Six Federal Home Loan banks have launched a salvo against Bank of America Corp.'s proposed $8.5 billion mortgage bondholder settlement, suggesting the payout may need to be triple that amount.
In a brief filed Thursday with Justice Barbara Kapnick of the New York State Supreme Court, attorneys for the six Federal Home Loan banks (FHLB) argue that research reports used to determine the settlement figure were too favorable to BofA, used faulty estimates from the Charlotte, N.C., bank and "raise more questions than they answer."
The Home Loan banks are not formally objecting to the proposed settlement, at least not yet. But they are seeking to intervene as a party in the proceeding, which would grant them the right to oppose the settlement if they decided to do so.
Together, the six FHLBs — of Boston, Chicago, Indianapolis, Pittsburgh, San Francisco and Seattle — own certificates in 73 of the 530 Countrywide trusts that are part of the proposed settlement, for which they paid more than $8.8 billion.
The Federal Home Loan Bank of Atlanta is already among the 22 large investors, including Pacific Investment Management Co. and BlackRock, that entered into the proposed settlement in late June that would reimburse bondholders for losses on loans originated by Countrywide Financial Corp., which BofA acquired in 2008.
The proposed settlement allows for some investors to opt out and attempt to negotiate a better deal on their own or sue.
Though the six Home Loan banks petitioned the court together, it's possible they may pursue litigation separately.
The six Home Loan banks that filed the petition claim the settlement figure is too low and only takes into account that 36% of loans originated by Countrywide would go into default and also breach specific investor underwriting standards.
Such assumptions are "inconsistent with widely publicized reports by professional loan auditors that even Countrywide loans that are merely delinquent (that is, behind on payments but not yet in default) have a 'breach rate' of well over 60% and often as high as 90%," the banks said.
"It is hard to imagine why a court would not require Countrywide and Bank of America to repurchase all loans, not just 40% of loans, that are both in default and have breached a representation or warranty," they said.
The Home Loan banks take aim at Bank of New York Mellon, which is in charge of administering the securities trusts for investors, and two independent researchers — Brian Lin, a managing director at the New York advisory firm RRMS Advisors, and Robert Daines, a professor at Stanford Law School.
Bank of New York Mellon and Lin declined to comment on the petition. Daines was not immediately available to comment.
The banks claim the $8.5 billion settlement figure was based on overly optimistic assumptions, some of which were provided by BofA and did not pertain to the specific portfolios of loans held by the trusts.
They said Lin adopted BofA's estimates of defaults "which in turn appear to have been based on a completely different portfolio of loans that were subject to the underwriting standards imposed by Fannie Mae and Freddie Mac."
Lawrence Grayson, a spokesman for BofA, defended BNY Mellon, saying that "the trustee has outlined at length the extensive due diligence in which it engaged before entering into the settlement, including the reports compiled by its independent experts. ... We look forward to the court determining on the merits whether the trustee acted appropriately in entering into the settlement. We believe that it did."
He added that "it's inaccurate to say that Bank of America has ever claimed that there's a 36% defect rate in either loans sold to the GSEs or loans sold to these trusts."
Lin also estimated that the trusts would recover between 45% and 60% of the principal balances of the loans through foreclosure.
"Both of these assumptions are quite controversial," the banks said in the filing.
The Home Loan banks argue that the research essentially reduced the amount that the trusts could potentially recover to $61.3 billion, from $208.9 billion.
The Home Loan banks are not the first to take issue with the proposed settlement. An activist investor under the name 28 Walnut Place filed a brief with the court earlier this month seeking to exempt itself from the deal, saying it failed to adequately compensate investors for their losses.