Fraud, Predatory Lending - Thursday, May 2, 2013 12:42 - 0 Comments
Bank of America Corp.’s Countrywide unit has agreed to pay $500 million to settle a lawsuit over billions of dollars in residential mortgage-backed securities that were downgraded to junk. The settlement will end a class action lawsuit filed by the Iowa Public Retirement System as the lead Plaintiff. The settlement will require court approval. The lawsuit filed in 2010 sought damages for $351 billion in downgraded Countrywide mortgage-backed securities after the 2007 subprime collapse.
The lawsuit was the largest in terms of securities at stake among dozens of cases brought against lenders and underwriters. U.S. District Judge Mariana Pfaelzer in Los Angeles had narrowed the case to $2.6 billion in bonds and dismissed Bank of America as a defendant. It should be noted that this case isn’t covered by the $8.5 billion settlement between Bank of America and 22 institutional investors in Countrywide mortgage-backed securities. Investors’ rights to receive trust distributions upon final approval of that settlement won’t be affected by the Los Angeles settlement.
A state pension fund in Oregon lost $29 million on its $200 million investment in the mortgage-backed securities, Oregon Treasurer Ted Wheeler and Attorney General Ellen Rosenblum said in a joint statement. The state hopes to get back more than 10 cents on the dollar, which the two state officials said is the typical recovery in security class-action cases.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. After the market for the securities evaporated, bankers and underwriters being sued argued that offering documents for those bonds adequately warned of risks. They claimed the securities performed as intended and investors were paid what they were owed from underlying mortgages. But investors in the Los Angeles case against Countrywide alleged that offering documents for the mortgage-backed bonds didn’t disclose that the company was disregarding its own guidelines for originating home loans.
The value of the securities plunged when they were downgraded to junk in 2008 and 2009. Countrywide was once the biggest U.S. residential home lender, originating or purchasing about $1.4 trillion in mortgages from 2005 to 2007. The company sold the bulk of those loans to investors as mortgage-backed securities. Bank of America acquired Countrywide in 2008.
This settlement is expected to resolve about 80 percent of the unpaid principal balance of Countrywide-issued mortgage-backed securities over which claims have been filed or threatened, according to Bank of America. The Bank said it will resolve about 70 percent of the unpaid principal balance of all such securities over which claims have been filed or threatened against all Bank of America-related entities. As of February, the unpaid balance of these securities, excluding those that are the subject of individual claims or threatened litigation, was $95 billion, according to Bank of America.
The Los Angeles case is Maine State Retirement System v. Countrywide Financial Corp., in the U.S. District Court, Central District of California (Los Angeles). Steven Toll, a lawyer with Cohen Milstein Sellers & Toll in Washington, D.C., represented the Iowa Public Retirement System (the lead Plaintiff); Spencer Burkholz, a partner at Robbins Geller Rudman & Dowd LLP, represented the Maine State Retirement System. From all accounts, these lawyers did a very good job in this case.
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