Countrywide Investors May be Entitled to $27.5B Instead of $8.5B

Bank of America may owe investors in soured Countrywide mortgage backed securities (MBS) $27.5 billion instead of the $8.5 billion it agreed to pay a group of Federal Home Loan Banks (FHLB), according to Reuters.

The FHLB banks in Boston, Chicago, Indianapolis, Pittsburgh, San Francisco and Seattle paid over $8.8 billion for mortgage backed securities (MBS) from Countrywide Financial Corporation, which was acquired by Bank of America in 2008. The banks are trying to figure out if the $8.5 billion deal announced last month is fair before attempting to challenge it. In New York state court filings, the banks say that the expert reports used to support the settlement by Bank of America “raises more questions than they answer” and might be based on false assumptions. The banks said that the expert reports are of little value since they appear to have been written in hindsight after the settlement was reached.

In particular, the banks focus on a report by Brian Lin, a managing director at mortgage strategist RRMS Advisors, that said a payout of $8.8 billion to $11 billion would be reasonable. However, the banks are saying that Lin might have underestimated the number of defaults, the ability to recover loan principal through the foreclosure process and the number of loans that the Bank of America should repurchase. The banks contend that if Bank of America were made to buy back all of the loans in default and which breached Countrywide’s representations and warranties, rather than the 40% Lin estimated the estimate of a reasonable settlement would increase from a range of $8.8 to $11 billion to a range of $22 billion to $27.5 billion.

The case is set for a hearing on the matter is scheduled for November 17, 2011. New York state attorney general Eric Schneiderman has requested more details from the 22 institutional investors that joined the accord, indicating he may line up to challenge the settlement as well.

The case is In re: The Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011.

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