It may be too early to declare who the winner is, but Bank of America's willingness to settle the $8.5 billion Countrywide suit hints at how big the litigation problem might be for mortgage originators in the courts today.
The bank has yet to pay out on the claim because the settlement amount has been disputed by several investors. The lawsuit, brought by Walnut Place in February 2011, alleged that subsidiaries of Countrywide, which BofA subsequently acquired, misrepresented the quality of the loans underlying more than $1 billion in MBS. According to Walnut Place's allegations, BNY Mellon (BNYM), the trustee holding the securities, failed to sue BofA and therefore did not satisfy its trustee obligations.
BofA, however, said that BNYM did act after receiving a demand notice and that the $8.5 billion proposed settlement between BofA and BNYM rendered pointless the Walnut Place action. That settlement, if approved, would resolve claims of holders - including Walnut Place, which has objected to the settlement - of 530 Countrywide RMBS. Putting a tag on what the bank's exposure could be can be difficult if only because very rarely is it disclosed in the court documents how much is still outstanding, which is going to be less because of the payouts, said Neil McCarthy, editor in chief at Lawyer Links, a legal consulting firm. A typical rule of thumb, according to McCarthy, is that the deals have paid out about 50%, depending on vintage, and the losses on what is left are about 50% of that, totaling roughly a quarter of the original deal.
"You could say that the investors are winning, and the best evidence is the amount of money that BofA was willing to settle the Countrywide claims for, although it hasn't paid anything yet," said Zachary Rosenbaum, a partner at Lowenstein Sandler. "It all depends on your definition of success. The banks will pay substantial sums of money to resolve claims and it might take a long time, but I believe that will happen, but they may view it as a success to have to pay only two or four cents on the dollar, so success is in the eye of the beholder."