RMBS Settlement’s Fate May Hinge on Pending Court Decision


An upcoming legal decision related to whether a proposed $8.5 billion Countrywide RMBS settlement returns to New York state court could affect the speed at which a deal moves forward — or whether it happens at all, according to a new report from Barclays.

A return to state court would “result in reduced delays in getting to a final decision on the settlement, but it does not mean that the settlement will be immediately completed,” Barclays analysts said in a report Wednesday.

“If the deal remains in federal court, it could cause [Countrywide’s successor] Bank of America to scuttle the deal entirely and add significant uncertainty to the settlement,” they said.

The decision on whether the proposed settlement returns to state court “should be made later this month,” the investment banking firm said.

Certain alt-A, negative amortization and subprime residential mortgage-backed securities originally issued by Countrywide Financial Corp. (CFC) have “significant upside” potential under the terms of the settlement, which was first announced in June of last year. (B of A bought CFC in August 2008.)

“Our base case is that the proposed settlement goes through on most deals, though the time is contingent on whether it moved back to state courts,” the Barclays researchers said, noting that, “a resolution to the Countrywide settlement should provide a blueprint for similar cases against other large originators.”

They reiterated, however, that, “If it stays in federal court, potential outcomes become less clear.”

Bank of New York Mellon, as trustee, initially entered into the settlement on behalf of 525 first-lien and five second-lien RMBS trusts issued by Countrywide affiliates in June of last year.

More than 20 institutional investors represented by law firm Gibbs Bruns originally notified the trustee and B of A’s BAC Home Loan Servicing unit of potential mortgage repurchase/servicing claims by means of a notice of non-compliance, requesting the trustee enter into the settlement. They also were parties to a separate agreement with B of A/CFC and BNY Mellon confirming their support for the settlement.

The investors include BlackRock Financial Management Inc., the Federal Home Loan Bank of Atlanta, the Federal Reserve Bank of New York’s Maiden Lane entities, AEGON USA Investment Management LLC, and several others.

As noted by the Barclays report, the settlement has faced delays. Investors had an initial period in which to register their concerns about the terms. An entity called Walnut Place filed motions to intervene and others also objected to the settlement, saying they believed its value was insufficient relative to the scope of the rep and warranty breaches.

Walnut Place initially was successful in an effort to move the case to federal court from state court in October of last year. But then BNY fought the move through an appeal, moving the case back to state court.

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