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BY E-MAIL AND BY HAND April 10, 2013

Re: MBIA Insurance Corporation v. Countrywide Home Loans Inc., et al., Index No. 602825/2008

Hon. Eileen Bransten New York Supreme Court 60 Centre Street, Room 442 New York, NY 10007

Dear Justice Bransten:

On behalf of the Countrywide Defendants,' we respectfully submit this letter to respond to certain points in Plaintiff MBIA's letter dated April 8, 2013 ("MBIA Letter") that we believe are contrary to the First Department's April 2, 2013 Decision and Order ("Decision"), Your Honor's January 3, 2012 Order, see MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 936 N.Y.S.2d 513 (Sup. Ct. N.Y. Cnty. 2012) ("Order"), or the record on the pending motions for summary judgment.

As Countrywide pointed out in its letter dated April 3, 2013 ("Letter"), MBIA's motion for summary judgment was premised on the availability of rescissory damages, a point MBIA made repeatedly in its motion papers and at oral argument. See Letter at 2 n.2. Remarkably, notwithstanding the First Department's decisive rejection of rescissory damages—i.e., a measure of damages that would allow MBIA to recoup all its claims payments minus premiums—MBIA now argues that it is entitled to precisely the same relief under a different name. And despite acknowledging that the First Department affirmed this Court's Order with respect to causation in its entirety, MBIA attempts to gloss over Your Honor's rulings (1) that, if MBIA. satisfies its burden of proving liability on its fraud and breach-of-contract claims, MBIA must then prove that it was damaged as a direct

The Countrywide Defendants are Countrywide Home Loans, Inc., Countrywide Securities Corp., and Countrywide Financial Corp., and Bank of America, N.A., solely in its capacity as successor by July 2, 2011 de jure merger to BAC Home Loans Servicing, L.P. (f/k/a Countrywide Home Loans Servicing, L.P.) (together, "Countrywide").

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SIMPSON THACHER & BAJITLETT LLP Hon. Eileen Bransten -2- April 10, 2013

result of material misrepresentations by Countrywide, and (2) declining to strike Countrywide's Fourteenth and Fifteenth Affirmative Defenses, which allow Countrywide to establish (subject to its burden of proof) that all or some portion of MBIA's losses were caused by intervening or superseding events as opposed to any wrongdoing by Countrywide. Order at 516, 522, 524. Finally, even though the First Department declined to endorse MBIA's argument that any material increase in risk of loss on day one could constitute a "material and adverse effect" requiring Countrywide to repurchase a loan, and held only that it was a question of proof whether a performing loan could have the requisite material and adverse effect,2 MBIA attempts to engraft its "risk of loss" theory onto the Decision. MBIA's arguments are wholly without merit.

MBIA's bald assertion that its motion papers "show as a matter of undisputed fact" that Countrywide materially misrepresented over half of the loans in the securitizations is a complete distortion of the record. MBIA Letter at 2. Countrywide has disputed MBIA's allegations with respect to every loan that Countrywide has not already agreed to repurchase—these disputes present classic issues of fact that cannot be resolved on summary judgment. Countrywide has disputed MBIA's allegations with a host of distinguished experts in the fields of underwriting, compliance, and appraisals, who challenge MBIA's assertion of breach and/or its assertion of materiality, with regard to each of the 3,246 purported "undisputed" breaches of representations and warranties among the 6,000 Sample loans. See Defs.' Mem. of Law in Opposition to MBIA's Mot. for Summ. J., at 3-4, 14-35; Expert Rebuttal Report of K. Godfrey, Concannon Aff. Ex. 40; Expert Rebuttal Report of F. Lucco, Concannon Alf. Ex. 37; Expert Rebuttal Report of L. Murphy, Concannon Aff. Ex. 39; Hr'g Tr. 96:3-106:17, Dec. 12, 2012. Countrywide has also submitted evidence from two of the world's leading economists showing (1) that MBIA would not have experienced any losses but for macroeconomic factors beyond Countrywide's control and (2) that the opinions of MBIA's expert Steven Butler regarding what constitutes a material increase in risk of loss at origination—MBIA's sole evidence on that issue—are demonstrably wrong. Indeed, the loans Butler claimed had significant defects that meaningfully increased risk of loss actually experienced defaults and delinquencies at a lower rate than the loans he found did not have such defects. See Expert Report of R. Hubbard TT 13, 62; Expert Report of J. Hausman TT 18, 47; Expert Rebuttal Report of R. Hubbard ¶J 12-14, Concannon Aff. Ex. 35; Expert Rebuttal Report of J. Hausman ¶¶ 9-10, Concannon Aff. Ex. 38. This evidence demonstrates that, even accepting MBIA's erroneous "risk of loss" theory, the representation and warranty breaches MBIA alleges did not increase its risk of loss or cause it to suffer any harm. Accordingly, MBIA's motion for summary judgment should be denied for the separate reason that the material facts about breach, materiality, and resulting damage remain squarely in dispute.

2 Indeed, the First Department expressed skepticism that it would be possible for MBIA to prove that a breach with respect to a performing loan had a material and adverse effect on MBIA's interests, noting that "[w]hether or not such proof is actually possible" was irrelevant to MBIA's summary judgment motion. See Decision at 33.

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I. By holding that rescissory damages are legally unavailable, the First Department indicated that MBIA must prove its damages on a loan-by-loan basis in accordance with the contractual "sole remedy" to which it agreed

Far from "clear[ing] the path for this Court to grant MBIA's pending motion for summary judgment," MBIA Letter at 1, the First Department's Decision rejected MBIA's basic theory of the case—namely, that MBIA would be entitled to recover "rescissory damages" in the form of all its claims payments made pursuant to the insurance policies merely by establishing that it would not have issued the policies but for Countrywide's alleged misrepresentations. Nevertheless, MBIA now attempts to argue that the First Department rejected rescissory damages in name only, and that MBIA may nevertheless "recoup all its losses" in claims payments—which it now re-labels "compensatory damages"—merely upon showing "that Countrywide's pervasive breaches materially increased the risk profile of the insurance." MBIA Letter at 1-2. Of course, this is precisely the rescissory damages relief the First Department held was "legally unavailable." Decision at 33. MBIA's argument improperly treats the First Department's rejection of rescissory damages as if it decided nothing of consequence.3

MBIA seizes upon the First Department's observation that New York Insurance Law §§ 3105 and 3106 mention "defeating recovery" under an insurance policy, which the panel concluded could "refer to the recovery of payments made pursuant to an insurance policy without resort to rescission." Decision at 31-32. But MBIA lifts this observation wholly out of context. The First Department apparently reasoned that even though MBIA is bringing an affirmative action to recover damages, that does not mean MBIA cannot avail itself of the lesser causation standard for which provision is made under §§ 3105 and 3106. The First Department did not, as MBIA now claims, "endors[e] a compensatory-damages remedy of 'recovery of payments made' without any requirement of a causal link between the defendant's misrepresentations and those payments." MBIA Letter at 3-4 n.4. To the contrary, the panel's rejection of rescissory damages in the very next paragraph forecloses this form of relief. MBIA badly misreads the First Department's decision, as if that Court contradicted itself from one paragraph to the next. And, as this Court has held, even if MBIA is able to prove liability on its fraud and breach-of-contract

3 MBIA now attempts to argue that it "never tied its ability to recover claims payments to the availability of a rescissory-damages remedy" and instead sought "a non-rescissory, compensatory-damages remedy" under New York Insurance Law § 3106. MBIA Letter at 3. Tellingly, MBIA cannot offer a single record cite at which MBIA seeks compensatory, as opposed to rescissory, damages; instead MBIA cites to statements in its briefing that "MBIA seeks rescissory damages" and that MBIA "may obtain rescission or equivalent relief" Id at 3 n.3. Countrywide's April 3 Letter pointed to numerous additional statements by MBIA in its motion papers and in hearings before this Court demonstrating that MBIA's entire theory of the case was based on the availability of rescissory damages. Letter at 2 n.2.

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claims, it still must prove "that it was damaged as a direct result" of the alleged misrepresentations—proof MBIA has nowhere presented. Order at 522 (emphasis added).4

MBIA is also flatly wrong in claiming that the First Department "defmitively reject[ed] Countrywide's sole-remedy argument." MBIA Letter at 5. The First Department did no such thing. As an initial matter, the First Department's express rejection of MBIA's prayer for rescissory damages compels precisely the opposite conclusion: if MBIA cannot seek rescissory damages, then all that remains on its breach-of-contract claim is the loan-by-loan "sole remedy" of repurchase for which it bargained. Moreover, the First Department panel implicitly endorsed Countrywide's "sole remedy" argument by favorably citing to Judge Rakoff's opinion in Assured Guaranty Municipal Corp. v. Flagstar Bank F.S.B., 892 F. Supp. 2d 596 (2012).5 And as Countrywide noted in its April 3 letter, several other courts interpreting nearly identical contractual language have held that monoline insurers are limited to the express remedies agreed upon by the parties to the contract. See Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., No. 652837/2011, 2012 WL 5192752, at *8 (Sup. Ct. N.Y. Cnty. Oct. 11, 2012); MBIA v. Ins. Co. v. Residential Funding Co. LLC, No. 603552/08, 2009 WL 5178337, at *3, 7 (Sup. Ct. N.Y. Cnty. Dec. 22, 2009); U.S. Bank Nat Ass '12 V. WMC Mortg. Corp., 843 F. Supp. 2d 996, 1001 (D. Minn. 2012).6

4 MBIA's lengthy discussion of Hotaling v. Leach & Co., 247 N.Y. 84 (1928), in this context is surprising. In Hotaling, the Court of Appeals embraced the general rule that fraud claimants must show both transaction causation and loss causation. Specifically, the court held that "[t]he plaintiff should be entitled to recover from the defendants the loss which is the proximate result of the fraud that induced the investment; the defendants should not be held liable for any part of plaintiff's loss caused by subsequent events not connected with such fraud." Id. at 87. Although the court did ultimately allow the defrauded plaintiff to recover all its losses, the court did so based on a unique problem of proof not present in this case. See id. at 90-93.

5 MBIA's argument that the panel cited Judge Rakoff's summary judgment decision as opposed to his post-trial decision is irrelevant. Judge Rakoff s summary judgment decision followed, and left undisturbed, his earlier ruling that "Flagstar's 'cure or repurchase obligation' [was] the exclusive remedy available to [Assured] for Flagstar's breach of a representation or warranty." Assured Guar. Mun. Corp. v. Flagstar Bank F.S.B., No. 11- cv-2375, 2011 WL 5335566, at *5 (S.D.N.Y. Oct. 31, 2011).

6 Yet again, MBIA strains to argue that the "sole remedy" provisions in Assured differ from the provisions at issue in this case and that the "sole remedy" provisions in this case limit only MBIA's remedies for breaches of paragraph 2.01(0 of the Insurance Agreements. MBIA Letter at 5. But yet again, MBIA fails to respond to Countrywide's summary judgment briefing on this issue, which demonstrates that the "sole remedy" provisions clearly limit all of MBIA' s breach of representation and warranty claims to the "sole remedy" of cure, substitution, or repurchase—just as Judge Rakoff found in Assured. See Reply Mem. of Law in Support of Countrywide's Mot. for Summ. J., at 13-16.

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Indeed, just this week, in Assured Guaranty Corp. v. EMC Mortgage, LLC, No. 650805/12 (Sup. Ct. N.Y. Cnty. Apr. 4, 2013) (decision attached), Justice Ramos joined this tide of opinions. Interpreting materially identical contractual language, Justice Ramos held that monoline insurer Assured was "limited to the remedy of compelling EMC to repurchase defective loans that breach any representations and warranties pertaining to the characteristics of the pooled loans," slip op. at 11, and therefore granted EMC's motion to dismiss "Assured's breach of contract claims that do not arise strictly under the Repurchase Protocol," id. at 7. Moreover, Justice Ramos distinguished Judge Crotty's decision in Syncora Guarantee Inc. v. EMC Mortgage Corp., No. 09 Civ. 3106(PAC), 2011 WL 1135007 (S.D.N.Y. Mar. 25, 2011)—upon which MBIA relies, see MBIA Letter at 5—pointing out that in Syncora, "the section of the MLPA which provided that the repurchase protocol was the 'sole and exclusive remedy' under the agreement for breaches of representations and warranties, did not name the note insurer, whereas it specifically named other parties to the transaction." Assured v. EMC, slip op. at 9. Here, on the other hand, the sole remedy provision does name MBIA: the MLPA expressly provides that "[t]he sole remedy of the ... Credit Enhancer [i.e., MBIA] against a seller [i.e., Countrywide] for the breach of a representation or warranty is" the repurchase protocol—just as in Assured v. EMC. See HELOC Securitization CWHEQ 2006-E MPLA 3.02(c), Sheth Aff., Ex. 8. Accordingly, here, as in Assured v. EMC, the transaction documents make "clear that the parties intended to limit [MBIA's] remedy for breach of the representations and warranties" to the "sole remedy" of repurchase. Assured v. EMC, slip op. at 8.

The First Department's rejection of rescissory damages makes clear that MBIA must prove its damages loan by loan. Specifically, on its fraud claim, MBIA must prove that any losses it claims as damages are attributable to loans that were materially misrepresented by Countrywide. And on its breach-of-contract claim, MBIA is limited to the contractually agreed upon loan-level "sole remedy" of cure, substitution, or repurchase of loans that breach the representations and warranties in a way that "materially and adversely affects" MBIA's interests in the loan. MBIA is not entitled to "recoup all its losses" in claims payments—or any other pool-wide remedy—because that is not what MBIA bargained for, see Assured v. EMC, slip op. at 9, and that is exactly the "rescissory damages" remedy the First Department squarely rejected.

II. MBIA wrongly attempts to use the First Department's Decision to expand this Court's ruling with respect to causation

MBIA further overreaches by attempting to use the First Department's decision to inappropriately expand this Court's causation ruling. MBIA concedes that the First Department's Decision affirmed this Court's causation ruling in its entirety. MBIA Letter at 6. But MBIA then attempts to read this Court's ruling on damages causation out of both decisions. As this Court clearly held, even if MBIA is able to prove liability on its fraud and breach-of-contract claims, "MBIA must then prove that it was damaged as a result of the material misrepresentations. As has been aptly pointed out by Countrywide, this will

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not be an easy task. Upon reaching its burden of proof for each claim, MBIA must then prove the amount of its damages." Order at 522 (emphasis added).

MBIA offers no alternative explanation for the Court's directive that upon establishing liability on each of its claims, MBIA must prove its damages; instead MBIA completely ignores those aspects of this Court's ruling that it finds inconvenient. MBIA similarly attempts to gloss over Judge Rakoff s holding in the Assured v. Flagstar post-trial decision that Assured was entitled to recover damages only upon demonstrating that "Flagstar's failure to repurchase those defaulted loans that had breached the representations and warranties directly and proximately caused Assured to improperly bear the burden of paying claims on the transactions." Assured, 2013 WL 440114, at *39 (emphasis added); MBIA Letter at 6. Judge Rakoff did not, as MBIA claims, allow Assured to recover all claims paid "without ... any causal link." MBIA Letter at 6. To the contrary, Assured was required to demonstrate that any claims payments it recovered as damages were directly and proximately caused by Flagstar's breaches of its repurchase obligation. Assured, 2013 WL 440114, at *39.

Importantly, MBIA does not dispute that no party appealed, and the First Department left intact, this Court's decision denying MBIA's motion to strike Countrywide's Fourteenth and Fifteenth Affirmative Defenses. Those defenses assert that all or some portion of MBIA's losses were caused, not by Countrywide's alleged misconduct, but by intervening or superseding events. Accordingly, this Court's ruling, as affirmed by the First Department, makes clear that although MBIA may not be required to establish a direct causal link between Countrywide's misrepresentations or breaches and MBIA's claims payments in order to carry its initial burden of proof on its fraud and breach-of-contract claims, Countrywide is then free to submit evidence establishing that MBIA's losses were caused by macroeconomic circumstances beyond Countrywide's control, in defense to liability. If Countrywide carries its burden—as we are confident it will—MBIA's claims will fail in their entirety.

III. MBIA wrongly asserts that the First Department "made clear" that all that is required to trigger Countrywide's repurchase obligation is a material increase in risk of loss on day one

MBIA accuses Countrywide of ignoring the First Department's citation to Syncora Guarantee Inc. v. EMC Mortgage Corp., 874 F. Supp. 2d 328 (S.D.N.Y. 2012), and Assured v. Flagstar, 892 F. Supp. 2d 596, which, MBIA says, "clearly held that an increase in risk of loss on day one is sufficient" to establish a material and adverse effect that triggers the repurchase provision. MBIA Letter 7. But MBIA does not cite to any language in the First Department's ruling that even remotely implicates its "risk of loss" argument—because there is none. The First Department cited to Syncora and Assured on this subject solely for the proposition that "the loan need not be in default to trigger defendants' obligation to repurchase it" and that MBIA may therefore attempt to prove that a performing loan

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"materially and adversely affected" its interest. Decision at 33. That was the full extent of the First Department's reliance on these two federal cases.

More importantly, however, the First Department declined to determine the meaning of "material" and "adverse," holding that "[w]hether or not such proof [of material and adverse effect with respect to a performing loan] is actually possible is irrelevant to plaintiff's summary judgment motion." Decision at 33. Countrywide respectfully submits that it will be impossible for MBIA to show that any breaches it may ultimately prove with respect to performing loans had a "material and adverse effect" on MBIA's interests, as it is undisputed that a performing loan causes no pecuniary harm whatsoever to MBIA. In fact, removing a performing loan from the Trust by repurchase harms the Trust and MBIA by depriving the Trust of principal and interest payments over the life of the loan, payments which can offset losses on other non-performing loans. And, fundamentally, even accepting MBIA's erroneous "risk of loss" theory, MBIA is unable to carry its burden of proof: substantial expert and loan-level evidence submitted by Countrywide demonstrates that the alleged breaches of representations and warranties claimed by MBIA in fact did not increase the likelihood of loss or risk to MBIA. See supra, page 2. In light of this evidence, there is no need to guess whether the alleged breaches increased MBIA's risk of loss; we know they did not.

Countrywide thanks Your Honor for considering this letter.

Resp fully,

Barrylstr

cc: All Counsel

FILED: NEW YORK COUNTY CLERK 04/09/2013 INDEX NO. 650805/2012

NYSCEF DOC. NO. 53 RECEIVED NYSCEF: 04/09/2013