In two settlements, one at the beginning of 2011 and the other at the beginning of this year, B of A paid a total of $10.08 billion (including cash and non-cash relief) to extinguish “substantially all” unresolved claims, as well as any future claims associated with loans sold to the government-sponsored enterprises. That settlement amount equates to roughly $0.09 on every dollar of the loans that were either in default or severely delinquent.
The trickiest bucket of all
The only bucket remaining, then, is the one related to Countrywide’s sale of mortgage-backed securities to institutional investors. The problem is that this slice of the liability pie — while representing only 46% of Countrywide’s mortgage origination volume from 2004 to 2008 — accounts for an inordinate share of B of A’s total liability. This is because the mortgages packaged into securities were the worst of the worst, both in terms of how they’ve performed and the adequacy of the underlying collateral.
As noted above, of the $846 billion in mortgages sold to the GSEs, a total of $111 billion, or 13%, have either defaulted or are severely delinquent. By comparison, of the $716 billion in mortgages sold to private investors, $190 billion, or 26.5%, are similarly situated. In addition, most loans sold to the GSEs are secured by first liens, whereas many of the mortgages sold to private investors are secured by second and/or third liens.
While the amount B of A will end up owing to purchasers of Countrywide’s MBSes remains a mystery, we know at least two things. First, it’ll probably be a generous amount. And second, whatever the amount, it’ll be a function of three different categories of cases making their way through the courts:
1). BoNY breach-of-contract: A proceeding in New York in which B of A is seeking judicial approval of an $8.5 billion breach-of-contract settlement between Countrywide, 22 institutional investors, and The Bank of New York Mellon Corporation (NYSE:BK) acting in its capacity as the trustee for $424 billion worth of MBSes.
2). Insurers breach-of-contract: A handful of cases — likewise in NY — that concern breach-of-contract actions brought by bond insurers like MBIA Inc. (NYSE:MBI) that insured Countrywide’s mortgage-backed securities against default.
3). Securities fraud: More than 20 cases in a federal court in California that address claims of securities fraud against Countrywide and an assortment of other Wall Street banks related to the sale of MBSes.
So, where does B of A stand?
If you’re an investor in B of A, it probably seems like the bank will never be done paying for its ill-fated decision five years ago to purchase Countrywide. But what I hope I’ve demonstrated here is that the end is indeed in sight. It’s just a ways off.
The bank has already put tens of billions of dollars in liability behind it with the GSE and servicing related global settlements. And by quarantining the lion’s share of remaining lawsuits into only two courts — the New York court overseeing the BNY Mellon settlement and claims by bond insurers, and the federal court in California presiding over the securities fraud charges — B of A’s legal team has positioned the bank to reach global settlements with the remaining litigants.
This isn’t to say that things couldn’t go awry, because they most certainly could. But the chances of that are decreasing with time.
The article The Single Biggest Threat to Bank of America Today originally appeared on Fool.com and is written by John Maxfield.
John Maxfield owns shares of Bank of America. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo.
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