Bank of America Corp. stepped up efforts to curtail the cost of soured mortgages, by suing First American Corp., claiming the title insurer refused to cover more than 5,500 loans that caused $535 million of losses.
First American, the second-biggest title insurer, was supposed to protect Bank of America against defective titles on home equity loans and lines of credit, according to the suit, filed March 5 in Mecklenburg County Superior Court in Charlotte.
The suit against the Santa Ana, Calif., company focuses on loans in which Bank of America relied on a borrower's word regarding any outstanding liens or mortgages.
Home lenders are sparring with mortgage insurers, bond investors and Fannie Mae and Freddie Mac over who should bear the cost of record defaults.
Bank of America, the biggest U.S. lender by assets, said last week that it has been writing off $1.5 billion to $2 billion of unpaid home equity loans each quarter, and has sued MGIC Investment Corp., the biggest mortgage insurer, for allegedly denying millions of dollars of claims.
The policies described in the First American case sound like "liar's title insurance," similar to the "liar loans" common among subprime lenders in the middle of the last decade, said Jack M. Guttentag, chairman of GHR Systems, a consulting firm in Wayne, Pa.
"Liar loans" is an industry term for mortgages made to borrowers who inflated their income on applications that were not verified by lenders.
Lenders such as Bank of America, of Charlotte, bought "lien protection" plans as a faster, cheaper approach for home equity loans than full title insurance policies as housing sales soared in the mid-2000s.
Full title insurance typically involves an independent check by the insurer on whether the title might face competing claims for ownership or financial obligations.
The American Land Title Association, a trade group representing title insurers, opposed some of the lien-protection plans because they offered less legal protection than traditional title insurance.
First American denied or ignored most of Bank of America's claims in 2008 and 2009, the lawsuit claims.
Last August, First American started sending more than 2,000 letters to B of A seeking information and documents related to the claims, the complaint said.
First American subsidiaries "regret that their valuable customer, Bank of America, has chosen to file a legal action against the companies," spokeswoman Carrie Gaska said by e-mail.
"We are hopeful that we will be able to resolve this matter outside of court with continued discussions."
Bank of America spokeswoman Shirley Norton had no comment.
MGIC has said it will defend itself against Bank of America's lawsuit, which was filed by the lender's Countrywide unit.
Bank of America ranked second last year in home mortgage lending, behind Wells Fargo & Co.
