Flagstar to pay $110 million to settle MBIA mortgage lawsuit

Flagstar Bancorp Inc said Thursday it would pay $110 million to settle a lawsuit by MBIA Inc accusing the bank of misrepresenting the quality of loans underlying $1.1 billion in mortgage-backed securities.

MBIA filed the lawsuit in January in the latest legal spat between bond insurers and banks that packaged mortgage financial products at the center of the 2008 financial crisis.

"Today's announcement represents another major milestone in putting legacy challenges behind us," Flagstar CEO Michael Tierney said in a statement.

MBIA, based in Armonk, New York, in the lawsuit said it had agreed to insure two mortgage-backed transactions by Flagstar in 2006 and 2007. But mortgage defaults mounted, resulting in MBIA paying out $165 million, the lawsuit said.

MBIA CEO Jay Brown in a statement said the settlement amount was "consistent with our recovery expectations."

The settlement has no impact on a separate lawsuit filed in 2011 by another bond insurer, Assured Guaranty Ltd , which following a trial won a $106.5 million judgment against the Troy, Michigan-based lender.

Flagstar is appealing against that decision, which came out of the first trial in the bond insurers' lawsuits against the banks. MBIA's case had been assigned to the same judge, U.S. District Judge Jed Rakoff in Manhattan.

MBIA said Thursday that Flagstar would pay the settlement to its structured finance insurer MBIA Insurance Corporation.

The subsidiary will in turn use the money to partially pay down a secured loan from MBIA's municipal bond insurer, National Public Finance Guarantee Corp.

The amount of the loan outstanding at the time of the settlement was $1.7 billion, MBIA said on February 27 in a filing with the U.S. Securities and Exchange Commission.

The loan was secured in part by any future receivables MBIA expected in pursuing claims against banks over mortgage-backed securities.

MBIA has cases still pending against other banks, including Countrywide Financial Corp, which Bank of America Corp bought in 2008.

The case is MBIA Insurance Corporation v. Flagstar ABS, LLC, U.S. District Court, Southern District of New York, 13-0262.

(Corrects paragraph 9 to clarify that the money will be used to partially pay down a secured loan)

(Reporting by Nate Raymond in New York; Editing by Bernard Orr and Paul Tait)