January 3, 2011 / 8:52 PM / 9 years ago

Analysis: Bank of America's GSE deal leaves plenty unsettled

NEW YORK/WILMINGTON, Del (Reuters) - Bank of America Corp’s $3 billion settlement with Fannie Mae and Freddie Mac may have brought New Year cheer to the bank’s stockholders, but now comes the hard part: settling far larger and thornier claims made by private mortgage investors.

After Monday’s announcement, Bank of America still faces lawsuits stemming from $375 billion of mortgage-backed bonds.

Compared with the deal with government-backed Fannie Mae and Freddie Mac, those legal claims will be far more difficult and costly and the latest settlement does not change that, according to legal experts and lawyers representing investors.

“It’s much more difficult to settle,” Jack Williams, a professor at Georgia State University College of Law, said of the investor lawsuits. “It’s going to take a long time and it’s going to take a lot of information.”

Talcott Franklin, a Dallas-based lawyer representing asset managers, hedge funds and other investors who have stakes in at least $600 billion of residential mortgage bonds, said the deal might be encouraging because it shows a willingness to resolve claims.

However, he noted Bank of America was particularly eager to settle with the two government entities, which purchase nearly all home loans currently sold by mortgage originators. Investors, in contrast, do not have the same profitable relationship with the bank or its rivals, he said.

Bank of America’s stock jumped 5 percent on Monday as investors greeted the settlement as a sign the company would be able to contain demands that it buy back billions of dollars in soured home loans.

Those loans were packaged into bonds sold as top-rated investments, but their shoddy construction became apparent when the U.S. real estate market suffered its worst crash since the Great Depression.

Investors ranging from hedge fund managers to several Federal Home Loan Banks have sued Bank of America and its Wall Street rivals and most want the banks to buy back the securities or loans backing them.

Money manager BlackRock Inc and bond fund Pimco are in talks with Bank of America over $16.5 billion of mortgage bonds they purchased.

Legal experts said the investor litigation will be tougher to resolve in part because the claims stemming from the loans sold to Fannie and Freddie may have been easier to settle.

The government-sponsored enterprises often had higher standards and well-understood eligibility guidelines for the mortgages they purchased. As a result, the lower quality loans were shipped off to other investors.

Williams, who has been researching legal issues surrounding mortgage securities, said Monday’s deal may even wear down some of the resistance of bond trustees, who have been a hurdle to investor lawsuits.

That could lead to an increase in new complaints against the Wall Street banks, but he did not think Monday’s settlement would expand the range of investors considering a lawsuit.

Investors also have a bit of momentum on their side, thanks to some recent court rulings.

MBIA, a bond insurer, recently overcame objections by Bank of America to the use of sampling from loan portfolios to prove the bank breached promises about the quality of its mortgage underwriting.

Bank of America had wanted MBIA to prove its case on a loan-by-loan basis, an incredibly expensive task in a lawsuit covering more than 375,000 mortgages.

In addition, the Federal Home Loan Bank of Pittsburgh recently overcame a motion to dismiss its case against several banks, including JPMorgan Chase & Co

Bank of America stockholders probably should not expect a settlement with private investors any time soon.

“It’s going to take a long time, it’s going to take a lot of information” to settle investor claims, said Williams.

Editing by Steve Orlofsky and Andre Grenon

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