By Karen Freifeld and Rick Rothacker
NEW YORK/CHARLOTTE, N.C. Feb 4 A group of
mortgage-backed securities investors says Bank of America Corp
failed to buy back more than $30 billion in loans from
investors after the bank modified the mortgages to reduce
The allegation, made in a letter sent to a New York state
judge on Friday, is the latest legal volley over a proposed $8.5
billion settlement that would help the bank, No. 2 in the United
States by assets, resolve investor claims from its 2008 purchase
of subprime lender Countrywide Financial.
The letter was written by attorneys for the Federal Home
Loan Banks of Boston, Indianapolis and Chicago and for Triaxx
funds. They are part of a group that has objected to the
proposed settlement. The letter says the trustee that
negotiated the pact, the Bank of New York Mellon Corp,
should investigate the group's claims.
If the settlement receives court approval, it would help
Bank of America put to bed one more claim stemming from its
disastrous Countrywide acquisition. If it fails to win approval,
the bank could face an even higher legal tab.
The letter also accused Bank of America of self-dealing in
connection with the loan modifications, saying it modified first
mortgages, which were owned by investors, but left intact home
equity loans owned by Bank of America.
"Modifying mortgages for homeowners in severe distress is
critical to the ongoing economic recovery and is encouraged by
government at all levels," Bank of America spokesman Lawrence
Grayson said in response to the letter. "It is difficult to see
how federally regulated entities like the Federal Home Loan
banks would seek to attack that practice, which helps families
to stay in their homes and in no way violated the contracts at
In one example cited in Friday's letter, a loan was reduced
to $243,703 from $639,581, resulting in a loss of more than
$400,000 to a 2006 trust, while Countrywide's $82,850 second
lien on the property was not modified.
"A short sale or foreclosure would have been a much better
strategy than loan modification," according to the letter.
Recent activity suggests the property is worth between $550,000
and $650,000, it said.
Grayson denied the bank engaged in self-dealing or put the
bank's interests above those of investors. The bank has
extinguished more than $10 billion in second-lien mortgages that
were held by the bank in instances in which the first-lien
mortgage was with another investor, he said. The three loans
cited as examples in the letter had their second lien loans
modified, he added.
Under the proposed settlement, Bank of America would pay
$8.5 billion to settle claims that its Countrywide unit sold
low-quality mortgage-backed securities that went bad when the
housing boom collapsed.
The proposed settlement, announced in June 2011, was
negotiated by Bank of New York Mellon as trustee for 530
residential mortgage-securitization trusts, with an estimated
$174 billion of unpaid principal.
Twenty-two institutional investors, including BlackRock Inc
, MetLife Inc and Allianz SE's Pacific
Investment Management Co, agreed to the $8.5 billion settlement.
"As trustee, we have complied with our duties under the
agreements and will follow any direction the court issues in
connection with the letter," Bank of New York Mellon spokesman
Kevin Heine said.
Kathy Patrick, of the law firm Gibbs & Bruns, who represents
the 22 institutional investors, said the issues raised in the
letter date back to 2009 and were considered fully at the time
of the settlement. "That Triaxx seeks to resurrect this issue
more than three years later says more about its litigation
tactics than it does about the settlement," Patrick said.
Friday's letter prompted responses that were sent to the
court on Monday. Monarch Alternative Capital, an investor in the
Countrywide securities, urged the court to approve the
settlement, while a lawyer for Bank of New York Mellon said the
issues brought up in the letter were already raised in 2009.
Justice Barbara Kapnick of New York State Supreme Court in
Manhattan must decide whether to approve the deal. A hearing in
the case is scheduled for Thursday.