Both Gretchen Morgenson of the New York Times and Karen Freifeld of Bloomberg are reporting this morning that New York Attorney General Eric Schneiderman may challenge Bank of Americas proposed $8.5 billion settlement with investors that hold bad mortgage securities issued by B of A.  Schneidermans office sent letters to 22 investment firms seeking information about the proposed settlement.  It seems possible that pending investigation, Schneidermans office may object to the deal.

The settlement covers hundreds of mortgage pools that were issued by failed lender Countrywide, which was purchased by Bank of America in 2008.  The problem is that the investors that agreed to the settlement only hold about a quarter of the interest in these securities.  The settlement would not allow any investors to opt out and sue Bank of America on their own, and would extinguish any outstanding claim from any investor.

The settlement would settle putback and chain of title liability between B of A and Bank of New York Mellon (BNYM), acting as trustee for 530 mortgage trusts.  The deal was criticized in many quarters for giving Bank of America broad indemnity for too little money.  Additionally, some of the investors who were not involved in the negotiations were suspicious of the secretive nature of these negotiations.

According to Morgensons article in the Times, the settlement covers securities with outstanding principal of $174 billion, making this settlement seem like a pretty good deal for Bank of America.  At least one investor, Walnut Place LLC has filed a petition contesting the settlement.  Walnut Place conducted its own investigation of mortgage backed securities it purchased from Countrywide and found that hundreds of the loans contained within those securities were not of good quality.  Walnut Place claims that upon presenting Bank of New York Mellon (the trustee for the trusts created by Countrywide) with evidence that Countrywide breached liabilities and warranties BNYM refused to sue to make Countrywide repurchase these defective loans: As it has in many cases in which it has been presented withevidence of Countrywide’s breaches, BNYM did nothing.

The petition goes on to pretty much sum up the objections to the settlement here:

The terms of the proposed settlement would release the claims of all 530 trusts for breaches of representation and warranties against Countrywide and Bank of America. Although BNYM concedes (BNYM Petition ¶ 13, 15) that it knew that Walnut Place andother certificate holders were likely to object to the proposed settlement, BNYM nevertheless made no effort to inform Walnut Place or the hundreds of investors in Countrywide trusts other than the 22 self-appointed investors that BNYM was secretly negotiating a deal with Countrywide and Bank of America, much less to solicit the views of those investors about what terms of settlement would be fair or whether they wished to be “represented” in those negotiations by the 22 self-appointed investors.

Walnut Place further said that it has serious concerns about the secret, non-adversarial, and conflicted way in which the proposed settlement was negotiated and about the fairness of the terms of the proposed settlement.  The petition is worth reading in its entirety if you have any interest in this settlement.

The investors who were involved in the settlement responded to Walnut Places petition by saying that:

It defies all reason and common sense to suggest that 22 separate institutions each of which independently evaluated and chose to support the settlement would set aside their own financial interests to benefit Bank of America.  Equally implausible is the suggestion that the institutional investors who act as fiduciary investment advisers would abandon the interests of their pension fund, mutual fund and individual investor clients in favor of Bank of America’s.

Its going to be pretty interesting to see what comes of this.

 

 

 

 

 

 

 

 

 

 

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