In a dispute over $666 million in mortgage-backed securities, Syncora sought a ruling that would force EMC to repurchase the loans through a repurchase agreement based on material misrepresentations and breached warranties associated with the loans. Syncora was the insurer of mortgage backed securities which were sold by EMC, a division of Bear Sterns, which bought and sold loans pooled into mortgage backed securities. The US District Court for the Southern District of New York found that New York law requires that insurers be provided accurate information before they insure their policies, and that alleged false warranties could be enough to trigger a repurchase agreement even if the warranties had not caused the actual losses.
In 2007, EMC pooled around 10,000 home equity lines of credit which Syncora agreed to insure and sold them to investors. The decision to insure these, according to Syncora, was based on EMC’s contractual warranties which vouched for the quality of the loans. The warranties for the quality of the loans turned out to be false according to Syncora’s complaint. Syncora alleged that it ended up having to pay over $168 million in claims and continues to face liability as a result of EMC’s breaches of representation and warranties.
EMC argued that its alleged breaches could not support Syncora’s assertion that EMC should repurchase the loans. EMC stated that in order for EMC to repurchase the loans, Syncora must show that the breaches actually caused the loans to default.
The court held that “Contrary to EMC’s argument, the parties’ written agreements do not provide that breaches of representations or warranties must cause any HELOC loan to default, before the insurer can enforce its remedies under the repurchase provision…Had the parties intended this requirement, they could have included such language. They did not, and the court will not do so now ‘under the guise of interpreting the writing.’”
The court went on stating that “Syncora relied on EMC’s material misrepresentations and warranties in deciding whether to insure the transaction and how to price that risk.” The judge stated “Indeed, the truthfulness of these representations and warranties as of the closing date [of the transaction] was a condition precedent to Syncora’s obligation to issue the policy. A breach of these warranties, if proven, would have adversely affected Syncora’s interests as an insurer.”
The trial, scheduled for August 2013, will examine the causes of Syncora’s losses and if they have arisen from EMC’s allegedly false warranties.
For a copy of this decision, click here.