Merrill Lynch & Co., which is now owned by Bank of America, has agreed to pay $315 million to settle a mortgage-securities lawsuit. Many observers believe this could well be the first of a long line of settlements. Investors are stepping up efforts to recoup losses from the mortgage meltdown. Bank of America had previously set aside funds for this settlement. Wells Fargo & Co. reached a similar settlement earlier this year with a group of pension funds for $125 million.
The Merrill Lynch agreement rates as the largest known settlement of a securities class-action case brought by investors in mortgage-backed securities that aren’t backed by the government. The case was brought by a variety of public retirement systems, including Public Employees’ Retirement System of Mississippi, as lead Plaintiff. It was alleged in the lawsuit that securities backed by pools of mortgages didn’t match up with sellers’ promises. The agreement will now go before U.S. District Court judge Jed Rakoff for approval. It should be noted that this judge rejected a $33 million settlement between Bank of America and the Securities and Exchange Commission proposed in 2009 before reluctantly approving a later $150 million agreement he called “half-baked justice at best.” Based on his prior rulings and observations, this settlement had better be real good or it may not get approval from Judge Rakoff.
Currently, there is a backlog of similar lawsuits against Bank of America and other big U.S. banks. Many large financial institutions are trying to put the financial crisis behind them and satisfy investor concerns about their future profitability. Stocks of major U.S. banks have been under pressure for all of last year, amid concerns about how much it will take to settle all of the claims arising out of the financial crisis. Perhaps Bank of America, which purchased troubled mortgage lender Countrywide Financial in 2008 and securities firm Merrill Lynch & Co. in 2009, has the greatest exposure in the mortgage litigation. Poor, and almost non-existent, regulation made it very easy for the big banks to hoodwink investors and now they are paying for their wrongdoing.
The Merrill Lynch lawsuit relates to about $17 billion in mortgage-backed securities. The lawsuit doesn’t say how much investors lost but touches on delinquency rates for individual securities. An amended Complaint filed in July 2010 alleged offering documents for the mortgage-backed securities either made untrue statements or omitted material facts regarding the underwriting standards purportedly used in originating of the underlying mortgages; the maximum loan-to-value ratios used to qualify borrowers; the appraisals of the properties underlying the mortgages; the debt-to-income ratios permitted on the loans; and the ratings of the mortgage pass-through certificates themselves.
It was alleged in the lawsuit that the delinquency, foreclosure and bank-ownership rates on the underlying mortgages have soared since issuance. As of June 2010, more than a third of the underlying loans in 15 of the 19 securities purchased by the Plaintiffs were more than two months behind in their payments, in foreclosure, or repossessed and owned by a bank, according to the lawsuit. In seven of these trusts, the rate is at or above 50%.
Bank of America has settled other mortgage-related cases for larger amounts, including a subprime-related securities suit by shareholders for $475 million, a subprime-securities class-action settlement stemming from the actions of Countrywide for $624 million, and $1.1 billion to bond insurer Assured Guaranty Ltd. to settle claims about poor-performing mortgage bonds guaranteed by Assured. Bank of America also agreed to pay $8.5 billion to settle claims by a group of high-profile investors that lost money on securities purchased before the U.S. housing collapse. That settlement still needs court approval.
There are many more securities cases working their way through the courts. For example, there are 13 federal securities lawsuits pending in Los Angeles against Countrywide Financial before U.S. Judge Mariana Pfaelzer. There are seven more cases awaiting final approval in that same court. Those include a $10 billion suit from insurer American International Group Inc. alleging Bank of America, Merrill Lynch and Countrywide packaged securities backed by defective mortgages.
Source: Wall Street Journal