(BAC) Bank of America Wins Dismissal of Lawsuit

On Thursday, the dismissal of lawsuit pertaining to the buyback of defective mortgage-backed securities (MBS), gave reprieve to Bank of America Corporation (BAC). The lawsuit was filed against BofA by a group of investors led by Walnut Place group.

The litigation charged BofA’s Countrywide Financial Corp. unit, which the bank acquired in 2008, of making wrong representations and warranties about the loans that backed these securities. The judge also dismissed Walnut Place’s allegation that Countrywide’s MBS trustee, The Bank of New York Mellon Corporation (BK), had not acted on its complaints regarding defective Countrywide loans.

The judge who dismissed the present litigation will also decide the fate of BofA’s $8.5 billion MBS settlement deal. In June 2011, the company had entered into an agreement to pay $8.5 billion for its legacy Countrywide mortgage repurchase and servicing claims.

This deal was struck between BofA, BNY Mellon, Pacific Investment Management Co., MetLife Inc. (MET), BlackRock Inc. (BLK) and group of about 20 investors who suffered large losses for their investments in MBS that were sold by Countrywide prior to the housing market failure. The agreement basically covered most of BofA’s legacy Countrywide-issued first-lien MBS repurchase exposure.

The deal hass yet to receive approval of the court. But some investors allege that BofA had secretly reached a bigger settlement deal with the large institutional investors, leaving the smaller ones with losses. They further argued that the settlement amount was too low.

Walnut Place is a pseudonym used by Boston-based hedge fund Baupost Group LLC. This is the second time that Walnut Place has lost an appeal against BofA. Last month, a U.S. Appeals Court had ruled that BofA’s settlement deal related to Countrywide MBS will be reviewed in the New York state court, instead of the federal court as demanded by Walnut Place.

Our Viewpoint

The deal, if approved, will not impact BofA’s financials as the company has already bore the brunt of the deal in the second quarter of 2011 by taking the reserves for $8.5 billion. Moreover, it will be a huge relief for the company as it has been facing a lot of lawsuits and investigations regarding various MBS sold by Countrywide.

Currently, shares of BofA have a Zacks #3 Rank, which translates into a short-term Hold rating. Additionally, we maintain our long-term Neutral recommendation on the stock.

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