Can Bank of America Ink This $8.5B Settlement?

Money

More than five years have passed since the housing market bubble burst — causing a credit crisis and leaving financial institutions stuck with securities that had lost much of their value — and the federal government is still attempting to assign responsibility for the problems that drove the mortgage boom and the subsequent collapse of the housing market.

Thanks to its 2008 acquisition of Countrywide Financial, Bank of America (NYSE:BAC) has been a key player in the government’s quest. It has been drawn into federal court for years regarding its mortgage business. Countrywide has been a milestone of sorts, hung around Bank of America’s neck; the brokerage only cost $4.1 billion, but to settle claims of a wide range of financial misconduct perpetrated by Countrywide Financial alone, Bank of America has spent more than $45 billion.

Furthermore, the bank’s troubles are lingering. In 2011, Bank of America agreed to a $8.5 billion settlement that was meant to put to rest claims made by a group of mortgage-bond investors, including American International Group (NYSE:AIG), BlackRock (NYSE:BLK), and MetLife (NYSE:MET) that Countrywide has misrepresented the condition of the mortgages underlying its securities.

Yet, the lawsuit has been drawn out. The problem is that the $8.5 billion “looked minuscule” to sophisticated investors, a lawyer for those opposed to the agreement told a Manhattan judge, according to Bloomberg. “This unprecedented settlement should not be approved because it’s the result of a flawed and conflicted process,” Daniel Reilly, an attorney for AIG, the lead objector to the settlement, told New York State Supreme Court Justice Barbara Kapnick Tuesday during closing arguments of a hearing on the agreement.

Those closing arguments represent the end to a hearing that began in June, lasted eight weeks, and included testimony from almost two dozen witnesses and evidence from more than 200 documents.“To sophisticated investors, the number looked minuscule compared to the hundreds of billions of dollars in losses,” Reilly added. “The process was in the dark, and the relief requested sent up red flags in the financial community and with those who invest in mortgage-backed securities.”

Court documents, seen by Bloomberg, show that the discussion that led to the agreement was “plagued by conflict and collusion” and that investor losses totaled more than $100 billion. While almost four dozen investors — including AIG — object, around two dozen institutional investors like BlackRock and Pacific Investment Management Co. have backed the deal. Bank of New York Mellon Corp. (NYSE:BK) has used its position as trustee for more than 500 residential mortgage-securitization trusts to file a petition in June 2011 for the settlement to be approved under a state law that allows trustees to seek judicial consent for their actions.

In the civil fraud suit brought by the Department of Justice, concerning mortgage loans sold to the government-owned mortgage financiers Fannie Mae or Freddie Mac, the federal government alleged that Countrywide sold Fannie Mae and Freddie Mac billions of dollars of toxic mortgage loans. Specifically, the complaint claims that between “at least 2007 through 2009,” Countrywide, and later Bank of America, implemented a new loan origination process — known as the “Hustle,” the “High Speed Swim Lane,” or HSSL — which was “intentionally designed” to process loans quickly and without quality checkpoints.

This process allegedly generated thousands of fraudulent and otherwise defective residential mortgage loans that were sold to the government-owned mortgage financiers and subsequently defaulted. Officer Brian Moynihan has made it his expressed goal to clean up the institution’s legal docket, but the bank’s efforts to dismiss the government’s latest accusations of fraud at Countrywide failed and the subsequent lawsuit, which began in late September, became the only government case linked to crisis-era financial misconduct to reach the trial stage.

In late October, a federal jury in Manhattan found Bank of America liable for those faulty loans. Federal prosecutors in New York sued the institution over the mortgage program it inherited from Countrywide as well.

Follow Meghan on Twitter @MFoley_WSCS

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