BofA Settlement Case in State Court - Analyst Blog
February 28 2012 - 12:14PM
Zacks
Providing a major relief to Bank of America
Corporation (BAC), a U.S. Appeals Court has ruled that
BofA’s $8.5 billion settlement deal related to mortgage backed
securities (MBS) will be reviewed in the New York state court,
instead of the federal court. This ruling overturns a decision by
the U.S District Court to take the case to federal court in October
2011.
The ruling for the settlement deal came after The Bank
of New York Mellon Corporation (BK), the
trustee for the MBS and the other parties – Pacific Investment
Management Co. (PIMCO) and BlackRock Inc. (BLK) –
argued that the settlement should remain in the state court, where
the deal was actually filed. However, for the Walnut Place group,
which was trying to move the case to the federal court, this is a
huge setback.
What Does This Mean?
BofA stands to gain from the present ruling. The company prefers
state court more than the federal court as the settlement was
structured under the provisions of New York state law that calls
for faster settlement proceedings.
Moreover, the provision under which the deal was filed does not
allow the investors to opt out of the case and limit the
objections, which were raised against BofA regarding the settlement
deal. Further, the current ruling also provides BNY Mellon’s broad
discretion in matters related to the agreements with investors.
The Back-Story
In June 2011, BofA had reached an agreement to pay $8.5 billion
for its legacy Countrywide Financial Corp. mortgage repurchase and
servicing claims. The settlement was for a group of 22 investors
who suffered significant losses for their investments in MBS that
were sold by Countrywide prior to the housing market failure. BofA
had acquired Countrywide in 2008.
The agreement basically covered most of BofA’s legacy
Countrywide- issued first-lien MBS repurchase exposure. It
represented 530 trusts with original principal balance of $424
billion and total current unpaid principal balance of about $221
billion.
The group of investors, including BlackRock, PIMCO and the
Federal Reserve Bank of New York had alleged that prior to the
financial crisis, Countrywide had sold securities that were tied to
bad-quality loans. The loans were not even managed well and lacked
proper paperwork. Therefore, these investors sought a buyback
relief in MBS that were offloaded by Countrywide.
However, the deal is yet to receive an approval of the court.
But, some of the investors alleged that BofA had secretly reached a
bigger settlement deal with the large institutional investors,
leaving the smaller investors with losses. Hence, they sought the
deal to be heard in the federal court. They further argued that the
settlement amount was too low.
In Conclusion
The acquisition of Countrywide substantially increased BofA’s
mortgage exposure compared with its peers. Following the collapse
of the housing market, mortgage repurchases claim risk for the
company grew manifold, a factor that has significantly drained the
company’s bottom line over the last several quarters.
The settlement, if approved, will not impact BofA’s financials
as the company has already bore the brunt of the deal in the second
quarter of 2011 by taking the reserves for $8.5 billion. However,
this will open the doors for similar investigations against many
other big banks including JPMorgan Chase & Co.
(JPM), Morgan Stanley (MS) and Wells Fargo
& Co. (WFC) for their MBS tied to soured loans.
Shares of BofA currently have a Zacks #3 Rank, which translates
into a short-term Hold rating.
BANK OF AMER CP (BAC): Free Stock Analysis Report
BANK OF NY MELL (BK): Free Stock Analysis Report
BLACKROCK INC (BLK): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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