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Mortgage Loans Lawsuit: Bank of America Loses Ruling

Bank of America's Countrywide Financial unit, which made all sorts of wild home loans in the past, is haunting the bank (rightfully so), most recently in a lawsuit by a bond insurer.

Bank of America (BAC) was sued by MBIA, a bond insurer, for losses that MBIA suffered as a result of Countrywide's loans, and the court recently ruled in MBIA's favor, reports Bloomberg News.

MBIA alleged that it was duped into guaranteeing payments on mortgage bonds Countrywide issued. But it still remains for MBIA to show that Countrywide made misrepresentations about the loans backing the bonds. Showing that much is considered a victory because MBIA could've been put in the situation of having to prove that the loans caused the losses -- which would be a far more difficult task for the bond insurer.

And why is this one case significant in the larger real estate scene? Well, according to Bloomberg:

Defeats on such matters may add as much as $9 billion to what Bank of America owes bond insurers, according to an August estimate by hedge fund Branch Hill Capital, which has bet against the lender's stock and has invested in MBIA.

A bond insurer is basically a company that guarantees payments to investors that buy securities backed by different kinds of loans, in this case, mortgage loans. Where the loans are fraudulent means that the bond insurer has been put in an unfavorable position of having to pay out to people that were misled.

Of course, Countrywide is not accepting liability for alleged fraudulent loans. Rather, it is blaming the housing bust. But MBIA is saying the same thing that individual homeowners who faced foreclosure on their homes are saying: the housing bust only happened because there were so many fraudulent loans given in the first place.

It is a real estate catch-22 that the courts are having to unravel. The moral, therefore, is that before entering into any mortgage loan, do your homework and check with an attorney first to avoid ending up in a mortgage loan lawsuit.

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