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HSBC plans $420M suit against Merrill Lynch, Bank of America for toxic Countrywide loans

HSBC claims Merrill Lynch, BofA knew loans were bad, securitized them anyway

HSBC Bank notified a New York state court this week that it plans to file a $420 million lawsuit against Merrill Lynch and Bank of America, claiming that both Merrill Lynch and Bank of America knew a series of Countrywide mortgage loans were toxic and allowed the loans to be securitized nonetheless.

According to legal documentation filed this week in the Supreme Court of the State of New York, HSBC is the trustee of a residential mortgage-backed securities trust from 2007, Merrill Lynch Alternative Note Asset Trust, Series 2007-OAR5.

In its role as trustee, HSBC plans to sue because it claims that Merrill Lynch and Bank of America were aware of the rampant breaches of the securitization’s representations and warranties, but refused, on many occasions, to notify HSBC of the defective loans, as well as refusing to cure or repurchase the loans.

Reps are loan conditions assumed to be true; warranties are investor protections when all is not as the reps claim.

HSBC claims “no less than” $420 million in damages from the alleged inaction of Merrill Lynch, Bank of America, and Countrywide.

HSBC’s summons with notice claims that on or about Oct. 31, 2007, Merrill Lynch securitized approximately 1,359 mortgage loans that carried a total unpaid principal balance of approximately $564,765,703.

According to HSBC’s filing, Merrill Lynch bought more than 90% of the loans (by dollar amount) from Countrywide, and purchased the remainder from other mortgage companies, including Merrill Lynch’s own affiliated companies.

The loans were then securitized and place into a RMBS trust, Merrill Lynch Alternative Note Asset Trust, Series 2007-OAR5.

In each company’s role, both Countrywide (and later Bank of America) and Merrill Lynch are required to notify the trust’s trustee, HSBC in this case, of any breaches of the loans’ rep and warrant policies.

According to the filing, a review of the 1,359 loans in Merrill Lynch Alternative Note Asset Trust, Series 2007-OAR5 found that there were rep and warrant breaches in 973 of the loans, or more than 71% of the entire RMBS trust.

HSBC claims that Merrill Lynch discovered at least some of the defective loans when the loans were initially securitized and in the years since then.

HSBC also claims that Bank of America discovered defective mortgage loans through its servicing of the loans and its “detailed due diligence” of Countrywide.

And HSBC also claims that Countrywide was aware of the defective loans as well, discovering the defect through the loans’ origination, as well as the subsequent monitoring and review of the loans.

Additionally, HSBC states that each defendant, Merrill Lynch, Bank of America, and Countrywide, discovered defective loans through their participation in “multiple government investigations” related to the origination, securitization and/or servicing of the loans in question.

But in spite of those repeated discoveries, none of the companies notified HSBC, the deal’s trustee of any of the breaches.

“Defendants’ failure to give the required notice of breaches interfered with and delayed both Merrill Lynch’s cure or repurchase of defective mortgage loans and the trustee’s exercise of its right to demand that Merrill Lynch cure or repurchase the mortgage loans,” HSBC’s filing states.

“Merrill Lynch has not cured or repurchased a single mortgage loan,” HSBC continues.

The filing also states that HSBC notified Merrill Lynch of the rep and warrant breaches on three separate occasions, on Oct. 16, 2013; on April 8, 2015; and on May 19, 2016.

“Merrill Lynch refused to repurchase the mortgage loans in response to the 2013 and 2015 notices and has not responded to the 2016 notice,” HSBC states.

And now HSBC says it plans to sue and wants at least $420 million on behalf of the trust.

According to the filing, Merrill Lynch, Bank of America and Countrywide have 20 days to respond to lawsuit once they are served.

When asked about the lawsuit, HSBC said it is not commenting officially on the pending litigation.

HousingWire contacted Merrill Lynch and Bank of America as well, and this article will be updated where appropriate.

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