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BofA's $8.5B Settlement Postponed

Zacks Equity Research

Bank of America Corporation’s (BAC) litigation woes seem to persist over time. Justice Saliann Scarpulla – who replaced Justice Barbara Kapnick – in the case relating to BofA’s proposed settlement of $8.5 billion with investors, related to faulty mortgage securities, has postponed the final judgment on the case. The New York state court in Manhattan has decided to withhold its final decision on the case until Feb 19.

Justice Scarpulla's decision comes days after Justice Kapnick approved BofA’s settlement with investors and ordered that the ruling to take effect from Feb 7. The group of investors included BlackRock Inc. (BLK), American International Group, Inc. (AIG), Pacific Investment Management Co. and MetLife Inc.

These companies bought mortgage-backed securities (:MBS) trusts from Countrywide Financial Corp. prior to the financial crisis. Notably, BofA acquired Countrywide in 2008.

However, on Feb 4, the American Insurance Group sought to delay the final judgment on the lawsuit, as it believed that certain issues had not been dealt with in Justice Kapnick’s time. Further, the company held that the final judgment on the lawsuit should not be declared until there were further proceedings to decide how losses would be calculated and how the settlement amount would be distributed.

The Backdrop

In Jun 2011, BofA had reached an agreement to pay $8.5 billion for its legacy Countrywide mortgage repurchase and servicing claims. The settlement took place with 22 investors who had suffered significant losses in 530 MBS trusts that were sold by Countrywide prior to the financial crisis.

The group of investors alleged that Countrywide had sold securities that were related to bad-quality loans. Further, the loans were not even well-managed by the trustee. Therefore, the investors sought a buyback relief in MBS that was offloaded by Countrywide.

Notably, the settlement was opposed by the AIG as it held that The Bank of New York Mellon Corporation (BK) – the trustee representing the investors – did not make adequate effort to recover money for the distressed investors. The insurer major stated that the settlement amount was inadequate to compensate the losses incurred by investors.

However, Kapnick dismissed claims by the American Insurance Group and ruled that BNY Mellon acted mostly in good faith at the time of the agreement.


BofA continues to suffer from flaws in Countrywide’s transactions prior to the financial crisis. The aforementioned postponement of the settlement could result in BofA having to shell out a much larger sum than what was initially agreed upon. The company has already incurred more than $40 billion in losses from bad loans, MBS claims and lawsuits. Though the company has settled quite a few lawsuits related to Countrywide, it still faces numerous litigations that could weigh on its financials going forward.

Currently, BofA carries a Zacks Rank #3 (Hold).

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