AIG American International Group Inc

Bank of America Corp. (BAC) has hit the headlines again for issues related to its Countrywide settlement. This time Ambac Assurance Corp., whose holding company is Ambac Financial Group Inc. (ABKFQ), has pulled itself out from the litigation over BofA’s projected $8.5 billion mortgage bond settlement for Countrywide. This was reported by Bloomberg, which cited a court filing.

Ambac, however, did not provide a reason for this retreat. Notably, a number of investors, including Ambac, had opposed BofA’s anticipated settlement or wanted more information.

Recent Objections and Rejections

According to a Reuters report, American International Group Inc. (AIG) was recently denied intervening in the BofA $8.5 billion mortgage bond settlement case. Along with a group of investors, AIG had earlier challenged BofA’s deal, referring to the settlement as significantly inadequate.

AIG alleged that The Bank of New York Mellon Corporation (BK), Countrywide’s mortgage-backed securities (MBS) trustee, and several institutional investors manipulated the deal in such a way that investors could not make out if the settlement was in their favor.

However, it seemed that AIG’s purpose to interfere in the settlement deal was largely influenced by its separate individual court case against BofA. New York State Supreme Court Justice Barbara Kapnick ultimately rejected the allegations of AIG.

In addition to this, in March 2012, a similar lawsuit filed against BofA by a group of investors, headed by Walnut Place group, was also dismissed. The litigation had charged BofA’s Countrywide Financial Corp. unit of making wrong representations and warranties about the loans that backed these securities.

Earlier this month, New York’s Attorney General (AG) Eric Schneiderman challenged the deal. According to the AG, the compensation that BofA is giving to the investors is insufficient compared to the losses incurred.

The Story Behind

Back in June 2011, BofA had entered into an agreement to pay $8.5 billion for its legacy Countrywide mortgage repurchase and servicing claims. This deal was struck between BofA, BNY Mellon, Pacific Investment Management Co., MetLife Inc. (MET), BlackRock Inc. (BLK) and a group of around 20 investors who incurred huge losses for their investments in mortgage backed securities that were sold by Countrywide prior to the housing market slump.

The agreement covered most of BofA’s legacy Countrywide-issued first-lien mortgage backed securities repurchase exposure. It represented 530 trusts with original principal balance of $424 billion and total current unpaid principal balance of about $221 billion.

Our Take

Notably, the purchase of Countrywide Financial in 2008 came with a bunch of problems for BofA. The Countrywide acquisition resulted in elevated mortgage exposure for BofA, compared to its peers. Following the collapse of the housing market, mortgage repurchases claim risk grew manifold for the company. This has significantly drained the company’s bottom line over the last several quarters.

BofA bought the mortgage lender for $2.5 billion in 2008, and has recorded more than $30 billion in losses from bad loans, mortgage-backed securities claims and lawsuits. The company continues to face numerous litigations, which will likely have a material impact on its financial stability.

However, we believe that the earlier BofA can close the settlement deal, the better it will be for the company as it would remove its litigation overhang to some extent, though it will dent its financials.

Currently, shares of BofA have a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Additionally, we maintain our long-term “Neutral” recommendation on the stock.

 
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