Bank of America’s Countrywide agrees to $500 million mortgage settlement; Maine retirement system to benefit
LOS ANGELES — Bank of America Corp.’s Countrywide unit has agreed to pay $500 million to settle a lawsuit, in which the Maine Public Employees Retirement System is a plaintiff, over billions of dollars in residential mortgage-backed securities that were downgraded to junk.
The accord will end a class-action, or group, lawsuit, led by the Iowa Public Retirement System, lead plaintiffs’ attorney Steven Toll of Cohen Milstein Sellers & Toll said Wednesday in a statement. The settlement, which couldn’t immediately be verified in court records, requires a judge’s approval, Charlotte, N.C.-based Bank of America said in a filing with the Securities and Exchange Commission.
The consolidated lawsuit filed in 2010 sought damages over $351 billion in downgraded Countrywide mortgage-backed securities after the 2007 subprime collapse. The lawsuit was the largest in terms of securities at stake among dozens of cases brought against lenders and underwriters.
“After five years of hard-fought litigation, this record- breaking recovery is a tremendous result for [mortgage-backed securities] investors misled by Countrywide,” Spencer Burkholz, a partner at Robbins Geller Rudman & Dowd, who represents the Maine Public Employees Retirement System, or MainePERS, said in an email.
Sandy Matheson, executive director of MainePERS, said she heard the news of the settlement Wednesday morning.
“We’re participants in a class-action lawsuit, which means we’re not directly involved in the litigation,” she told the Bangor Daily News.
She couldn’t yet say how MainePERS will benefit from the settlement.
“It is going to be a long time before all the details will be worked out, because there are a lot of participants in the lawsuit,” she said.
U.S. District Judge Mariana Pfaelzer in Los Angeles narrowed the case to $2.6 billion in bonds and dropped Bank of America as a defendant.
The case isn’t covered by the $8.5 billion settlement between Bank of America and 22 institutional investors in Countrywide mortgage-backed securities, also referred to as MBS. Investors’ rights to receive trust distributions upon final approval of that accord won’t be affected by the Los Angeles settlement, the bank said.
“After five years of hard-fought litigation, this record- breaking recovery is a tremendous result for MBS investors misled by Countrywide,” Spencer Burkholz, a partner at Robbins Geller Rudman & Dowd, who represents the Maine State Retirement System, said in an email.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the United States into the biggest recession since the 1930s.
After the market for the securities evaporated, bankers and underwriters being sued argued that offering documents for those bonds adequately warned of risks. They claimed the securities performed as intended and investors were paid what they were owed from underlying mortgages.
Investors in the Los Angeles case against Countrywide alleged that offering documents for the mortgage-backed bonds didn’t disclose that the company was disregarding its guidelines for originating home loans. The value of the securities plunged when they were downgraded to junk in 2008 and 2009, the investors claimed in court documents.
Countrywide was once the biggest U.S. residential home lender, originating or purchasing about $1.4 trillion in mortgages from 2005 to 2007. The company sold the bulk of those loans to investors as mortgage-backed securities. Bank of America acquired Countrywide in 2008.
The settlement announced today is expected to resolve about 80 percent of the unpaid principal balance of Countrywide-issued mortgage-backed securities over which claims have been filed or threatened, Bank of America said. It will resolve about 70 percent of the unpaid principal balance of all such securities over which claims have been filed or threatened against all Bank of America-related entities, the company said in its filing.
As of February, the unpaid balance of these securities excluding those that are the subject of individual claims or threatened litigation, was $95 billion, Bank of America said.
BDN Business Editor Whit Richardson contributed to this report