Objections continue to mount against Bank of America's proposed $8.5 billion settlement with 22 major holders of Countrywide Financial Corp. mortgage-backed securities.
The settlement calls for BofA to pay the amount to resolve claims from investors regarding Countrywide MBS, which BofA purchased in 2008.
If the settlement doesn't get court approval and BofA goes back to the negotiating table, it will become more expensive for the bank.
William Pauley III, a federal judge in the United States District Court for the Southern District of New York, is considering a petition of investors to intervene in the proposed settlement.
The bond investors filing to intervene include the Walnut Place group of 11 buysiders, several federal home loan banks, pension funds, and insurers, according to a Reuters report, The proposed interveners have called the settlement unfair. The petition to intervene means that BofA can face further legal liabilities over mortgages.
Last month, New York Attorney General Eric Schneiderman also filed an intervention on the BofA settlement with the New York courts on behalf of the Countrywide bond investors.
However, trustee Bank of New York Mellon Corp., along with 22 institutional investors, claimed that the attorney general of New York has no standing to intervene in the case. Bank of New York serves as the trustee on the deals covered under the BofA settlement. It requested the judge to reject the bid made by Schneiderman.
The trustee said that the attorney general's questions on whether Bank of New York acted in good faith will derail what should be an expedited proceeding, a Bloomberg report stated. Bank of New York also said that the claims could take years to resolve.
To be sure, BofA could potentially add another $9 billion to the bill of what it owes bond insurers, according to hedge fund Branch Hill Capital. The Association of Financial Guaranty Insurers earlier predicted that the BofA repurchase obligations could range between $10 billion and $20 billion for industry members alone.
Filings objecting to the deal were also lodged by the Federal Deposit Insurance Corp. (FDIC), which represents failed banks that lost money on the securities, and the Federal Housing Finance Agency (FHFA), which regulates the two GSEs Fannie Mae and Freddie Mac.
The FDIC and the FHFA described their objections as place holders. They said they needed more time to fully understand the deal that BofA struck with the holders of bonds from Countrywide.
The FHFA said that it wants to preserve its rights for a possible future objection to the settlement but does not expect to object.
"While the FDIC generally does not comment on pending litigation, this filing is simply a formal notice to preserve our right to make claims as a part of the settlement and seeks additional information to evaluate those potential claims," said Andrew Gray, director of FDIC's Office of Public Affairs. "It is not an evaluation or opinion on the settlement itself."
Meanwhile, the American International Group (AIG) has also filed its objection to the BofA MBS settlement. In its filing, AIG argued that Bank of New York and the institutional investors had implemented a plan for a settlement that prevents other beneficiaries from evaluating if the proposed settlement is in their best interest. The insurance firm also pointed out that Bank of New York cannot be depended on to represent AIG considering that the New York attorney general had strongly opposed Bank of New York's role in crafting the settlement. The plaintiff lawyers who negotiated the settlement, AIG also claimed, were conflicted because BofA had agreed to pay them $85 million once the settlement is approved.
U.S. Bancorp has also requested that the New York state court make a Countrywide Financial unit to repurchase more than 4,000 loans in a mortgage pool. This was done to repair breaches of contract related to improper underwriting, according to a Bloomberg report.
The bank filed a lawsuit that claimed that Countrywide agreed when it sold the pool in 2005 that it would repurchase all the loans within 90 days of receiving notice of a material breach.
U.S. Bancorp is trustee for the HarborView Mortgage Loan Trust 2005-10, which held the pool. The pool's original value was $1.75 billion, the bank stated in court papers.
The lawsuit said that the mortgage pool became delinquent and defaulted at a fast rate soon after it was purchased by U.S. Bancorp. Countrywide allegedly did not follow its underwriting guidelines.
U.S. Bancorp asked the court to find that because of a breach of its seller representation, Countrywide must repurchase all the loans. The court can also order Countrywide to repurchase all defective loans, U.S. Bancorp said.
Investors who were considering objecting to the proposed $8.5 billion BofA MBS settlement would have had to file a short-form objection seeking further information related to the proposed deal no later than Aug. 30, explained attorneys at Lowenstein Sandler in a note published earlier this month.
Those who have filed an objection by the Aug. 30 deadline will be entitled to have their counsel, over the week of Sept. 5, negotiate with the counsel to Bank of New York, BofA and other objectors regarding the scope of, and schedule for, the production of documents related to the settlement.
The objectors will also be able to appear before a judge on Sept. 16 to address the scope of, and schedule for, the production of such documents.
BofA set aside $18 billion last quarter to cover claims but that includes the proposed $8.5 billion for the Countrywide bond settlement reached in June with investors that include BlackRock, the Federal Reserve Bank of New York and Pacific Investment Management Co.
If the courts do intervene on behalf of investors objecting to that deal its likely to deal a fresh blow to the financial health of the bank which has seen its stock market capitalization fall well below one-half of its tangible book value.
Standard & Poor's recently abandoned the position that BofA's mortgage exposure is "contained and quantifiable." Instead, S&P equity research analyst Erik Oja wrote earlier this month that, the rating agency "no longer has this view."