AIG Seeks Delay in $8.5 Billion Bank of America Deal

Bank of America Corp.’s $8.5 billion settlement with mortgage-bond investors will be delayed at least 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 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.”

Hearing Scheduled

Scarpulla has scheduled oral arguments for Feb. 19 on the objectors’ request, delaying Kapnick’s entry date of Feb 7. 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 courts, said in a phone interview.

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

The settlement with investors including BlackRock Inc. and Pacific Investment Management Co. is part of Bank of America’s push to resolve liabilities tied to faulty mortgages that have cost it at least $50 billion since the financial crisis, most inherited with 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.”

Mortgage Pools

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. 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.

Triaxx Funds

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.

The ruling is a partial victory for Bank of America, as the exclusion of the modified mortgages means “at least part of the overhang from the case would persist,” Mark Palmer, an analyst at BTIG LLC in New York, said this week in a note.

“Given our perception that most investors had anticipated that BAC would win the case outright, we believe the outcome was somewhat worse than expected for the bank,” he said.

For AIG and the other objectors, the ruling means it’s still possible they could collect more than $8.5 billion, Palmer said. The trustee must now investigate the merit and potential value of the modified-loan claims and Bank of America may seek a settlement on the claims “to finally remove the overhang associated with the case,” he said.

Investor Approval

“While any deal would cause the bank’s total outlay related to the 530 mortgage trusts to exceed the $8.5 billion it has reserved, we believe investors would applaud the removal of uncertainty rather than punishing it for exceeding the set-aside,” he said.

Bank of America rose 5 cents, or 0.3 percent, to $16.40 in New York today. They have risen 38 percent in the past 12 months.

The case is In the matter of the application of the Bank of New York Mellon, 651786-2011, New York State Supreme Court, New York County (Manhattan).

Before it's here, it's on the Bloomberg Terminal.