Bank of America (BAC: 7.23 -0.96%) more than tripled its litigation expenses resolving mortgage problems from Merrill Lynch and Countrywide Financial Corp. in 2011, but they appear to be making at least some progress.
In the first nine months of 2011, the bank spent $3.8 billion in litigation expenses, up from $1.2 billion over the same period last year. Where an estimate is possible, the bank said in its third-quarter financial filing, a range of possible losses from a wide-array of pending lawsuits could total as high as $3.6 billion.
The bank did hedge itself, clarifying in its filing that it does not represent a maximum loss given many uncertainties.
"The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate," BofA said.
The cases name either BofA or its two acquisitions as issuers, sellers, underwriters or sponsors of mortgage-backed securities or the originator of the underlying loans that defaulted. Among the many claims, BofA is juggling defenses for how underlying properties were appraised; allegedly fraudulent disclosures of loan-to-value ratios; and other faulty underwriting practices.
The most recent sign of headway came at the end of October. BofA and the Public Employees' Retirement System of Mississippi – which bet heavily on the mortgage markets during the bubble – reached a settlement pending approval in the U.S. District Court for the Southern District of New York.
Bank-rating firm Institutional Risk Analytics said the issue surrounds roughly 18 MBS offerings of $17 billion in original principal – of which they estimate investors lost $4 billion.
"While this settlement does not include the $30 billion or so in collateral default obligations claims still facing Merrill Lynch and (Bank of America), this proposed settlement is an important step to clearing the decks at (BofA)," said IRA's Chris Whalen.
On Oct. 21, The U.S. District Court for the Central District of California dismissed claims from Allstate alleging negligent misrepresentation and aiding and abetting fraud from millions in Countrywide RMBS deals.
The U.S. District Court for the Southern District of New York also denied a motion from American International Group's (AIG: 25.09 -0.20%) to move its $10 billion MBS case against BofA, Merrill and Countrywide to state court.
Problems remain. Shortly after BofA reached the settlement in the Mississippi case, a New York court denied its attempt to consolidate complaints filed against it from monolines, including MBIA, Syncora Guarantee, Financial Guaranty Insurance and Ambac Insurance.
Courts heard oral arguments from MBIA and Syncora on the same day Oct. 5. MBIA even sought rulings that it does not have to prove Countrywide's alleged fraud caused the monoline's losses.
The BNY Mellon (BK: 20.08 +0.40%) settlement saga remains ongoing. A number of 44 groups, including the New York Attorney General, the Federal Deposit Insurance Corp. and the Federal Housing Finance Agency, came forward to contest the $8.5 billion settlement over 530 MBS trusts containing $424 billion in Countrywide loans, claiming the dollar figure isn't enough.
Late in October, U.S. District Court of the Southern District of New York Judge William Pauley III denied BNY Mellon's motion to move the case to state court.
BofA said it can't even predict how many groups will intervene let alone how long it would take to resolve the objections.
"It is not currently possible to predict how many of the parties who have appeared in the court proceeding will ultimately object to the BNY Mellon Settlement, whether the objections will prevent receipt of final court approval or the ultimate outcome of the court approval process, which can include appeals and could take a substantial period of time," BofA said in its filing.
BofA can withdraw from the settlement if isn't approved by the end of 2015.
Then, there's Fannie Mae and Freddie Mac. Their regulator sued BofA, Countrywide and Merrill – along with 14 other institutions – over a combined $57.4 billion in MBS sold to the government-sponsored enterprises allegedly laced with fraudulent disclosures. BofA was responsible for $6 billion of the liability with the rest stemming from Merrill and Countrywide.
BofA also said it faced roughly $11.7 billion in unresolved representation and warranty claims to buyback individual mortgages, up from $10.7 billion remaining at the end of 2010. The bulk of the new claims stem from Fannie and Freddie claims not covered by previous multibillion-dollar settlements.
Add it all up and it's easy to understand why BofA continues to search for new capital to fund its courtroom battles that could take years still. The bank received billions in capital from Warren Buffett, sales of its China Construction Bank stake and the shedding of other businesses – all while maintaining it does not face a capital shortfall.
"There is still a great deal of liability for BofA still pending the decision of the courts," Whalen said.
Write to Jon Prior.
Follow him on Twitter @JonAPrior.
