Rakoff Delivers Enormous Gift to MBS Bond Insurers, Noteholders

U.S. Senior District Judge Jed Rakoff of Manhattan made Assured Guaranty wait a long time for the opinion explaining his ruling back in February that denied the MBS issuer Flagstar summary judgment on its interpretation of what constitutes a breach of the representations and warranties on mortgages underlying the securities Assured insured. But for Assured and its counsel at Susman Godfrey, the 24-page opinion Rakoff finally issued Tuesday was worth the wait, and then some. Rakoff not only offered a simple definition of a material adverse effect that should help everyone with MBS put-back claims but also wiped out several other potential Flagstar defenses to Assured’s claims. With a bench trial in the case only a couple of weeks away, Flagstar has to be wondering if it’s time to talk settlement.

Rakoff is the third judge to offer an analysis of loss causation in the context of a bond insurer’s put-back case — and the third to reject MBS issuers’ arguments that they’re only liable for repurchasing deficient underlying mortgages when the breaches caused the loans to default. Like his Manhattan federal court colleague Paul Crotty, who granted summary judgment to the bond insurer Syncora in its case against EMC in June, Rakoff said that Assured must only show that the breaches in representations and warranties materially increased the risk that the insurer would suffer losses. (New York State Supreme Court Justice Eileen Branstenreached the same destination via a different route in January in MBIA’s put-back case against Countrywide.) “Put another way,” Rakoff wrote, “the causation that must here be shown is that the alleged breaches caused plaintiff to incur an increased risk of loss.”

Rest here…

Copy of the opinion below…

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4closureFraud.org

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ASSURED GUARANTY MUNICIPAL CORP vs FLAGSTAR BANK