Six Federal Home Loan banks launched a salvo against Bank of America Corp.'s proposed $8.5 billion mortgage bondholder settlement, suggesting the payout may need to be triple that amount.
In a brief filed Thursday with Judge Barbara Kapnick of New York Supreme Court, attorneys for the six FHLBs argue that research reports used to determine the settlement figure were too favorable to B of A, used faulty estimates from the Charlotte, N.C., bank and "raise more questions than they answer."
The FHLBs are not formally objecting to the proposed settlement, at least not yet. But they are seeking to intervene as a party in the proceeding, which would grant them the right to oppose the settlement if they decided to do so. They filed the petition "precisely to gather additional information through the disclosure process."
Together, the six FHLBs - of Boston, Chicago, Indianapolis, Pittsburgh, San Francisco and Seattle - own certificates in 73 of the 530 Countrywide trusts that are part of the proposed settlement, for which they paid more than $8.8 billion.
The Federal Home Loan Bank of Atlanta is already among the 22 large investors, including Pimco and BlackRock Inc., that entered into the proposed settlement, which was announced in late June, that allows for a certain number of investors to opt-out and attempt to negotiate a better deal on their own or sue.
The other Federal Home Loan banks and coalitions of smaller mortgage-backed securities holders have pursued litigation separately.
The six FHLBs that filed the petition claim the settlement figure is too low and only takes into account that 36% of loans originated by Countrywide Financial Corp., which B of A acquired in 2008, would go into default and also breach specific investor underwriting standards.
Such assumptions are "inconsistent with widely publicized reports by professional loan auditors that even Countrywide loans that are merely delinquent (that is, behind on payments but not yet in default) have a 'breach rate' of well over 60% and often as high as 90%," the banks stated. "It is hard to imagine why a court would not require Countrywide and Bank of America to repurchase all loans, not just 40% of loans, that are both in default and have breached a representation or warranty."
The FHLBs take aim at Bank of New York Mellon, which is in charge of administering the securities trusts for investors, and two independent researchers — Brian Lin, a managing director at New York advisory firm RRMS Advisors and Robert M. Daines, a professor at Stanford Law School.
Bank of New York Mellon declined to comment on the petition.
The banks claim the $8.5 billion settlement figure was based on overly optimistic assumptions, some of which were provided by B of A and did not pertain to the specific portfolios of loans. They say Lin adopted Bank of America's estimates of defaults "which in turn appear to have been based on a completely different portfolio of loans that were subject to the underwriting standards imposed by Fannie Mae and Freddie Mac."
Lin also estimated that the trusts would recover between 45% to 60% of the principal balances of the loans through foreclosure.
"Both of these assumptions are quite controversial," the banks said in the filing.
The FHLBs argue that the research was too favorable to B of A and essentially reduced the amount that the trusts could potentially recover to $61.3 billion, from $208.9 billion.
The FHLBs are not the first to argue that the proposed settlement has holes. An activist investor under the name 28 Walnut Place LLC filed a brief with the court earlier this month seeking to exempt itself from the deal, saying it failed to adequately compensate investors for their losses on the Countrywide loans.
