June 30, 2011
BankAmerica Agrees to Pay $8.5 Billion to Settle Mortgage Loan Litigation
On June 29, 2011 BankAmerica announced that they had reached an agreement to make an $8.5 billion cash payment to settle litigation related to repurchase and servicing claims from the origination and underwriting of loans included in residential mortgage backed securities transactions issued between 2004 and 2008. The litigation was initiated by 22 large institutional investors and covers 530 Countrywide, non-agency mortgage trusts with an original principal balance at issuance of $424 billion. The cash payment will not be paid directly to the parties to the lawsuit but rather to the Trustee, Bank of New York Mellon, for the benefit of the covered trusts and all the investors in those trusts. The settlement does not cover loans originated by Countrywide and other BankAmerica entities that were sold into non-Countrywide, private label mortgage trusts or loans sold to third parties.
The payment will be allocated among the covered trusts based upon the aggregate forecast losses of each securitization. An expert firm, National Economic Research Associates (NERA), has been engaged to estimate total cumulative losses over the life of each transaction including both current as well as future losses. Each trust will receive an allocable share of the $8.5 billion settlement based upon its pro rata share of the total aggregated losses of all the securitizations. The net result is that those trusts experiencing the highest delinquencies and losses will garner the greatest share of the settlement. The payment is subject to the approval of the Supreme Court of the State of New York. Once the settlement is finalized and approved by the court, NERA will have 90 days to forecast losses for the trusts and allocate the settlement and thereafter BankAmerica will have 30 days to transfer funds to the Trustee. Based upon the timely approval of the settlement by the court, which could take several months, funds should be disbursed to investors early next year.
Settlement amounts are to be paid directly into each trust’s certificate collection account and those funds will then be distributed to investors according to each securitization’s unique pooling and servicing agreement which stipulates the priority of principal repayment. The amounts received will be treated as “subsequent recoveries” which effectively treats the proceeds as an unscheduled principal payment. While not all securitizations are the same, this means that the majority of the monies will be disbursed as principal prepayments to current pay, sequential bonds and pass-through securities. Longer dated NAS and locked out sequential bonds will receive little if any of the settlement proceeds. The amount of the allocated settlement will also be used to reverse losses previously allocated to subordinate bonds in reverse order in which those losses were realized. The subordinate bonds will not receive actual principal payments, but will have their outstanding balances increased to the extent that prior losses were reversed. This will make the securities eligible to receive greater interest payments in future periods based upon a higher outstanding balance. There is an exception to this rule, however, to the extent that should all of the subordinate bonds of a transaction been written off and the senior bonds being allocated losses, then the subordinate losses can not be reversed and any balance increases are limited to the senior bonds.
While this $8.5 billion settlement is a considerable amount of money and represents a landmark win for investors, we believe that the recoveries by individual investors will be quite modest once the settlement is allocated across a large number of deals. When compared to the approximately $97 billion in defaulted and seriously delinquent loans in the covered transactions, it’s fairly evident that this settlement will not go very far in covering the expected future losses on these transactions.
Please feel free to contact your AAM Portfolio Manager or Joel B. Cramer, CFA, Director of Sales and Marketing at email@example.com should you have additional questions.
Scott A. Edwards, CFA
Director of Structured Products
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