Bank of America Corporation
's (
BAC
) $8.5 billion mortgage settlement deal is facing opposition from
New York's attorney general (
AG
), Eric Schneiderman. According to the AG, the compensation that
BofA is giving to the investors is inadequate compared to the
losses incurred by them. This forced him to file papers in the New
York State Supreme Court justice department for permission to
intervene in the case.
The objection to mortgage settlement deal comes after the case
was transferred from the federal to state court in late February.
Earlier, in August 2011, New York AG had raised objection against
the deal and won the approval of the federal court judge to
intervene and take part in the case. But, with the settlement deal
again transferred to the state court, he has to file for the
permission to participate in the case again.
BofA's settlement deal requires the consent of New York State
Supreme Court before the company can proceed with the distribution
of the compensation among the investors.
The Story Behind
In June 2011, BofA had reached an agreement to pay $8.5 billion
for its legacy Countrywide Financial Corp. mortgage repurchase and
servicing claims. The settlement took place between 22 investors
who suffered significant losses for their investments in mortgage
backed securities (MBS) that were sold by Countrywide prior to the
housing market failure. BofA acquired Countrywide in 2008.
The agreement basically covered most of BofA's legacy
Countrywide- issued first-lien MBS repurchase exposure. It
represented 530 trusts with original principal balance of $424
billion and total current unpaid principal balance of about $221
billion.
The group of investors, including
BlackRock Inc.
(
BLK
), PIMCO,
MetLife Inc.
(
MET
) and the Federal Reserve, had alleged that prior to the financial
crisis, Countrywide had sold securities that were tied to
bad-quality loans. The loans were not even well-managed by
The Bank of New York Mellon Corporation
(
BK
), which was the trustee for these MBS. Therefore, these investors
sought a buyback relief in MBS that were offloaded by
Countrywide.
Conclusion
The acquisition of Countrywide substantially increased BofA's
mortgage exposure compared with its peers. Following the collapse
of the housing market, mortgage repurchases claim risk for the
company grew manifold. This has significantly drained the company's
bottom line over the last several quarters.
Now, with the new objections raised by the New York AG, there
might be a delay in getting the approval. However, if the New York
AG participates in the settlement deal, the investors will have a
chance to get a better deal from BofA.
Currently, the shares of BofA have a Zacks #3 Rank, which
translates into a short-term 'Hold' rating. Additionally, we
maintain our long-term "Neutral" recommendation on the stock.
BANK OF AMER CP (
BAC
): Free Stock Analysis Report
BANK OF NY MELL (
BK
): Free Stock Analysis Report
BLACKROCK INC (
BLK
): Free Stock Analysis Report
METLIFE INC (
MET
): Free Stock Analysis Report
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