September 26, 2012 / 3:13 PM / 6 years ago

Flagstar Bank to face trial over mortgage servicing: judge

NEW YORK (Reuters) - Flagstar Bank (FBC.N), the ninth-largest mortgage lender in the United States, must face trial next month over allegations that it breached contracts for financial guaranty insurance on nearly $1 billion in securities backed by home equity loans.

A federal judge in New York, expanding on an order he issued in February, wrote in an opinion issued on Tuesday that the plaintiff, Assured Guaranty Municipal Corp, had provided enough evidence to survive the bank’s motion to throw out the case.

Flagstar spokeswoman Susan Bergesen said the savings bank had a policy of declining to comment on pending litigation.

In his opinion, U.S. District Judge Jed Rakoff said he was skeptical that Assured Guaranty’s allegations of Flagstar’s failure to follow customary servicing practices amounted to gross negligence, misfeasance or bad faith. But the judge added: “The court finds that the plaintiff has presented enough evidence to survive summary judgment on this claim.”

The trial is scheduled to start on October 9, he said.

Troy, Michigan-based Flagstar, which says it has assets of $14.4 billion and is one of the largest savings banks in the United States, settled a civil lawsuit by the U.S. Department of Justice over home loans last February.

The government said Flagstar had improperly approved thousands of home mortgages for government insurance, using unauthorized employees to perform underwriting duties in the loan approval process.

Flagstar settled for $132.8 million in damages and penalties, the office of the Manhattan U.S. Attorney said in its announcement. The bank admitted and accepted responsibility for submitting false certifications that misled the U.S. Department of Housing and Urban Development and the Federal Housing Administration.

The case is Assured Guaranty Municipal Corp v Flagstar Bank, FSB in U.S. District Court for the Southern District of New York, No. 11-2375

Reporting by Grant McCool; Editing by Lisa Von Ahn

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