BofA Gets Nod for $500M RMBS Settlement

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In a major development, another litigation overhang has been removed for Bank of America Corporation (BAC). Recently, the bank received approval from a federal judge regarding the $500 million Countrywide Financial Inc. mortgage settlement deal. Notably, BofA acquired Countrywide in 2008.

The plaintiffs had filed a class action lawsuit against BofA for misrepresenting the quality of underlying home loans in the offer documents while selling residential mortgage-backed securities (RMBS) from 2004 to 2007. Though these RMBS had the highest credit ratings, the housing market collapse in 2008 caused their ratings to fall to “junk” status.

The plaintiffs included Maine State Retirement System, Iowa Public Employees System, the Western Conference of Teamsters Pension Trust Fund and Federal Deposit Insurance Corp. (:FDIC), among others.

The settlement between BofA and the plaintiffs was reached in Apr 2013 and it gained preliminary approval from the court in August. However, in October, several investors including FDIC raised objections to the deal on grounds of its lack in fairness and adequacy. Notably, while approving the settlement last week, the U.S. District Court for the Central District of California declared that the deal was fair and reasonable.

The court approval resolves nearly 75% of BofA’s RMBS litigation claims related to Countrywide. Additionally, the company is still awaiting court approval for $8.5 billion settlement with nearly 22 institutional investors related to the sale of risky MBS.

Earlier this month, BofA announced a mortgage settlement deal with Freddie Mac (FMCC), resolving all outstanding and probable representations and warranties claims on RMBS. The deal is expected to put an end to the company’s representations and warranties claims related to loans sold to Freddie Mac and Fannie Mae (FNMA) before the financial crisis.

Despite the latest approval, BofA still faces many investigations and litigations on similar issues. These will likely impact its financial stability going forward.

Currently, BofA carries a Zacks Rank #3 (Hold). A better-ranked finance stock worth considering is SVB Financial Group (SIVB), which carries a Zacks Rank #2 (Buy).

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