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Lawsuit against Michigan bank could affect other cases

A 2011 lawsuit against Michigan's Flagstar Bancorp is scheduled to go to trial, with some experts saying the case could have broad repercussions on a number of other pending claims. An executive with the plaintiff said a "big win" would be threatening for defendants in similar cases, likely prompting to them to "get really interested in getting a settlement achieved." The plaintiff has launched similar claims against JPMorgan, Credit Suisse and several other prominent banks.

A bond insurer sued the Flagstar in 2011 for breach of contract, claiming the bank failed to make clear the quality of loans it had pooled into mortgage-backed securities. The plaintiff guaranteed $900 million worth of these securities, making it responsible for paying investors when investment values dropped with the onset of the housing crisis. The plaintiff claims that 610 out of 800 analyzed loans were misrepresented by the bank. The bond insurer filed the lawsuit after Flagstar refused to repurchase some of the loans, arguing that the plaintiff carefully reviewed the securities before insuring them. The plaintiff is requesting $108 million from Flagstar.

Flagstar was previously involved in a civil fraud settlement with the U.S. Justice Department, agreeing to pay $132.8 for illegally approving home loans for insurance. This is just one of many lawsuits against banks regarding their practices before the housing collapse, with another bond insurer filing a $3 billion lawsuit against Bank of America over repackaged home loans.

The Flagstar case is expected to go to trial soon if a settlement is not reached, and will be heard by a judge who is famous for rejecting a $285 settlement between Citigroup and the U.S. Securities Exchange Commission, after which he chastised the SEC for agreeing to the settlement without requiring Citigroup to address allegations that it wrongfully sold toxic mortgage debt.

Source: CNBC, "New York mortgage trial could have broad impact on Wall Street," Nate Raymond, Oct. 9, 2012

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