Mortgage bond investors finally get paid $8.5 billion Countrywide settlement

Five-year wait to receive settlement funds is over

Last month, mortgage bond investors moved one step closer to ending their five-year wait for 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 in the years since then, the sides battled in court over whether Bank of New York Mellon had the authority to settle.

The final legal hurdle was cleared in May when 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.

At the time, a report from Wells Fargo suggested that the aggrieved bondholders would receive their money in June, and according to a new report from Fitch Ratings, that’s exactly what happened.

The Fitch report states that the payments are a “windfall” for the investors, but are unlikely to elicit any “significant” ratings actions for the mortgage bonds themselves.

The settlement terms require Bank of America, which purchased Countrywide in 2008, to pay $8.5 billion to Bank of New York Mellon, which is acting as trustee for 22 institutional investors in for 530 Countrywide residential mortgage-backed securities trusts.

According to Fitch’s report, a third-party expert determined each trust’s share of the settlement based on projected lifetime net losses, and the entire settlement payment was paid to the trustee in February 2016. 

Then, after the Bank of New York Mellon sought judicial guidance concerning the order in which to distribute funds to bondholders (whether to pay down or write up first), payments were distributed to bondholders of 512 of the 530 trusts in June 2016, Fitch’s report states.

“Nearly five years after the settlement was reached, bondholders from most of the 530 trusts included in the settlement received payments on the June 2016 distribution date,” Fitch’s report states.

Of the roughly 3,000 classes included in the settlement that Fitch actively rates, 74% have incurred principal writedowns to date, Fitch notes.

“The settlement payouts improved the principal recoveries for many defaulted classes,” Fitch states. “Nonetheless, Fitch does not expect to upgrade such classes because the lost interest to date related to the writedown is not expected to be recovered.”

The remaining 18 trusts face “further legal hurdles” before receiving payments, Fitch added.

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