End in Sight for Countrywide Saga as IRS Approves Settlementby
Mortgage-bond investors to see cash beginning next year
$8.5 billion accord was reached more than four years ago
The Internal Revenue Service has stamped an approval on Bank of America Corp.’s $8.5 billion settlement tied to bad mortgages sold by its Countrywide unit in the run-up to the financial crisis, possibly setting a standard for agreements with other lenders.
A notice posted on the settlement’s website and dated Oct. 13, sets into motion a payout timeline for 530 mortgage-backed securities served by Bank of New York Mellon as trustee, more than four years after the agreement was announced and nearly six months after a New York court approved the payments. Cash could begin flowing to investors early next year.
The accord was delayed by bondholders who claimed Bank of New York Mellon had acted against their interests in agreeing to the deal. A state appellate court ruled that there was no indication the trustee had acted improperly, and that decision along with the IRS private-letter determination that the settlement would not be treated as regular income is expected to set a pattern for trustees involved in similar cases, including Citigroup Inc. and JPMorgan Chase & Co.
“Everyone has been wondering what’s been taking the IRS so long,” said John Sim, a residential mortgage bond analyst at JPMorgan. "It paves the way, so that Citi and JPM can get some certainty if they settle."
Investors have combed the case for clues to the timing of the expected payouts. They have for years pursued a strategy of identifying legacy mortgage bonds expected to benefit from Countrywide and other crisis-era settlements. Bank of America has charged off $60 billion in losses tied to the toxic mortgages.
Bank of America spokesman Lawrence Grayson declined to comment, as did Anthony Burke of the IRS. Messages left for Bank of New York Mellon representatives were not immediately returned.
Bank of America has until Feb. 10 to deposit the settlement amount, but real cash flows may take several more months, said Nomura Holdings Inc. analyst Paul Nikodem. Settlement payouts in previous cases were delayed as trustees sought clarification on the handling of some of the claims.
For Citigroup and JPMorgan, this week’s progress provides a “benchmark regarding potential timelines for IRS approval,” although that approval may take less time, he said. Trustees including U.S. Bank and Bank of New York Mellon sought court approval in August 2014 for a $4.5 billion agreement with JP Morgan over similar claims. Citigroup announced a $1.13 billion pact in April 2014.
The Countrywide agreement dates to 2011 when Bank of America agreed to settle with 22 institutional investors such as BlackRock Inc. and Pacific Investment Management Co. Executives at the latter have called the terms “outstanding” for the investors. The case is separate from a $16.7 billion agreement to resolve the government’s mortgage probes into the bank.