The game of hot potato between lenders and mortgage insurers continues.
The mortgage insurance unit of Old Republic International Corp. is asking a court to back its refusal to pay claims on soured mortgages originated by Countrywide Financial Corp.
In a suit filed Dec. 31 in New York State Supreme Court, Republic Mortgage Insurance Co. said it has discovered more than 1,500 delinquent Countrywide loans with "material misrepresentations … , in some cases by Countrywide or with its knowing participation."
Republic said that, because Countrywide, now a unit of Bank of America Corp., disputes the insurer's investigation and its refusal to pay the claims, it is seeking a declaratory judgment that its procedures were consistent with the law and are not a basis for the lender to challenge the rescissions, or policy cancellations.
Old Republic disclosed the suit in a Securities and Exchange Commission filing Feb. 5.
Lawsuits like this one have been on the rise as ever more mortgages default. It is no secret that the housing market boom fostered poorly underwritten mortgages, in which it was common that a borrower's income was inflated or never documented. Insurers are denying the claims on many loans, asserting they are not liable to pay claims because, they allege, the loans were originated fraudulently.
Moody's Investors Service Inc. has estimated that in recent quarters private mortgage insurers have rejected about 25% of claims, up from a historical average of about 7%.
In another recent case, Bank of America sued MGIC Investment Corp. over its rescission practices. B of A has also stopped sending new business to the Milwaukee insurer.
What is different about the Republic case is that the insurer is being proactive in seeking validation of its rescission practices.
"Some courts are better than others for insurers, and they wanted to make sure Countrywide didn't jump them," said David Goodwin, a partner in the policyholder insurance practice at Covington & Burling LLP in San Francisco. Goodwin is not involved in the Republic case.
Neither Republic nor B of A would discuss the suit. (The lender is trying to get the case moved to arbitration.)
However, Al Zucaro, the chairman and chief executive officer of Old Republic, the Chicago parent of Republic Mortgage Insurance, said that, with the increasing volume of rescissions, it is natural for the number of disagreements between lenders and insurers to rise.
"There've always been rescissions in the business," he said. "They've just not in the past been at the same high level as they seem to be currently."
Fannie Mae and Freddie Mac, which buy most of the loans covered by private mortgage insurers, compound the problem by forcing lenders to buy back a lot of these loans, he said.
"Fannie Mae and Freddie Mac themselves have been rescinding a lot of loans as well," he said. "So whenever that happens, it creates obvious pressures and stresses in the system."