The Federal Deposit Insurance Company ("FDIC"), as conservator of IndyMac Federal Bank F.S.B. ("IndyMac"), recently filed a complaint seeking a declaration that PMI Mortgage Insurance Corp. ("PMI") could not rescind coverage for 5,565 residential mortgages. IndyMac Federal Bank F.SB. by the Federal Deposit Ins. Corp. as Conservator v. PMI Mortgage Ins. Co., No. 08-CV-04303 (N.D. Cal. Sept. 12, 2008). According to the Complaint, PMI provided coverage against borrower defaults on the mortgages, which were either originated or acquired by IndyMac and then sold in the secondary mortgage market. PMI allegedly sought to rescind coverage, however, claiming that IndyMac failed to produce files for the 5,565 mortgages within thirty (30) days after PMI requested them.
Under the agreement between IndyMac and PMI, rather than perform a detailed review of each loan before issuing coverage, PMI would retain the right to review individual files upon request. Specifically, the agreement states that PMI "reserves the right to rescind coverage with respect to a Loan or deny a Claim for a Loan if the Loan file record for such Loan is not furnished for review or audit within thirty (30) days after [PMI’s] written request for the same, to the extent that [PMI] is damaged by such delay." According to the Complaint, PMI sought to rescind coverage on the 5,565 mortgages at issue after IndyMac failed to meet the thirty-day deadline.
The Complaint alleges that the request for over 5,000 mortgage files was unreasonable and substantially deviated from PMI’s longstanding custom and practice of only requesting loan files for delinquent loans or loans for which IndyMac has filed a claim. IndyMac allegedly requested an extension from PMI, but the request was denied. Instead, the Complaint alleges that PMI unreasonably chose to rescind coverage for those mortgages, which had unpaid mortgage balances in excess of $1.49 billion. PMI then returned to IndyMac more than $13.7 million in premiums it had paid.
The Complaint seeks an injunction that: (a) prevents PMI from rescinding coverage for the 5,565 mortgages at issue; (b) prevents PMI from demanding loan files unless the loan at issue is delinquent or IndyMac has filed a claim for the loan; and (c) requires that PMI give IndyMac a reasonable time to comply with any requests for loan files. The Complaint also seeks damages and, if necessary, reformation of the contract between IndyMac and PMI to adequately reflect the parties’ intent. A copy of the Complaint is available here.
PMI is not the only insurer taking a hard-line on coverage for residential mortgages. Recently, several bond insurers started challenging coverage for residential mortgage backed securities. Earlier this month, MBIA Insurance Corp. ("MBIA") filed an action against Countrywide Financial Corp. ("Countrywide") accusing Countrywide of making misrepresentations about roughly $14 billion in residential mortgage backed securities insured by MBIA. Specifically, MBIA accuses Countrywide of failing to disclose a decision by Countrywide to abandon its underwriting policies in an effort to increase the number of residential mortgages it could issue. Countrywide allegedly then collateralized those mortgages and insured the resulting bonds through MBIA. As with the IndyMac case, one of MBIA’s chief complaints was that Countrywide refused to provide MBIA with complete files for mortgages underlying those bonds.
MBIA, however, was not the first bond insurer to question coverage for mortgage backed securities in the current market. Earlier this year, Ambac Financial Group ("Ambac") told investors that it believed fraud was "rampant in the mortgage market" and, therefore, that it would be reviewing a number of bond policies it issued by it. Thus far, Ambac has not reported any fraud, however, its willingness to challenge the integrity of representations made to it demonstrates a willingness to be aggressive about coverage issues in this area.