Bank of America Corp. (BAC:US)’s $8.5 billion settlement with mortgage-bond investors is being considered by a New York judge two years after the lender struck the deal to resolve claims over home loans bundled into securities.
Opening statements began today before Justice Barbara Kapnick in State Supreme Court in Manhattan. The settlement is part of an effort by Chief Executive Officer Brian Moynihan to clear up liabilities tied to the purchase of home lender Countrywide Financial in 2008.
While the deal has the backing of an investor group that includes BlackRock Inc. (BLK:US), it must overcome opposition from investors led by American International Group Inc. (AIG:US) who argue Bank of America isn’t paying enough.
“The settlement is the centerpiece of the strategy to resolving Countrywide’s mortgage liability,” said Isaac Gradman, a mortgage-finance litigator at Perry, Johnson, Anderson, Miller & Moskowitz LLP in Santa Rosa, California, who isn’t involved in the case. “It’s imperative they get this approved or there’s going to be a lot more pain down the road.”
For Moynihan, 53, approval of the settlement would resolve one of the biggest remaining uncertainties tied to Charlotte, North Carolina-based Bank of America’s takeover of Countrywide, said Pri de Silva, senior banking analyst at CreditSights Inc.
The bank reached an $11.7 billion settlement with mortgage-finance company Fannie Mae in January and ended disputes with bond insurers including MBIA Inc. (MBI:US), which settled for $1.7 billion with the lender in May. What remains for Moynihan are claims from private investors, and the 2011 accord deals with most of those, de Silva said.
“I’m sure he’ll be a pretty happy camper if it gets approved,” de Silva said. “This ends one chapter in the mortgage saga for Moynihan.”
Bank of New York Mellon Corp. (BK:US), the trustee seeking approval of the agreement on behalf of investors, agreed to the settlement because it was the “only reasonable choice,” Matthew Ingber, an attorney for the bank, told Kapnick. The bank took a certain payment over the risk of years of litigation against Bank of America.
“It chose certainty. It chose finality. It chose a settlement that was more than fair,” Ingber said. “It chose not to roll the dice.”
Investors supporting the settlement and opponents are scheduled to make their opening statements tomorrow.
If the settlement is rejected, Bank of America will either have to negotiate a costlier agreement with the investor group, or deal with individual bondholders in a way that “could drag out the process for years,” Betsy Graseck, a Morgan Stanley analyst, said in an April 23 research note.
Moynihan called the deal, which stems from Countrywide loans with an original principal balance of $424 billion, “a major milestone in a March 27 interview on PBS television’s “Charlie Rose” program. He has booked more than $45 billion in costs to clean up the mortgage mess inherited from the purchase of Countrywide.
“If you think about the pie, or the piece being this big, we’ve been chopping it down to less and less,” Moynihan said in the interview. “There’s a couple pieces of mortgage litigation left, but the lion’s share of it has gone through” the bank’s earnings, he said.
Unresolved demands that Bank of America repurchase mortgages dropped 39 percent to $17.1 billion as of March 31, driven by demands extinguished in the Fannie Mae deal, according to company filings (BAC:US).
Lawrence Grayson, a Bank of America spokesman, declined to comment about the court hearing on the settlement.
AIG and other opponents have asked Kapnick in court papers to reject the settlement. They call it a “pennies-on-the-dollar bargain” for the bank because losses to the securitization trusts at issue in the case are expected to be more than $100 billion.
They also claim BNY Mellon violated its responsibilities to investors by putting its own interests and the interests of its “business partner,” Bank of America, ahead of the interests of investors.
“The trustee acted unreasonably by failing to investigate material facts, by failing to use its leverage to obtain a larger settlement and by merely rubber stamping a settlement that was negotiated by a minority investor group,” the opponents said.
The investor group supporting the deal, which also includes Pacific Investment Management Co., Goldman Sachs Asset Management and MetLife Inc. (MET:US), called the opponents a “vocal minority.” Out of tens of thousands of investors, only 10 filed objections, they said in court papers, and many of them, including New York-based AIG, are pursuing separate litigation against Bank of America and BNY Mellon.
“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,” they said.
Gradman said the claims are worth more than $8.5 billion and that assumptions used to justify the settlement have been undermined by court rulings since the deal was reached. The investor group and BNY Mellon agreed to the settlement to avoid a drawn-out fight with Bank of America and preserve business relationships with the lender, Gradman said.
Kevin Heine, a BNY Mellon spokesman, declined to comment on that claim, and lawyers for the investor group backing the settlement didn’t respond to requests for comment on it.
The advantage for Bank of America and the supporters is that the standard for approval is whether BNY Mellon’s decision to enter into the settlement was reasonable. That’s a deferential standard that will be difficult for opponents to overcome, whatever the settlement’s flaws, said Gradman.
The case is In the matter of the application of the Bank of New York Mellon, 651786-2011, New York State Supreme Court, New York County (Manhattan).
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