Bank of America Corp.'s proposed $8.5 billion settlement with mortgage-bond investors, including BlackRock Inc. (BLK) and Pacific Investment Management Co., was approved by a New York state judge, except for some loan modification claims.

Bank of New York Mellon Corp., the trustee for more than 500 residential mortgage-securitization trusts, filed a petition in June 2011 seeking approval of the settlement, which aimed to resolve claims that the loans backing the bonds didn't meet their promised quality.

For Bank of America, the settlement is part of Chief Executive Officer Brian Moynihan's efforts to resolve liabilities tied to faulty mortgages that have cost the company at least $50 billion since the financial crisis, most inherited from its 2008 purchase of Countrywide Financial Corp.

"This clears a big hurdle for Bank of America," Paul Miller, an analyst at FBR Capital Markets Corp., said in a telephone interview. "It would've been a huge headache if it fell apart."

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.

Investor Accord

New York State Supreme Court Justice Barbara Kapnick in Manhattan authorized Charlotte, North Carolina-based Bank of America's accord with investors in a judgment issued today. She delayed the entry of the ruling until Feb. 7.

Kapnick qualified her approval of the pact, allowing some loan modification claims by investors to continue. She said the trustee "abused its discretion" on that issue "without exercising their potential worth or strength." It wasn't immediately clear how Kapnick's caveat would affect the settlement terms.

Lawrence Grayson, a spokesman for Bank of America, declined to immediately comment on the ruling. Kathy Patrick, a lawyer representing BlackRock and other institutional investors who back the settlement, and Matthew Ingber, a lawyer representing Bank of New York, didn't immediately return calls seeking comment on the ruling.

Bank of New York asked Kapnick to approve the accord under Article 77, a state law that allows trustees to seek judicial consent for their actions, saying the settlement benefits investors by giving them a known recovery instead of years of uncertain and costly litigation.

Nine Weeks

Kapnick presided over a nine-week settlement hearing that began in June and featured testimony from almost two dozen witnesses, including Bank of America's chief risk officer, Terrence P. Laughlin, who led the settlement negotiations for the lender.

Dozens of investors in the securities objected to the deal, led by American International Group Inc. (AIG), which said the settlement resolves claims for "pennies on the dollar" while losses totaled more than $100 billion. Only about 15 objectors remained as closing arguments in the hearing began in November.

'Bad Faith'

Kapnick found that the trustee "did not abuse its discretion in entering into the settlement agreement and did not act in bad faith or outside the bounds of reasonable judgment."

AIG said in a statement that it's "pleased that the court refused to approve the proposed settlement in its entirety" and found that the trustee acted unreasonably in agreeing to compromise billions of dollars of investor claims.

"We respectfully disagree with the other aspects of the court's ruling, which are not supported by the record and which set a dangerous precedent that could eliminate important protections for investors," said Jon Diat, a spokesman for AIG. "This case is very far from over because the settlement will not take effect until a variety of potential post-trial motions and appeals are resolved."

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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