At NY trial, Assured says Flagstar must pay for shoddy mortgages

* Bond insurer sued bank for breach-of-contract

* Flagstar says due diligence firms gave loans high marks

* Bench trial in federal court expected to go two weeks

By Nate Raymond

NEW YORK, Oct 10 (Reuters) - Flagstar Bancorp Inchad to know by 2009 that hundreds of loans it originated didn'tmeet underwriting guidelines when it sold $900 million inmortgage-backed securities to investors, a lawyer for a bondinsurer said on Wednesday.

At the start of a civil trial over Flagstar's mortgagesecurities practices at the height of the housing boom, AssuredGuaranty Ltd lawyer Jacob Buchdahl said the bankmisrepresented the quality of home loans packaged together asinvestments.

Buchdahl said Troy, Michigan-based Flagstar was required tobuy back mortgages that did not comply with standards for theinvestments, but did not do so.

"The defendant Flagstar failed to live up to its promises,"he told U.S. District Judge Jed Rakoff in Manhattan. The judgeis hearing the case without a jury.

The case, filed last year, is one of the first to go totrial over claims tied to the bundling of mortgages that weresold to investors. The collapse of these securities when thehousing market cooled has been blamed in part for the financialcrisis.

Assured, like other bond insurers, guaranteed the Flagstarsecurities. The insurer was forced to pay up when the assetvalues fell amid the housing meltdown.

The case is expected to test insurers' ability to recoverdamages in the dozens of similar cases against banks. Assuredhas sued for breach of contract and is seeking $108 million fromFlagstar.

Buchdahl said a mortgage underwriting expert will testifyabout a review of 800 loans included in the two Flagstarofferings. The review found 610 instances of misrepresentations,according to Assured.

But Veronica Rendon, a Flagstar lawyer, attacked thatanalysis and contended that the loans were made through "qualityand sound underwriting."

Those earlier loan reviews went through a "tighter processwith greater control" than one conducted by the trial expertAssured hired for the lawsuit, Rendon told the judge.

Also, due diligence firms hired by Assured when thesecurities were issued in 2005 and 2006 gave the loans highmarks, she said.

Assured's losses can be attributed to the decline in housingvalues, she said, as homeowners decided to walk away from theirmortgages rather than make payments on underwater properties.

"As Bill Clinton said in his successful campaign againstPresident George Bush, 'It's the economy stupid,'" Rendon said.

The trial is expected to last two weeks.

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

(Reporting By Nate Raymond in New York; Editing by MarthaGraybow, Bernard Orr)

((Nate.Raymond@thomsonreuters.com and Twitter@nateraymond)(646-223-6341))Keywords: ASSURED TRIAL/