Flagstar Has Tarp Sale Delayed, Loses $90M Judgment

Flagstar Bancorp (FBC) in Troy, Mich., has taken two steps back and one step forward.

The Treasury Department has put the sale of its stake in Flagstar on hold at the request of the company, an agency spokesman said Wednesday.

The move coincided with a federal judge's ruling that Flagstar will have to pay more than $90 million to a bond insurer for failing to follow its own mortgage-underwriting practices.

Meanwhile, Flagstar announced that it has reached has reached a deal to sell nearly all of its remaining commercial loans in the Northeast. It is part of Flagstar's ongoing effort to reshape its balance sheet.

Treasury on Tuesday had included Flagstar among a group of bank companies it had identified for its latest round of auctions as it winds down the Troubled Asset Relief Program. At $266 million, Treasury's stake in Flagstar would have been the largest investment it has auctioned.

However, the auctions began Wednesday and did not include the Flagstar holdings.

"Flagstar requested to be removed from the auction, and we agreed to do so," said Matthew Anderson, a Treasury spokesman. He declined to comment on the reason for the request or if Treasury plans to include Flagstar in future auctions.

Officials at Flagstar, which has assets of $14.1 billion, declined to comment on the matters beyond their press releases Wednesday. Company shares had fallen nearly 3%, to $15.54 apiece, in late-morning trading.

The court decision was issued Tuesday.

U.S. District Judge Jed Rakoff of the Southern District Court of New York ordered Flagstar to pay $90 million to bond insurer Assured Guaranty Municipal Corp., formerly Financial Security Assurance.

After a 12-day, nonjury trial, Rakoff ruled that Flagstar breached insurance contracts on roughly $1 billion of residential mortgage-backed securities by failing to follow its underwriting guidelines.

Flagstar will have to pay interest, attorney's fees and other costs in addition to the $90 million, Rakoff ruled.

"This ruling is a significant milestone in forcing the banks to honor the contractual commitments they made and have long sought to avoid," Jacob W. Buchdahl, a partner in the New York office of Susman Godfrey LLP, which represented Assured Guaranty, said in a news release.  

Flagstar said in a news release that it "strongly disagrees" with the ruling and intends to appeal.

The loan sale was announced Wednesday. Customers Bank in Pennsylvania has agreed to buy a portfolio of commercial loans for just under $150 million. The portfolio has approximately $151 million outstanding, Flagstar said. Flagstar said it expects to complete most of the loan transfers this quarter.

Flagstar has been selling its Northeast-based commercial loans to focus on its home state of Michigan and its national mortgage business.

Last month Flagstar announced it had agreed to sell $1.2 billion in commercial loans to CIT Bank, a unit of CIT Group, for $779 million. Flagstar will have only $19.3 million of Northeast-based commercial loans on its books after the deal with Customers Bank closes, it said.

"This agreement represents another milestone as we enhance our focus on our community banking operation in Michigan and our national mortgage business," Flagstar Chief Executive Michael Tierney said in a news release. "Going forward, our commercial banking efforts will primarily relate to small business and middle-market companies in Michigan."