Bloomberg News

Moynihan’s 2-Cents-on-Dollar Mortgage Offer Faces Hurdle

June 30, 2011

(Updates with investor filing after the subheadline ‘behind its back.’)

June 30 (Bloomberg) -- Bank of America Corp.’s effort to move past the soured mortgages that Countrywide Financial Corp. packaged into securities may hinge on whether a judge agrees that the world’s largest bond buyers struck a generous-enough deal for all investors.

The lender, the largest U.S. bank by assets, is seeking to pay $8.5 billion, or 2 percent, to avoid repurchasing faulty loans placed into $424 billion of bonds, an offer supported by a group of 22 bondholders including BlackRock Inc. and Pacific Investment Management Co. in an agreement announced yesterday.

“Two cents on the dollar is an absolute joke,” said Bill Frey, head of investment and brokerage firm Greenwich Financial Services LLC in Greenwich, Connecticut, who advises mortgage- securities investors. Frey lost a suit to Countrywide last year in which he said the company’s agreements with state attorneys general to modify loans unfairly penalized bondholders.

The accord is the largest yet by Bank of America Chief Executive Officer Brian T. Moynihan to resolve disputes with firms that said they were duped by misrepresentations such as overstated property values or inflated borrowers’ incomes. The Charlotte, North Carolina-based bank fell 17 cents, or 1.5 percent, to $10.97 at 2:17 p.m. in New York Stock Exchange composite trading after jumping 3 percent yesterday.

‘Not Out of the Woods’

Bank of New York Mellon Corp., the debt’s trustee, is seeking approval from a New York state judge for the deal, which would apply to bondholders beyond the 22 firms in the talks. BNY Mellon said in a court document that the agreement is “reasonable,” considering the legal defenses Moynihan could mount if the trustee sought the $11 billion that its analysis showed could be justified.

The bank is “not out of the woods,” said Chris Gamaitoni, a Compass Point Research and Trading LLC analyst, in a note to investors. The $8.5 billion sum is a “starting point and will likely increase meaningfully after the court hears arguments from other invested parties” to as high as $26.5 billion.

Bank of America Chief Financial Officer Bruce Thompson, asked on a conference call yesterday whether other bond investors could derail the deal, cited the consensus among firms including BNY Mellon, BlackRock and Pimco.

“We have 22 of the largest institutional investors in the world that have gone through this in a fair level of detail,” Thompson said. New York State Supreme Court Justice Barbara R. Kapnick yesterday set a hearing on the settlement for Nov. 17.

‘Severely Delinquent’

The settlement would compensate investors, who continue to hold the bonds, at about 8 percent of the $106 billion in loans that have either defaulted or are “severely delinquent.” The rest of the $424 billion has either been paid off or remains outstanding. The ratio compares with the 10.7 percent the bank paid to government-controlled mortgage investor Freddie Mac in settling similar claims over loans, according to presentations by the company.

“It certainly feels cheap to me,” said Richard D’Albert, co-chief investment officer at Seer Capital Management LP, a New York-based hedge fund overseeing about $400 million, and the former head of securitized products at Deutsche Bank AG.

Investors outside the group may be concerned that companies who signed on have “significant business dealings with BofA and might not be interested in aggressively pursuing a settlement,” said Isaac Gradman, a San Francisco-based litigation consultant who worked on mortgage-repurchase cases.

Spokespeople for New York-based BlackRock and Newport Beach, California-based Pimco, declined to comment. Representatives of MetLife Inc., Goldman Sachs Group Inc. and TIAA-CREF, which are also in the group, declined to comment.

‘Huge Institutions’

“The testament to the value of the settlement is that there are 22 huge institutions that worked over a year to achieve it and are standing up publicly to say they support it,” said Kathy Patrick, a lawyer at Houston-based Gibbs & Bruns LLP who represents the group.

The potential cash payment to investors represents only one part of the deal, with Bank of America also agreeing to strengthen its management of outstanding loans and to pay penalties if the servicing falls short, Patrick said. The servicing changes are “extraordinarily valuable and important and could not be achieved through litigation,” she said.

Fannie Mae

The regulator for Fannie Mae and Freddie Mac was “pleased” the deal calls for the bank to turn over high-risk loans to specialized servicers at its own expense, said Corinne Russell, a spokeswoman. The Federal Housing Finance Agency is reviewing whether the settlement makes sense for the companies, which bought bonds created by Countrywide in addition to its mortgages, she said.

Bank of America also agreed to cover losses where it can’t foreclose because of documentation mistakes.

BNY Mellon said that litigation challenges from Bank of America could include attempts to avoid responsibility for the liabilities of Countrywide, which it purchased in 2008. Cases involving its “successor liability” have had “mixed” results, Patrick said.

The proposed deal was “the result of extensive negotiations” and BNY Mellon believes it is “in the best interests of the trusts,” said Kevin Heine, a spokesman.

The settlement won’t preclude investors that invested in Countrywide mortgage bonds when they were initially sold from pursuing separate claims alleging bad disclosures and fraud.

Allstate

Allstate Corp., the insurer that sued Countrywide over $700 million of debt on such grounds, “continues to pursue aggressively all of its rights and remedies,” Maryellen Thielen, a spokeswoman, said in an e-mail.

While such suits can have larger payouts, they can be harder to win than cases seeking to force loan repurchases under bond contracts, according to Gradman, the consultant.

Patrick, the bondholder group’s lawyer, said the settlement is beneficial for investors because it would bring to an end the dispute over deals involving more than 700,000 loans.

“We did a calculation at one point that if you had to litigate every loan over time, it would take as much as 10 years,” she said.

Eleven limited liability companies with variations of the name Walnut Place signaled in a court filing yesterday in a separate case that they may oppose the agreement.

‘Behind its Back’

“Walnut Place did not have sufficient time before this filing to study the implications of the proposed settlement,” according to a footnote in the document filed in New York State Supreme Court. “In brief, however, Walnut Place strenuously objects to any purported ‘settlement’ made behind its back.”

Walnut Place sued Countrywide in February over mortgage bonds. The entities are seeking to win money for all investors in their mortgage-bond trusts, which were created out of $2.8 billion of loans and are included in the potential deal. They said in February that BNY Mellon “unreasonably failed” to sue Bank of America to force it to repurchase loans. Typically, only trustees can file suits on behalf of the trusts.

Owen Cyrulnik, a lawyer for the investors at Grais & Ellsworth LLP, declined to comment or identify the Walnut Place investors.

--With assistance from David McLaughlin, Karen Freifeld, Noah Buhayar and Hugh Son in New York and Christopher Condon in Boston. Editors: Dan Kraut, Dan Reichl

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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