Download now: The Downfall of Cable, and the Rise of 5G!

Bank of America Mortgage Settlement

Bond Investors's Claims Finally Answered

Written by Brian Hicks
Posted June 4, 2013

Bank of America Corp. (NYSE: BAC) is finally going to get its day in court. The company’s $8.5 billion settlement agreement, struck with investors in Bank of America’s mortgage bonds, has come under the scrutiny of New York State’s Supreme Court Justice, Barbara Kapnick, in Manhattan.

bank of americaThis comes almost two years after Bank of America had laid out the deal—in 2011—in an effort to meet claims on the company’s home loans bundled into securities, reports Bloomberg.

One major problem is that American International Group Inc. (NYSE: AIG) has insisted that Bank of America must pay a larger sum, though an investor group that includes BlackRock Inc. (NYSE: BLK) has thrown its support behind Bank of America.

Two Possibilities

Should this settlement arrangement be denied in court, Bank of America will have two options. One, it would have to negotiate a new settlement, which will almost certainly be pricier. Two, it would have to negotiate settlements on a per-investor basis, and that means a very long process indeed.

All of this is, in effect, fallout from Bank of America’s purchase of Countrywide Financial back in 2008. Those loans carried an original principal balance of $424 billion, and thus far Bank of America has incurred costs exceeding $45 billion as part of the cleanup effort. Back in January, Bank of America was able to resolve matters related to this mess with Fannie Mae in an agreement worth $11.7 billion. It also resolved disputes with some bond insurers for $1.7 billion in May.

The Fannie Mae deal was actually pretty good for Bank of America, since it led to a sharp reduction in the number of unresolved demands for the company to repurchase mortgages (as of the end of March, this decrease was equal to 39 percent, or down to $17.1 billion).

The Claims

The opposition, including AIG, is expected to point to the fact that despite Bank of America’s string of agreements, the securitization trusts involved still stand to lose more than $100 billion. On top of that, it's expected to claim that Bank of New York Mellon Corp. (NYSE: BK) essentially put its own interests and those of Bank of America ahead of investors by agreeing to what is seen as a very unequal deal.

Rebuffing these claims, the group of investors that supports the deal—a group that includes Pacific Investment Management Co., Goldman Sachs Asset Management, and MetLife Inc. (NYSE: MET)—has decried the opposition as a minor obstacle. The fact that several of them, such as AIG, are also taking up separate cases against Bank of America doesn’t help a lot.

Bloomberg sums up the group's case in this quote:

“Rejection of this landmark settlement would plunge thousands of innocent investors and hundreds of trusts into decades of potentially fruitless litigation that could well end in Countrywide’s bankruptcy and a resulting scramble among its creditors over assets which are far less than the $8.5 billion payment.”

The case will hinge on deciding whether BNY Mellon was reasonably justified in accepting Bank of America’s agreement offer or not. This sort of puts the advantage with the supporters of the deal, since the flaws of the actual settlement will not really come under the judicial lens. Reuters states that the case will be decided without the presence of a jury, and that Justice Kapnick will hear the arguments over the first two weeks of this month.

Overwhelmingly, though, it seems likely that the settlement will go ahead as indicated by Bank of America, since just seven percent of certificate-holders are actually raising objections.

In any case, this is not the first time drama has popped up along the way. Earlier, Boston’s Baupost Group, an investor group opposing the proposed settlement, attempted to shift the hearing to federal court on the basis that the payment could be escalated. Separately, the attorney generals of New York and Delaware spoke out against the deal, alleging fraud on part of BNY Mellon. But then a U.S. appeals court tossed everything back to the state level. Baupost retreated, and so did New York and the attorney generals.

Either way, Bank of America CEO Brian Moynihan will shortly have his verdict. Should the court find that BNY Mellon ought, under reasonable expectations, to have negotiated with Bank of America for a larger deal instead of letting them off as cheaply, then (as stated earlier) the company will need to pursue renewed negotiations. 

 

If you liked this article, you may also enjoy:

Buffett's Envy: 50% Annual Returns, Guaranteed