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April 17, 2014

A Settlement on Soured Mortgages May Raise Questions on What Is Enough

“One of the unsettled questions from the financial crisis is whether the big banks have paid enough to cover the mortgage abuses they committed before the market collapsed.”

“A settlement announced on Wednesday that involves Bank of America indicates that, in some cases, the banks could have been made to pay more than they have.”

“Bank of America agreed to pay a combined $950 million to the Financial Guaranty Insurance Company, a bond insurer, and a group of investors that includes Fir Tree Partners, a New York hedge fund. In litigation, Financial Guaranty contended that Countrywide Fiinancial, the mortgage giant that Bank of America bought in 2008, had packaged defective home loans into bonds that were then sold to investors.”

“In recent months, Bank of America and other large banks have agreed to pay seemingly huge sums to settle lawsuits that contend they stuffed bonds with mortgages that fell far short of contractual standards. Last year, for instance, JPMorgan Chase agreed to a $13 billion deal over such claims.”

“But as large as the headline numbers might appear, some investors have voiced two chief criticisms. The settlements, they contend, effectively underestimated how many mortgages fell short of the bonds’ written standards. Also, the investors complain that they, not the banks, end up bearing some of the settlements’ costs. For instance, the big government settlements have required the banks to write down the value of the loans in the bonds to help make them more manageable for stressed borrowers. The investors bear any losses caused by such write-downs — not the banks.”

“But investors said the Bank of America deal announced on Wednesday was different.”

“In a statement, Fir Tree applauded the settlement, saying it provided “excellent value for bondholders.” The investors holding nine Countrywide bonds are receiving $365 million in cash from the deal. Fir Tree said that Bank of America had already made payments on seven of the nine bonds, and that it expected the remaining payments to be made within 45 days. Under other settlements, investors have had to wait for months for payment. Fir Tree said the deal was also not subject to a court approval.”

“Financial Guaranty received $584 million in the settlement because the company had backstopped the securities and had to make good on the bonds’ payments when the underlying mortgages soured, thus suffering losses.”

***

Read full New York Times article here.

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