Bad Loans
Ambac to sue Bear Stearns subsidiary over bad home loans
Culminating a nearly year-long process to be reimbursed for bad loans in securities it insured, Ambac Financial Group Inc. (ABK) will file a complaint over four transactions it insured for a Bear Stearns subsidiary.
The four transactions include loans that contain inaccuracies, typically called warranties and representations regarding the borrowers' income and employment status, whether a home is to be a primary residence or an investment property and other factors that violate terms of the financial guarantee bond insurers write on securities backed by home loans.
The four transactions were guaranteed by Bear Stearns subsidiary EDC. Bear Stearns was acquired by JPMorgan Chase & Co. (JPM) earlier this year.
Ambac said it has sent notices on 17 transactions over similar issues.
The issue of pushing lenders to make good on loans that don't live up to lenders' promises has become an important element to bond insurers' expected losses.
Last month, MBIA Inc. (MBI) sued a unit of GMAC Financial Services as well as several units of Countrywide Financial Corp., claiming they had made misrepresentations about the quality of loans and loan underwriting standards related to the securitization of more than $17 billion in home-equity loans.
Earlier Wednesday, Ambac reported a net loss of $2.43 billion, or $8.45 a share, compared with a prior-year net loss of $360.6 million, or $3.53 a share.
Ambac's latest results included $2.71 billion in realized and unrealized derivatives losses, up from $723.3 million a year earlier, with most of the latest quarter's total due to increased loss projections for its portfolio of collateralized debt obligations.
Both MBIA and Ambac are under review for a potential credit rating downgrade by Moody's Investors Service. Ambac said that, if it is downgraded, collateral and termination payments that will be triggered on its guaranteed investment contracts, or GICs, will exceed the capital it has on hand to make payments by $ 2.8 billion to $3.2 billion, depending on the severity of the potential downgrade.
Ambac said it is in discussions with its regulator "regarding solutions to this potential shortfall.
(Published by CNN News - November 5, 2008)