A judge has approved an $8.5B mortgage-bond settlement between Bank of America (BAC) and investors. The agreement should settle most of the bank’s liability from when it acquired Countrywide Financial Corp. while the financial crisis was happening and resolves contentions that the loans behind the bonds were not up to par in quality as promised. Included among the 22 investors in the mortgage-bond deal: Pacific Investment Management Co., BlackRock Inc. (BLK), and MetLife Inc. (MET.N). Under the agreement, investors can still go ahead with their loan-modification claims.
The trustee for over 500 residential mortgage-securitization trusts is Bank of New York Mellon Corp. (BK), which had turned in a petition seeking approval for the deal nearly three years ago for investors who had about $174 million of mortgage-backed securities from Countrywide. Now, Judge Barbara Kapnick of the New York State Supreme Court Justice has approved the mortgage-bond deal.
Kapnick believes that the trustee had, for the most part, acted in good faith and reasonably when determining the settlement and whether it was in investors’ best interests. However, she is allowing plaintiffs to continue with their claims related to loan-modification because, she says, Bank of New York Mellon Corp “abused its discretion” on the matter in that even though the trustee purportedly knew about the issue, it didn’t evaluate the possible claims. Also, the judge said that it makes sense for this one-time payment because it was evident that Bank of New York Mellon was worried Countrywide wouldn’t be able to pay a judgment in the future that came close to the $8.5 billion settlement.
Home loans securitized into bonds played a big role in the housing bubble that helped push the US into its largest recession since in decades. As the housing market failed and securities dissolved, investments banks and lenders also were dragged into the crisis.
It was Countrywide as the top securities lender that created $405 billion of the $3.04 trillion of bonds that were sold in the few years leading up to the financial meltdown. Meantime, Bank of America put out $76.9 billion of bonds and Merrill Lynch (MER) and First Franklin issued about $116 billion collectively.
American International Group (AIG), one of the bigger investor in the mortgage bonds, is part of a small group that opposed the settlement with Bank of America. AIG attorneys claim that the settlement shortchanges investors and the trustee should have done more to get a greater sum of money from BofA. The insurer contends that $8.5 billion is not much compared to how much was actually lost.
Court approves Bank of America's $8.5 billion mortgage settlement, Reuters, January 31, 2014
Bank of America Settlement on Bonds That Soured Is Approved, NY Times, January 31, 2014
More Blog Posts:
$500M MBS Settlement Reached Between Countrywide and Investors, Stockbroker Fraud Blog, May 10, 2013
FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011
Bank of America’s Countrywide to Pay $17.3M RMBS Settlement to Massachusetts, Institutional Investor Securities Blog, December 30, 2013