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Last updated: August 31, 2011 1:57 am
Bank of America’s legal woes worsened as the biggest US bank by assets was sued for alleged breach of contract by US Bancorp over a $1.75bn pool of mortgages and investors moved to block a separate $8.5bn mortgage settlement.
US Bancorp, the Midwestern bank that is the nation’s sixth largest, said it was filing the suit on Tuesday in its role as trustee to investors who had bought into the mortgage pool, only to see the loans default “at a startling rate”. It said that by June this year, 46 per cent of the outstanding mortgages were in default or the homeowners were more than 60 days late with payments.
As with similar claims, US Bancorp said the high loss rate was the result of lax underwriting standards at Countrywide, the mortgage unit BofA acquired in 2008. US Bancorp demanded that BofA be forced to repurchase all of the loans because so many – “an extraordinary 66 per cent of the loans” in a sample – breached Countrywide’s stated lending requirements.
BofA, which last week unveiled Warren Buffett’s Berkshire Hathaway as a $5bn investor in a move that helped shore up its battered share price, said: “While we are still reviewing the complaint, we do not believe that the existing contractual documents give US Bank any right to demand that Bank of America Corp’s Countrywide subsidiary repurchase loans on a pool-wide basis, nor do we believe there is any basis in fact to demand a repurchase of every loan in this securitisation, the majority of which have either paid off or are current.”
BofA’s shares fell 3.2 per cent to $8.12.
Separately, a deal to settle claims related to other mortgage losses was put under further pressure on Wednesday when a group of investors and the Federal Housing Finance Agency joined the New York attorney-general in lodging objections in court.
In June, the bank agreed to pay $8.5bn to investors in mortgage-backed securities brokered with Bank of New York Mellon, which was trustee to the investors. But a resolution of the claims has been jeopardised because some of the investors, backed by the New York attorney-general, say the settlement is too small.
The number of opponents swelled on Wednesday and the FHFA, which is regulator to Fannie Mae and Freddie Mac, the government-backed entities that buy and insure mortgages, said it was reserving its right to object, although it noted it had no substantive disagreement with the deal.
On Monday, the Federal Deposit Insurance Corporation filed a notice stating it may also intervene because it did not have enough information to evaluate the settlement.
BofA said BNY Mellon had outlined a “very reasonable process in which it engaged in order to determine to settle”, adding: “We continue to believe those materials present compelling reasons why the settlement should be approved.”
In a third legal blow, the state of Nevada on Tuesday accused BofA in a court filing of “almost immediately” violating a 2009 settlement agreement it reached with Countrywide over predatory mortgage lending practices. As part of the multi-state, $8bn agreement, the bank was supposed to provide loan modifications to eligible borrowers. The attorney-general of Nevada said that the bank failed to do so and misled consumers. BofA said it would “vigorously defend” the suit.
In one piece of good legal news for BofA, Bloomberg reported that a US federal judge dismissed claims by BNP Paribas and Deutsche Bank against BofA over losses stemming from the European banks’ investment in notes issued to finance mortgages for which BofA acted as collateral agent.
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