FDIC: Bank of America Mortgage Bond Settlement is Not Good Enough

The Federal Deposit Insurance Corporation (FDIC) has filed an objection to a proposed $8.5 billion mortgage-bond settlement between Bank of America (NYSE:BAC) and investors. In so doing, the FDIC joins other investors and states challenging the agreement. The FDIC is claiming that it owns securities covered by the settlement but doesn’t have enough information to evaluate the accord, as it states in a federal court document filed Monday in Manhattan, and is seeking additional information in order to evaluate potential claims.

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The $8.5 billion agreement would have Bank of America paying to resolve claims from investors in Countrywide Financial Corp. mortgage bonds, which Bank of America acquired in 2008. Though the settlement was negotiated with a group of institutional investors, including BlackRock Inc. (NYSE:BLK) and Pacific Investment Management Co. LLC, it would apply to investors outside that group.

Bank of New York Mellon (NYSE:BK), which acts as trustee for the mortgage-securitization trusts covered by the agremeent, has asked a New York state judge to approve the settlement in November, but an investor group is trying to move the case to federal court. Investors who are not part of negotiations but who would be bound by the settlement have criticized the deal and the role being played by Bank of New York in representing investors. Both New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden have also objected to the settlement, and urged the court to reject it. Now that the FDIC has involved itself, it is less likely the settlement will be approved.

FDIC Spokesman Andrew Gray said in an e-mail that the FDIC doesn’t generally comment on pending litigation. “This filing is simply a formal notice to preserve our right to make claims as a part of the settlement and seeks additional information to evaluate those potential claims,” said Gray. “It is not an evaluation or opinion on the settlement itself.”

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If the settlement is rejected by the court, Bank of America (NYSE:BAC) will re-enter negotiations, which will no doubt result in a more expensive deal. If it does gain approval, according to analyst Paul Miler at FBR Capital Markets, “then that’s going to be a big positive, because that starts to ring-fence those private-label losses, and we can start to move forward and say ‘This is what we think the losses are going to be.'”