BofA Mortgage Ruling Challenged Over Loan Exception

Bank of New York Mellon Corp., the trustee that negotiated Bank of America Corp.’s $8.5 billion settlement with mortgage-bond investors, said it will appeal the portion of a New York state judge’s ruling approving the pact that excluded claims over modified loans.

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.

The settlement 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.

Kapnick refused to include claims that Bank of America was required to repurchase modified loans, saying the trustee, BNY Mellon, failed to properly evaluate them.

BNY Mellon said in a court filing yesterday that it’s appealing the judgment with respect to the court’s “erroneous ruling regarding loan modification claims in the settlement.”

“We were extremely pleased that the court has vindicated the trustee’s actions by approving nearly every aspect of the settlement,” Kevin Heine, a BNY Mellon spokesman, said in a telephone interview. “We are preserving our right to appeal the court’s decision on the loan modification claims because it is in the best interest of all trust investors to do so and to move ahead with the payment of settlement proceeds.”

Housing Bubble

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.

Justice Saliann Scarpulla this week denied a motion by American International Group Inc. and other objectors to the settlement to delay entry of Kapnick’s ruling, while saying she will listen to their arguments to vacate the judgment and proceed to trial.

Lawrence Grayson, a spokesman for Charlott, North Carolina-based Bank of America, declined to comment on the filing.

Quick Filing

“This very quick filing of an appeal challenging the court’s decision is at odds with the public position the bank has taken that the court has blessed the settlement,” Mark C. Zauderer, an attorney for AIG with Flemming Zulack Williamson Zauderer LLP, said in a telephone interview. “It is a further indication that the health of this proposed settlement is in jeopardy.”

BNY Mellon, 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.

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.