Bank of America Corp. (BAC:US)’s Countrywide unit agreed to pay $500 million to settle a lawsuit over billions of dollars in residential mortgage-backed securities that were downgraded to junk.
The accord will end a class action, or group lawsuit, led by the Iowa Public Retirement System, lead plaintiffs’ attorney Steven Toll of Cohen Milstein Sellers & Toll PLLC said today in a statement. The settlement, which couldn’t immediately be verified in court records, requires a judge’s approval, Charlotte, North Carolina-based Bank of America said in a filing (BAC:US) with the U.S. Securities and Exchange Commission.
“This settlement will bring closure to investors who were misled about the quality of the mortgages that Countrywide securitized,” Toll said.
The consolidated lawsuit filed in 2010 sought damages over $351 billion in downgraded Countrywide mortgage-backed securities after the 2007 subprime collapse. The lawsuit was the largest in terms of securities at stake among dozens of cases brought against lenders and underwriters.
U.S. District Judge Mariana Pfaelzer in Los Angeles narrowed the case to $2.6 billion in bonds and dropped Bank of America as a defendant.
The case isn’t covered by the $8.5 billion settlement between Bank of America and 22 institutional investors in Countrywide mortgage-backed securities. Investors’ rights to receive trust distributions upon final approval of that accord won’t be affected by the Los Angeles settlement, the bank said.
“After five years of hard-fought litigation, this record- breaking recovery is a tremendous result for MBS investors misled by Countrywide,” Spencer Burkholz, a partner at Robbins Geller Rudman & Dowd LLP who represents the Maine State Retirement System, said in an e-mail.
It may take months of negotiations for plaintiffs to decide how to split up the money, according to a statement released by officials of Oregon. A state pension fund lost $29 million on its $200 million investment in the mortgage-backed securities, Oregon Treasurer Ted Wheeler and Attorney General Ellen Rosenblum said in a joint statement.
The state hopes to get back more than 10 cents-on-the- dollar, the typical recovery in security class-action cases, according to the statement.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s.
After the market for the securities evaporated, bankers and underwriters being sued argued that offering documents for those bonds adequately warned of risks. They claimed the securities performed as intended and investors were paid what they were owed from underlying mortgages.
Investors in the Los Angeles case against Countrywide alleged that offering documents for the mortgage-backed bonds didn’t disclose that the company was disregarding its guidelines for originating home loans. The value of the securities plunged when they were downgraded to junk in 2008 and 2009, the investors said in court documents.
Countrywide was once the biggest U.S. residential home lender, originating or purchasing about $1.4 trillion in mortgages from 2005 to 2007. The company sold the bulk of those loans to investors as mortgage-backed securities. Bank of America acquired Countrywide in 2008.
The settlement announced today is expected to resolve about 80 percent of the unpaid principal balance of Countrywide-issued mortgage-backed securities over which claims have been filed or threatened, Bank of America said. It will resolve about 70 percent of the unpaid principal balance of all such securities over which claims have been filed or threatened against all Bank of America-related entities, the company said.
As of February, the unpaid balance of these securities excluding those that are the subject of individual claims or threatened litigation, was $95 billion, Bank of America said.
Bank of America fell (BAC:US) 4.72 percent to $11.70 in New York after shortfalls in mortgage banking and trading marred first- quarter earnings, which were reported today, and slowed the company’s turnaround.
While net income (BAC:US) quadrupled to $2.62 billion, or 20 cents a share, analysts surveyed by Bloomberg had predicted 23 cents a share, and revenue dropped 8.4 percent on an adjusted basis to $23.9 billion.
The Los Angeles case is Maine State Retirement System v. Countrywide Financial Corp., 10-cv-00302, U.S. District Court, Central District of California (Los Angeles).
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