Finally: $8.5B Countrywide mortgage bond settlement gets green light

Payouts set to reach burnt investors as soon as June

Ending a legal quagmire that stretched back to 2011, investors are finally set to receive their money from an $8.5 billion settlement involving Bank of America, mortgages originated by its Countrywide unit, and the Bank of New York Mellon, which acted as the trustee for the mortgage bond investors.

The parties originally agreed to the $8.5 billion settlement five years ago, but since then, a legal battle raged over whether Bank of New York Mellon had the authority to settle.

Here’s a sampling of HousingWire’s coverage of one of the legal battles, in 2012:

The case ties back to BoNY's decision, as trustee off loans in a securitized trust, to settle with Countrywide on behalf of RMBS investors over losses on loans originated by the closed lender.

Bank of New York Mellon and Countrywide agreed to settle last summer. But investors with loans in the trust pushed back, suggesting the settlement would rob them of an opportunity to represent their own interests.

Click here for access to the more than 800 articles and/or blogs HousingWire posted on Countrywide.

Here's the latest: Last year, the Appellate Division of the New York Supreme Court ruled that BNY Mellon properly executed its duties in settling all the claims, but that wasn’t the last legal hurdle.

The last hurdle was cleared earlier this week, as a New York state judge approved the “Severance Order and Partial Final Judgment” for 512 of the 530 trusts that are subject to the $8.5 billion settlement, according to a note from analysts with Wells Fargo.

The Wells Fargo Securities analysts, Vipul Jain and Neil Delap, write that the severance order allows for payment to be made to the 512 “Initial Release Trusts,” while legal proceedings on the 18 “Remaining Trusts” will continue.

According to the Wells Fargo analysts, The Partial Final Judgment dictates the timing and manner by which BNY Mellon should distribute the settlement proceeds.

The Wells Fargo analysts state that payments are expected to reach investors in June, a full five years to the month after the settlement agreement was originally entered into the New York Court System.

According to Wells Fargo’s note, one of the issues that held up the settlement was the issue of “overcollateralization leakage,” which refers to how the money will be paid out to the senior certificates and the subordinate certificates.

In a previous report, Wells Fargo’s analysts discussed the issue:

The conditions of the Settlement Agreement state that the funds are to be distributed to each Trust as if it were a “Subsequent Recovery.” However, in many cases this allows significant “leakage” of funds to the subordinated certificates at the expense of the senior certificates due to the design of the overcollateralization triggers.

But that issue is resolved now.

Again from Wells Fargo, this time from the most recent note:

According to the final ruling, for the Initial Release Trusts, the trustee shall, for the purposes of determining the principal distribution, calculate the OC amount to account for the paydown of the certificate balance and the write up of the certificate balance in an amount equal to the trust’s allocable share plus and ordinary subsequent recoveries.

Wells Fargo’s analysts also noted the “finality” of this ruling, quoting the judge: “All issues concerning the Initial Release Trusts are severed for full and final resolution herby, with proceedings concerning the remaining trusts to continue according to law.”

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