Bank of America won approval Friday for an $8.5 billion settlement with investors over losses from home loans originated by the bank’s Countrywide unit.
The settlement could be a big step forward for the Charlotte-based bank in its attempts to resolve costly litigation that has dogged it since the financial crisis. The accord is also the largest settlement the bank has reached with private investors since the financial-industry meltdown.
At least one investor in the mortgage-backed securities said Friday it plans to appeal the ruling.
“This case is very far from over because the settlement will not take effect until a variety of potential post trial motions and appeals are resolved,” a spokesman for insurer American International Group said in a statement.
A New York state judge approved nearly all aspects of the settlement, which was struck nearly three years ago and involves 22 large investors, including BlackRock, Freddie Mac and MetLife.
Justice Barbara Kapnick of the State Supreme Court in Manhattan did not approve a portion of the settlement involving modified loans. Settlement opponents claimed that Bank of America is required to repurchase loans that are modified. Kapnick said it appears that Bank of New York Mellon, the trustee overseeing the securities, failed to evaluate the claim.
Bank of America spokesman Lawrence Grayson said the bank is pleased that the settlement has been approved.
“Any outstanding issues raised in the opinion can be addressed without undue delay,” Grayson said.
Analysts have closely followed the case since the settlement was reached in June 2011. One reason why, independent bank analyst Nancy Bush said, is that Bank of America might have faced higher legal costs if the settlement were rejected and the bank was forced to deal with the investors separately. The case was also seen as a “guidepost” to how similar settlements might be handled in the future, she said.
The settlement comes after Bank of America has already paid a $55.8 billion price tag for legal entanglements since the crisis. Analysts, who say such litigation has weighed on Bank of America’s stock, said Friday’s ruling was good news for the bank.
“As the company is able to cut the legal liabilities ... from the cost that it needs to spend, it’s able to reinvest that within its own businesses,” said Dan Marchon, a bank analyst for Raymond James & Associates.
“For years, the stock underperformed because of headline risk specifically regarding anything with mortgage banking, because they acquired Countrywide and because they acquired them at such a bad time.”
The case involved 1.6 million Countrywide mortgages that were turned into bonds and sold to investors. The mortgages included prime and subprime loans, according to documents.
Bank of America, then led by CEO Ken Lewis, bought Countrywide in July 2008, as the mortgage lender verged on collapse and the financial crisis was yet to hit its peak. Current CEO Brian Moynihan has been resolving the bank’s legal challenges stemming from the crisis.
Bank of New York Mellon entered into the settlement with Bank of America. Investors said the trustee shirked its obligations and acted in bad faith in the settlement negotiations by failing to represent their interests. The trustee put Bank of America’s interests before those of investors, they claimed.
Kapnick’s ruling, though, says Bank of New York Mellon acted in good faith and “did not abuse its discretion” in entering into the settlement. But, she said, there was “an apparent failure” by the trustee to evaluate the loan modification claims.
The settlement calls for Bank of America to implement, among other things, improvements to the way it services mortgages.
Objectors to the settlement, such as AIG, have claimed that the $8.5 billion falls far short of what investors lost. AIG has calculated losses to investors at $108 billion.
Friday’s ruling comes after the U.S. government this week increased the amount of penalties it wants Bank of America to pay three months after a jury found its Countrywide unit guilty of knowingly selling bad home loans to Fannie Mae and Freddie Mac.
The government is seeking $2.1 billion in penalties, up from $864 million, after a jury in the civil case found Countrywide Financial Corp. and former executive Rebecca Mairone guilty of fraud over the defective mortgages. The mortgages were generated in a process nicknamed “Hustle” and which the government said handled loans at a fast pace and without regard for quality.
Bank of America is defending itself in other cases stemming from the financial crisis. A look at some:
• A trial has yet to begin for a separate case involving AIG, which has sued Bank of America, Merrill Lynch and Countrywide, claiming they misrepresented loans that went into mortgage-backed securities.
• A trial also has not begun in a lawsuit involving the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. The agency sued Bank of America and some other banks, alleging misrepresentation on mortgage-backed securities that were sold to Fannie Mae and Freddie Mac and later went sour.
Bank of America shares closed down 1.06 percent Friday to $16.75.
Roberts: 704-358-5248; Twitter: @DeonERoberts