It turns out, talk of Bank of America's proposed settlement with a group of institutional investors that suffered steep financial losses investing in mortgage-backed security issued by mortgage loan provider Countrywide Financial Corp. may be a bit premature.

Some of those investors, including six of the nation’s 12 regional Federal Home Loan Banks, have raised objections to the settlement being negotiated in New York State Supreme Court between BofA, which took over the failed Countrywide in a government-arranged deal back in 2008, and Bank of New York Mellon, the trustee 22 of those Countrywide investors.

In a court filing on Thursday in New York, the home loan banks, which are quasi-governmental, federally chartered bodies, say they need more information about the proposed settlement deal that would then have to be approved by a judge. They say that information in expert reports being used to support the settlement amount “raise more questions than they answer.”

Under the terms of the proposed settlement reached in negotiations between Bank of NY Mellon and Bank of America, BofA would use a reported $8.5 billion to compensate some of the losses suffered not just by the 22 investors for whom Bank of NY Mellon is trustee, but all of the investors in some 530 mortgage securitization trusts set up by Countrywide. 

But the FHLBs alone, which are not part of the Bank of NY Mellon group, claim they invested some $8.8 billion in Countrywide’s mortgage-backed securities.

At issue is the percentage of losses that BofA would be required to return to beleaguered investors. 

The FHLB banks claim that the proposed settlement calls for BofA to buy back only 40% of the mortgage-backed securities that are in default. If that figure were raised to 100%, they said, the amount set aside for a “reasonable” settlement would have to be between $22.5 billion and $27.5 billion -- a figure roughly three times as large as the proposed settlement.

In their filing, the banks argue that modifying any of the other terms of the proposed settlement could make the ultimate settlement “rise much more” than even that figure.

The FHLBs that are challenging the settlement are based in Boston, Chicago, Pittsburgh, Seattle, San Francisco and Indianapolis.

Bank of America’s position is that the large investors in Countrywide’s securities had a fiduciary responsibility to investigate and evaluate the securities in question, and that it is “hard to believe” that they didn’t know what they were buying.

Earlier this month, another group of investors in Countrywide’s mortgage-backed securities, identified as Walnut Place LLC I-XI, also filed a petition with the court in which they objected to the proposed settlement. These investors claim that Bank of New York Mellon was trying to reach an agreement on behalf of 22 investors for whom it was trustees but which would then apply to all investors in Countrywide’s securities.

That petition seeks the right to intervene and block the settlement on behalf of other affected investors. It accuses Bank of New York Mellon of having negotiated the proposed settlement with Bank of America “in secret” and claims the bank “made no effort to inform Walnut Place or the hundreds of investors in Countrywide trusts” that it was negotiating with BofA.

This petition asks that the Walnut Place investors be excluded by the court from any settlement negotiated between Bank of New York Mellon and Bank of America.


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