Los Angeles last Wednesday, saying that United Guaranty, a provider of the mortgage insurance that covers lenders in case a borrower defaults on a loan, was trying to get out of its obligations.
Just one day later, on Thursday, United Guaranty sued Countrywide in a California federal court, this time contending that the lender had misrepresented the risk associated with over $1 billion of mortgage loans that they’d insured.
According to United Guaranty, Countrywide wanted coverage to increase the credit rating of its mortgage-backed securities, rather than using it to facilitate home purchases by responsible, but credit-damaged, borrowers. It also claimed that Countrywide traded on the long-standing relationship between the two companies in order to make United Guaranty insure loans that were too risky or not issued according to correct underwriting standards. It maintains that more than $30 million in claims has already been paid out on Countrywide loans, and that there is exposure of “…several hundred million dollars more.”
Countrywide, on the other hand, said in its lawsuit that United Guaranty, “…reaped hundreds of millions of dollars…” when the real estate market was booming but was now refusing to pay required losses on borrowers’ loans.
According to the Countrywide lawsuit, United Guaranty, “…faces the reality of steep financial losses because of a significant economic downturn and has announced its unilateral refusal to pay on much of the insurance it sold because it believes it has already paid too much.”
United Guaranty’s parent company, AIG, has received $180 billion in government aid after amassing huge losses based on hedges about toxic mortgage assets, which triggered credit rating cuts and collateral demands the insurer cannot meet. They are currently at the center of a huge political drama because of the bonuses paid to their top executives amid the bailout.
Also named in United Guaranty’s lawsuit was the Bank of New York Trust Co., a trustee for the mortgage-backed securities formed by Countrywide. A spokesperson for Bank of America, which bought Countrywide for roughly $4 billion in stock last July, declined to comment on the litigation, as did a spokesperson for the Bank of New York Trust Co.
Countrywide was one the largest mortgage lender in the United States.