Mich. Flagstar to Appeal Ruling in Coverage Dispute with Chubb

November 22, 2006

Flagstar Bancorp, Inc. has announced that a federal judge dismissed its lawsuit against an insurance company in a coverage dispute. As a result, Flagstar will record a one-time charge in the fourth quarter of 2006 of approximately $8.7 million, before taxes. Flagstar intends to appeal the court’s ruling, and will continue to pursue other avenues of loss mitigation. Any subsequent recoveries would be recorded as a gain, the company statement said.

The coverage dispute involves an insurance claim pursuant to Flagstar’s fidelity bond that was issued by the Chubb Group of Insurance Companies. As described in Flagstar’s Annual Report on Form 10-K for the period ended Dec. 31, 2005, Flagstar discovered in March 2004 that a series of warehouse loans totaling $22.4 million were fraudulently obtained. Upon discovery of the fraud, Flagstar seized cash and real property and also recovered additional sums through civil litigation. In addition, the U. S. government was able to seize cash and assets from the perpetrators of the fraud, many of whom have been convicted and are currently serving prison sentences.

Although the cash, real property and other assets were subject to competing claims of other entities that were defrauded, the parties agreed to a ratable split of proceeds. Flagstar sought reimbursement under the forgery coverage of the fidelity bond to cover its remaining loss and filed suit when the insurance company denied its claim. In its dismissal order, the federal court concluded that the loss did not result from the forgery, but instead because the underlying collateral turned out to be worthless.

In addition to appealing the judgment in its insurance coverage dispute, Flagstar will continue to seek recovery of the civil judgment and criminal restitution order that it has obtained against the perpetrators of the fraud. In addition, Flagstar is pursuing conspiracy and fraud claims in a Colorado state court action against another large warehouse lender that previously discovered this scheme, but allegedly misrepresented the situation when providing a reference to Flagstar so that the other lender would be repaid. Although Flagstar believes that these efforts will result in additional recoveries, there can be no assurance that Flagstar’s appeal or any of its other efforts to remediate its loss will be successful.

Flagstar Bancorp identifies itself as the largest publicly-held savings bank in the Midwest. Flagstar currently operates 149 banking centers located throughout Michigan, Indiana and Georgia.

Source: Flagstar Bancorp, Inc.

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