A.I.G. and Countrywide Go Head-to-Head Over Mortgage Insurance Coverage

The battle of the titans has begun. As reported by Reuters on Friday, both A.I.G. and Countrywide have now sued one another over who will bear the losses on a $1 billion pool of subprime mortgage loans.

Countrywide fired the opening salvo on Wednesday when it sued A.I.G.’s United Guaranty Mortgage Indemnity Co. in Los Angeles County Court, alleging that the insurer was refusing to honor its mortgage insurance obligations. One day later, United Guaranty responded by suing Countrywide in federal court in Los Angeles, alleging that Countrywide had misrepresented the risks tied to the pool of mortgage loans and had failed to follow its own underwriting guidelines.
Based on the arguments asserted by both sides in their complaints, this clash of mortgage giants features two familiar but wildly disparate perspectives on the causes of this crisis. On one hand, Countrywide argues that United Guaranty profited for years from the premiums it received to insure loans against borrower default, but now that it is “fac[ing] the reality of steep financial losses because of a significant economic downturn,” United Guaranty is trying to escape its obligations.

On the other hand, United Guaranty argues that Countrywide took advantage of its long-standing relationship with the insurer to induce United Guaranty to insure loans that never should have been approved. According to another article in Bloomberg, United Guaranty’s review of loan files from 11 separate policies for asset-backed securities revealed that most either violated Countrywide’s own underwriting standards or had material defects such as misrepresented credit scores or fake social security numbers.

United Guaranty will likely have a mountain of salacious evidence on its side to demonstrate Countrywide’s improper and irresponsible lending, as other lawsuits against the former lending giant have revealed a shocking abandonment of underwriting standards and practices. Yet, United Guaranty will have several hurdles to overcome. First, according to its Complaint, United Guaranty has already paid out over $30 million in insurance claims on these loans. This is sure to raise arguments of waiver or estoppel by Countrywide and questions of whether the insurer should have known about the quality of loans when it placed insurance coverage or, at the very least, when it paid claims. Second, United Guaranty will have to counter Countrywide’s argument that these losses were caused by the broader economic downturn, and show that they were caused, in fact, by Countrywide’s abusive and irresponsible lending practices. United Guaranty might be able to do this by demonstrating that this pool of mortgage loans is significantly worse than comparable pools and/or by showing that Countrywide’s underwriting deficiencies directly caused the loans to fail. The latter approach will likely prove much tougher than the former, as we have already seen litigants struggle to make out the loss causation claim in prior mortgage crisis litigation.
Regardless, this heavyweight legal matchup will be closely watched by the industry and is certain to have a significant impact on future lawsuits stemming from the broader financial crisis.
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