* $8.5 bln mortgage bond deal likely to face challenges
* Investors need to organize or accept "low" settlement
* Deal faces legal hurdles and questions
(Adds comments in paragraphs 3, 5, 11, 12; background on other
large investor groups in paragraphs 16-18)
By Tom Hals
WILMINGTON, Del., June 29 Bank of America
Corp's (BAC.N) $8.5 billion settlement to clear up its mortgage
bond mess isn't a done deal and could be challenged -- if the
large number of investors locked out of negotiations decide to
The deal was struck with trustees for $424 billion of
mortgage bonds and has the backing of 22 institutional
investors including Pacific Investment Management Co (PIMCO), the
world's largest bond fund manager, and BlackRock Inc (BLK.N).
"I think people are surprised the number is as low as it
is," Gregory Taxin of Spotlight Advisors LLC, which advises
pension funds on mortgage bond investments, said of the
settlement. "You've seen a lot of research estimates that the
number was going to be five or more times this number."
The settlement needs court approval, and investors who were
on the sidelines are being urged by an advocate to put up a
"If investors were to open their mouths they can push for a
better and fairer settlement, or they can get 2 cents on the
dollar like they are getting," said Bill Frey of Greenwich
Financial, a firm that structures asset-backed securities.
He has been organizing pension funds and hedge funds that
hold mortgage bonds to demand Wall Street banks buy back soured
home loans that were packaged into bonds. He said investors
angry about the settlement had bombarded him with emails.
The 530 trusts in the settlement are governed by New York law,
and the deal requires it be approved by the state's supreme court.
The case was assigned to Judge Barbara Kapnick on Wednesday.
The trusts bought home loans from mortgage lender
Countrywide Financial, now part of Bank of America, and issued
bonds to investors with warranties about the quality of the
underlying loans. Money that flowed to the trusts from
homeowners paying down their mortgages was then distributed to
investors holding the bonds.
The main trustee, Bank of New York Mellon Corp (BK.N), will
have to show the judge it knows the percentage of loans that
breached warranties, and from that can value the settlement,
said Isaac Gradman, an attorney who has brought legal action
over mortgage bonds. He is not involved in the Bank of America
SETTLE OR LITIGATE?
The attorney who represented the 22 investors in the
settlement noted that five experts evaluated the pact.
"I have a hard time seeing how anyone could recover more
than this in six or seven years of litigation," Kathy Patrick,
a partner at law firm Gibbs & Bruns, told Reuters' legal blog
"On The Case."
"I don't know of any long-term holder of these certificates
who wouldn't think this is a good deal," she said.
Gradman questioned whether institutional investors
supporting the deal hold at least 25 percent of most of the
mortgage bonds, a level that allows them to direct the trustee
of a bond issue to strike a settlement.
"Does the investor group that negotiated this settlement
actually have standing in all 530 trusts? My sense is they
don't," said Gradman.
In a May securities filing, Bank of America said the 22
investors held at least 25 percent of 230 trusts. Wednesday's
settlement agreement does not specify the investors' holdings
in the 530 trusts.
Large groups of investors also have organized to fight for
compensation from other banks over mortgage bonds, which were
often sold to pension funds as low-risk securities but
plummeted in value during the housing crash.
Texas lawyer Talcott Franklin has developed a "clearinghouse"
of investors that he has said holds at least 25 percent of 3,763
out of 6,882 mortgage securitizations he has identified.
New York attorney David Grais has also led the charge against
Wall Street over soured mortgage bonds. Both Franklin and Grais
declined to comment.
Gradman said he expects a challenge to the Bank of America
deal but investors will need to organize quickly.
Investors, he said, could make a case for rejecting the deal
by exposing poor loan underwriting on bonds, and emphasizing the
investors backing the settlement hold small positions in some
"I don't think you can have this small group release all these
other claims. I think that would be compelling for a judge," he
The judge could order Bank of America to contribute more to
the deal or reopen talks with a bigger pool of investors, he
(Reporting by Tom Hals; Editing by Martha Graybow, Gerald E.
McCormick and Phil Berlowitz)