Tags: Ambac | Banks | Pay | Mortgage | Bond | Losses

Ambac: Banks Must Pay for Some Mortgage Bond Losses

Friday, 19 Nov 2010 10:39 AM

Ambac Assurance, whose parent company filed for bankruptcy earlier this month, said Thursday that banks that assembled a dozen poor performing mortgage bonds that it insured must pay for some of those losses.

Ambac said it was reviewing loans in residential mortgage-backed securities (RMBS) issued by the Countrywide unit of Bank of America and affiliates of Citigroup among others.

The company may be riding the growing momentum of mortgage "putbacks" — forcing banks to buy back mortgage securities — driven by Pacific Investment Management and other big investors.

Those investors have forged alliances to fight banks they claim shoveled faulty loans into mortgage bonds.

U.S. mortgage giants Fannie Mae and Freddie Mac have said in securities filings they have been able to cut their losses by billions of dollars with putbacks.

JPMorgan Chase has estimated the cost to the banking industry from putbacks could be as high as $90 billion.

Ambac Assurance has stopped writing new business and is undergoing a rehabilitation plan after it insured tens of billions of dollars of mortgage-backed securities that are going bad due to the U.S. housing crash.

The insurer said that after reviewing loan origination files it is seeking to have the banks buy back certain loans that are part of the bonds.

Ambac Assurance "believes, based on its review, that the sponsors of these securities are obligated to pay sums, which may in certain cases be material," the insurer said a securities filing.

Jerome Dubrowski of Bank of America said, "In cases where we determine a valid defect, Bank of America will act responsibly. In cases where we do not determine a valid defect we will vigorously contest the claim and will defend our interests and the interests of our shareholders."

Citigroup declined to comment.

Ambac Assurance is a unit of Ambac Financial Group, which has filed for bankruptcy. The parent company strayed from insuring municipal bonds and began guaranteeing RMBS and other more exotic instruments.

In March, Wisconsin Insurance Commissioner Sean Dilweg, who regulates Ambac Assurance, seized $64 billion of its worst policies, including the RMBS business, and placed them in a segregated account.

Ambac Assurance also said it had sued in connection with 17 RMBS for breaches of representations and warranties by the banks that assembled the securities.

Most of the RMBS involved in litigation were structured by Countrywide.

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