A decision by a New York state court to allow bond insurer MBIA to keep the burden of proof lower in its representation and warranties case against Bank of America‘s (BAC) Countrywide unit could lead to more losses, the bank warned earlier this year.
In its second-quarter 2011 filing, Bank of America said if a court ruled against the standard of proof that BofA believed was appropriate when judging reps and warrants cases involving plaintiffs like bond insurer MBIA, then it could “significantly impact this estimated range of possible loss (for non-GSE loans packed into securities).”
Those words were revisited by market analysts this week after the Supreme Court of the State of New York heard arguments from BofA, claiming MBIA would have to prove that misrepresentations made on securitized loans sold by Countrywide were actually the cause of losses MBIA recorded for insuring the mortgages.
On the other hand, MBIA won the court’s approval and obtained acceptance of a lower standard of proof. That lower standard says all MBIA has to prove to pursue its fraud claim against Countrywide is that the lender, which is now part of BofA, misrepresented the quality of loans insured by MBIA.
As of June 30, 2011, Bank of America calculated liabilities on reps and warranties claims at $17.8 billion, according to quarterly filings. And for the three-month period ending on June 30, 2011, the company said its provision for losses on reps-and- warrants claims held at $14 billion, compared to $1.2 billion a year earlier.
“Of the $14 billion provision recorded in the three months ended June 30, 2011, $8.6 billion was attributable to the Bank of New York Mellon (BNY) settlement and $5.4 billion was attributable to other non-GSE exposures, and to a lesser extent, GSE exposures. The BNY Mellon settlement led to the determination that we now have sufficient experience to record a liability related to our exposure on certain other private-label securitizations.”
However, BofA noted that substantive court holdings, like the ruling in favor of MBIA this week, could change liability levels.
“Changes to any one of these factors could significantly impact the estimate of the liability and could have a material adverse impact on our results of operations for any particular period,” BofA wrote.
Write to Kerri Panchuk.
