Judge to Bank of America: Hold Off Paying Investors in RMBS Settlement

A New York judge last week signed an order to delay payouts to investors from Bank of America Corp’s $8.5 billion mortgage securities settlement because Bank of New York Mellon, the trustee in charge of the securities, was unsure how to split the proceeds among investors.

Justice Saliann Scarpulla of New York state court in Manhattan signed an order to hold payouts to a group of mortgage-bond investors including BlackRock, MetLife, and Pacific Investment Management in escrow. The decision to disperse the money had been made just one week prior to last week’s delay order and is intended to give investors the chance to voice their opinions on how the funds should be dispersed.

Scarpulla has set a March 4 deadline for investors to file papers.

According to the order, BNY Mellon petitioned the court to delay the payouts until it could untangle competing interpretations of the methodology. Payouts were scheduled at the end of January to begin on Feb. 10 and will eventually go to 530 residential mortgage-backed securities trusts.

BNY Mellon’s argument reportedly stems from a question of what each of the trusts should do with the money once received. The main question is whether the trusts should count the money it will receive from Bank of America as a decrease in the trust’s liabilities to investors, or as an increase in the trust’s assets. According to the filing, the order could lead to investors in less-secure investor classes receiving money that would otherwise be distributed to more senior investor classes.

A group of 22 institutional investors negotiated the deal in June of 2011 to resolve claims that $174 billion of mortgage securities issued by the now-defunct Countrywide Financial Corp. (which Bank of America acquired in 2008) didn’t meet their promised quality. The petition was accepted in New York Court last April.

The payouts, when made, are expected to be a huge relief for Bank of America, which has had to contend with $50 billion in bad money, most of it due to what it took on from Countrywide, since the recession.

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