BofA Countrywide Deal Approval May Help JPMorgan, Citi Pacts

Bank of America Corp.’s $8.5 billion settlement of investor claims tied to bad mortgages sold by its Countrywide unit won full court approval in a ruling that may allow similar accords to move ahead.

The New York appeals court decision is a victory for mortgage-bond trustees, who have come increasingly under fire for their roles in the mortgage crisis. The appeals court in Manhattan ruled that Bank of New York Mellon Corp. didn’t abuse its discretion or act unreasonably or in bad faith in reaching the settlement.

Thursday’s decision has “important implications” for similar settlements between investors and JPMorgan Chase & Co. and Citigroup Inc. now awaiting approval, as well as for future agreements, according to a report by Nomura Securities analysts Paul Nikodem, Pratik K. Gupta and Rohit Sinha.

“Trustees only need to show that they did not act unreasonably” when relying on the advice of their counsel or expert advisers regarding a settlement, the analysts wrote. They said the ruling increases the possibility that the JPMorgan and Citigroup settlements will win approval because trustees gave bondholders sufficient notice and sought indemnification from them if they chose to reject the settlement.

Investor Claims

A trial judge in Manhattan in January 2014 approved most Bank of America’s 2011 agreement with investors in more than 500 mortgage-security trusts. The loans backing the bonds didn’t meet promised quality, the investors alleged.

State Supreme Court Justice Barbara Kapnick refused to include claims that the Charlotte, North Carolina-based bank was required to repurchase modified loans because BNY Mellon, the trustee, failed to properly evaluate them.

The appeals court, overturning that decision, said BNY Mellon acted within its authority in reaching the settlement and there was “no indication that it was acting in self-interest or in the interests of BofA rather than that of the certificate holders.”

BNY Mellon didn’t abuse its discretion as trustee in deciding to release claims based on a failure to repurchase modified loans, the appeals court said.

Stricter Standard

Kapnick imposed a stricter standard that “allows a court to micromanage and second-guess the reasoned, and reasonable, decisions of a trustee,” according to the ruling. Kapnick, now on the appeals court, didn’t participate in the decision.

“We’re pleased that the court approved the settlement in its entirety and recognized that Bank of New York Mellon acted reasonably and in good faith,” said Kevin Heine, a spokesman for the bank.

Lawrence Grayson, a spokesman for Bank of America, declined to comment on the ruling.

BNY Mellon is among the lenders sued by investors in June for their roles as mortgage-bond trustees. The investors included BlackRock Inc. and Pacific Investment Management Co., which previously settled with Bank of America.

The investors alleged the trustees knew loans underlying trillions of dollars of residential mortgage-backed securities were misrepresented and failed to invoke their rights to force the sellers to buy them back or act against servicers, causing billions of dollars in losses.

JPMorgan, Citigroup

Thursday’s ruling may speed approval for Citigroup’s $1.13 billion settlement reached in April, as well as JPMorgan’s $4.5 billion agreement, said Barclays Plc analysts Jasraj Vaidya and Harkaran Talwar in a note.

The decision, though based on somewhat different objections, “likely clarifies the standard against which trustees will be judged,” the Barclays analysts said.

BNY Mellon sought approval of the Countrywide settlement in 2011. American International Group Inc. and other objectors asked the court to reject the deal, saying it resolved claims for “pennies on the dollar” while investor losses totaled more than $100 billion.

AIG, the largest commercial insurer in the U.S. and Canada, sued Bank of America for $10 billion in 2011. AIG withdrew its objections to the settlement in July after settling with the bank for $650 million.

The settlement is part of Bank of America’s push to resolve liabilities tied to faulty mortgages that have cost it at least $60 billion since the financial crisis, most inherited with its 2008 purchase of Countrywide Financial Corp.

Financial Crisis

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.

Countrywide Financial, based in Calabasas, California, was the biggest U.S. residential home lender before the collapse, originating or purchasing mortgages valued at about $1.4 trillion from 2005 to 2007. The bulk of them were sold to investors as mortgage-backed securities.

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).

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