BofA mortgage accord faces delay on modified loan issue

AN $8.5 BILLION SETTLEMENT with mortgage-bond investors by Bank of America has been put on hold while some of the bondholders ask a judge to rule on loan modifications. / BLOOMBERG FILE PHOTO/JIN LEE
AN $8.5 BILLION SETTLEMENT with mortgage-bond investors by Bank of America has been put on hold while some of the bondholders ask a judge to rule on loan modifications. / BLOOMBERG FILE PHOTO/JIN LEE

NEW YORK – Bank of America Corp.’s $8.5 billion settlement with mortgage-bond investors will be delayed almost two weeks after American International Group Inc. and other objectors asked a judge for a hearing to address loan modifications excluded from the accord.

New York State Supreme Court Justice Barbara Kapnick in Manhattan on Jan. 31 approved most of the bank’s 2011 deal to end claims by investors in more than 500 mortgage-security trusts that the loans backing the bonds didn’t meet promised quality. Kapnick refused to include claims Bank of America was required to repurchase modified loans, saying the trustee, Bank of New York Mellon Corp., failed to properly evaluate them.

The objectors yesterday asked Justice Saliann Scarpulla, who took the case when Kapnick moved to an appeals court, to delay the Feb. 7 entry of the ruling. They argued the modified-loan claims are a “significant piece” of the settlement and that the ruling leaves open questions as to how much of the settlement funds will go to the trusts, which trusts are covered by the accord, and how the funds will be divided.

Entry of a final judgment in the case “could leave the trust beneficiaries with no choice but to commence new, duplicative actions in order to protect their rights,” Mark C. Zauderer, an attorney for the objectors, said in a court filing. “The entry of final judgment should be stayed so that all issues relating to the enforcement or effectuation of the settlement may be litigated in this action.”

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Delay

Scarpulla has scheduled a Feb. 19 hearing on the objectors’ request, delaying the Feb. 7 date Kapnick set for formal entry of the ruling. The judgment must be formally entered before any appeals can begin.

“This was simply a courtesy to all the parties involved and an opportunity to take a deep breath,” David Bookstaver, a spokesman for New York state’s Unified Court System, said in a telephone interview.

Lawrence Grayson, a spokesman for Charlotte, N.C.-based Bank of America, declined to comment on AIG’s request.

The settlement with investors, including BlackRock and Pacific Investment Management Co., is part of Bank of America’s push to resolve liabilities tied to faulty mortgages that have cost the company at least $50 billion since the financial crisis, most inherited from its 2008 purchase of Countrywide Financial Corp.

Kenneth E. Warner, an attorney for BlackRock and the other investors who support the settlement, said the request for a stay has no merit and “will be greatly prejudicial to the thousands of certificate holders who are waiting for the settlement proceeds to be distributed.”

Pools

Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the United States into the biggest recession since the 1930s. The housing market collapsed and the crisis swept up lenders and investment banks as the market for the securities evaporated.

Bank of New York, as trustee for more than 500 residential mortgage-securitization trusts, filed a petition in June 2011 seeking approval of the settlement. AIG and other objectors asked the court to reject the deal, which it said resolves claims for “pennies on the dollar” while investor losses totaled more than $100 billion.

While Kapnick found that the trustee didn’t abuse its discretion or act in bad faith in reaching the settlement, she allowed the claims on modified loans to continue, saying that the trustee failed to evaluate or investigate them.

Objectors to the settlement included a group of funds known as the Triaxx entities. They argued that pooling and servicing agreements for most of the trusts required Countrywide to buy back modified loans, according to Kapnick’s ruling. Triaxx funds lawyers argued that the trustee failed to investigate about $31 billion in modified mortgage repurchase claims.

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