Bank of America Corp (BAC:US).’s Countrywide unit and investors in its devalued residential mortgage-backed securities will ask a federal judge to overrule objections from the Federal Deposit Insurance Corp. and approve a $500 million class-action settlement.
U.S. District Judge Mariana Pfaelzer in Los Angeles, who in August gave preliminary approval to the settlement, is scheduled to hear arguments today on final approval of the accord, which the plaintiffs’ lawyers says is the largest of a mortgage-backed securities class-action lawsuit to date.
The FDIC, as receiver for 19 failed banks that had invested in the securities before the collapse of the U.S. housing market in 2007, objects to the settlement, saying it favors a small group of investors whose securities were among those owned by the plaintiffs that filed the first securities-fraud claims against the mortgage lender.
“Named plaintiffs and class counsel have a conflict of interest with the members of the class that invested in 9,325 of the 9,383 covered tranches,” the FDIC said in its Oct. 7 objection to the settlement.
The settlement resolves claims that Countrywide Financial Corp., which was bought by Bank of America in 2008, provided false and misleading information in the offering documents for the securities. The investors alleged that Countrywide, at the time the largest U.S. mortgage lender, lied about the quality of the loans that were pooled for the securities.
Many of the securities, which had been given the highest credit ratings when they were issued, were cut to junk after a surge of defaults. When Calabasas, California-based Countrywide, which originated or purchased about $1.4 trillion in mortgages from 2005 to 2007, could no longer sell mortgages to the secondary market, it was taken over by Bank of America.
The settlement is separate from the proposed $8.5 billion settlement Bank of America reached with institutional investors in Countrywide residential mortgage-backed securities who brought claims against the bank for breaching its obligations to repurchase delinquent mortgages pooled for the securities.
Pfaelzer in a series of rulings in 2010 and 2011 excluded Bank of America, as corporate parent, from the cases before her and narrowed the number of securities the investors could sue over to include only those individual segments of them that were bought by the plaintiffs who filed the first lawsuits in California state court in 2007 and 2008.
The settlement involves three lawsuits, including the ones that had been pending in state court until last year. Pfaelzer’s rulings on which segments of the securities could be included in the cases weren’t yet applied to the ones transferred to federal court, creating what the FDIC called a “loophole” for the plaintiffs in those cases to settle on behalf of all investors.
Lawyers for the named plaintiff said in Oct. 21 filing that the settlement is “remarkable,” in particular given the potential risk Bank of America could put the Countrywide unit into bankruptcy court protection because of the billions of dollars in possible legal claims.
“Because the court has already dismissed Bank of America as potential defendant, any sizeable verdict in plaintiff’s favor at the conclusion of a trial, or upon a successful appeal of this court’s rulings on standing and tolling, would be an empty victory if Countrywide would declare bankruptcy,” the lawyers said.
Of the $500 million, the lawyers seek $89 million in fees and expenses. Investors in the 58 segments of the securities that were owned by the first plaintiffs in state court will receive $267 million. Investors in 111 segments, for which there were plaintiffs who sought to represent other investors and for which the claims were filed too late, will get $85 million.
That leaves $41 million for investors in 9,214 of the slices, according to the FDIC’s objection. That amounts to 0.012 percent of the face value of the securities for most of the investors, the FDIC said.
The case is Maine State Retirement System v. Countrywide Financial Corp., 10-00302, U.S. District Court, Central District of California (Los Angeles.)
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