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Originally published July 1, 2011 at 5:00 PM | Page modified July 2, 2011 at 9:35 PM

Bank of America's proposed mortgage-debt settlement criticized

Bank of America's effort to move past the soured mortgages that Countrywide Financial packaged into securities may hinge on whether a judge agrees that the world's largest bond buyers struck a generous-enough deal for all investors.

Bloomberg News

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Bank of America's effort to move past the soured mortgages that Countrywide Financial packaged into securities may hinge on whether a judge agrees that the world's largest bond buyers struck a generous-enough deal for all investors.

The lender, the largest U.S. bank by assets, is seeking to pay $8.5 billion, or 2 percent, to avoid repurchasing faulty loans placed into $424 billion of bonds, an offer supported by a group of 22 bondholders including BlackRock and Pacific Investment Management in an agreement announced Wednesday.

"Two cents on the dollar is an absolute joke," said Bill Frey, head of investment and brokerage firm Greenwich Financial Services LLC in Greenwich, Conn., who advises mortgage-securities investors. Frey lost a suit to Countrywide last year in which he said the company's agreements with state attorneys general to modify loans unfairly penalized bondholders.

The accord is the largest yet by Bank of America Chief Executive Brian T. Moynihan to resolve disputes with firms that said they were duped by misrepresentations such as overstated property values or inflated borrowers' incomes. Bank of New York Mellon, the debt's trustee, is seeking approval from a New York state judge for the deal, which would apply to bondholders beyond the 22 firms in the talks. BNY Mellon said in a court document that the agreement is "reasonable," considering the legal defenses Moynihan could mount if the trustee sought the $11 billion that its analysis showed could be justified.

The bank is "not out of the woods," said Chris Gamaitoni, a Compass Point Research and Trading analyst, in a note to investors. The $8.5 billion sum is a "starting point and will likely increase meaningfully after the court hears arguments from other invested parties" to as high as $26.5 billion.

The settlement would compensate investors, who continue to hold the bonds, at about 8 percent of the $106 billion in loans that have either defaulted or are "severely delinquent." The rest of the $424 billion has either been paid off or remains outstanding. The ratio compares with the 10.7 percent the bank paid to government-controlled mortgage investor Freddie Mac in settling similar claims over loans, according to presentations by the company.

Investors outside the group may be concerned that companies who signed on have "significant business dealings with BofA and might not be interested in aggressively pursuing a settlement," said Isaac Gradman, a San Francisco litigation consultant who worked on mortgage-repurchase cases.

Officials for BlackRock and Pimco, declined to comment. Representatives of MetLife, Goldman Sachs Group and TIAA-CREF, which are also in the group, declined to comment.

The potential cash payment to investors represents only one part of the deal, with Bank of America also agreeing to strengthen its management of outstanding loans and to pay penalties if the servicing falls short, Patrick said. The servicing changes are "extraordinarily valuable and important and could not be achieved through litigation," she said.

The regulator for Fannie Mae and Freddie Mac was "pleased" the deal calls for the bank to turn over high-risk loans to specialized servicers at its own expense, said Corinne Russell, a spokeswoman. The Federal Housing Finance Agency is reviewing whether the settlement makes sense for the companies, which bought bonds created by Countrywide in addition to its mortgages, she said.

Bank of America also agreed to cover losses where it can't foreclose because of documentation mistakes.

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