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BofA's legal woes from Countrywide worse than expected

Plaintiffs who appeared to have settled claims related to the failed mortgage giant are returning to besiege Bank of America again, while new demands are surfacing in courts across the country.

February 25, 2011|By E. Scott Reckard, Los Angeles Times | Los Angeles Times Staff Writer

More than three years after Bank of America Corp. agreed to acquire Countrywide Financial Corp., the legal mess the bank inherited from the mortgage giant seems only to grow.

It was no secret that the bank took on a heaping plate of litigation with the Calabasas-based lender, which during the housing boom had matched every risky loan its rivals devised.

But adversaries who appeared to have settled Countrywide-related claims are returning to besiege BofA again, while new demands are surfacing in courts across the country.

"We knew BofA was going to be taking on a lot of legal problems with Countrywide, which was a big concern of ours at the time of the acquisition," said RBC Capital Markets analyst Joe Morford. "But even so, it's been worse than we expected."

This week alone brought fresh lawsuits in New York and Los Angeles, one filed by investors in Countrywide's mortgage-backed bonds and the other by hedge funds that bought private Countrywide securities. Both sets of plaintiffs allege they were misled about the risks the lender had taken. A BofA spokeswoman described the suits as meritless and the plaintiffs as "sophisticated investors looking to blame someone for investment losses incurred during a period of economic downturn."

Bank of America thought it had rid itself of a major pain last August by settling, for $600 million, class-action litigation brought by former Countrywide shareholders who lost billions when the mortgage company's stock price plunged.

But when lawyers for both sides go before a federal judge in Los Angeles on Friday to seek final approval for the settlement, 33 plaintiffs will be missing, including the giant California Public Employees' Retirement System.

CalPERS and the others have decided to pursue their own lawsuits rather than accept a payout of less than 5% of their losses, said Blair Nicholas, a San Diego lawyer representing 16 of the dropouts.

Bank of America had expected to sustain big losses when it acquired Countrywide in 2008 for stock then valued at $2.5 billion, said Stifel, Nicolaus & Co. analyst Christopher Mutascio. But he calculates that the actual cost to the bank will be at least $10 billion more than it had projected.

A BofA executive familiar with the bank's initial projections regarding Countrywide acknowledged that the costs had been far higher than anyone at BofA had anticipated. But the executive, who was not authorized to speak publicly about the projections and insisted on confidentiality, said the forecasts were overly optimistic because bank executives underestimated "the depth and length of the downturn in housing," not because they had incorrectly assessed Countrywide itself.

Among the actual and potential Countrywide-related costs incurred by BofA since the acquisition:

• An October 2008 agreement to reduce borrowers' payments by as much as $8.6 billion on Countrywide mortgages that state officials said were abusive.

• A March 2010 settlement in Massachusetts requiring the bank to erase as much as $3 billion in principal for severely delinquent Countrywide borrowers who owed more than their homes were worth.

• An agreement last month to pay Fannie Mae and Freddie Mac $2.8 billion to settle demands for buybacks of flawed home loans. The amount was in addition to about $3.5 billion in such payments already made to the government-controlled mortgage firms.

• Payments that could total in the billions to satisfy investors' demands that BofA buy back Countrywide loans backing non-Fannie and -Freddie mortgage securities.

• A possible multibillion-dollar settlement of state and federal probes into big banks' alleged mishandling of troubled borrowers and home foreclosures.

In the Countrywide shareholder case, BofA has called the decisions by some plaintiffs to opt out of the settlement "unfortunate," but it has agreed to set aside $22.5 million of its $600-million commitment to pay for future individual settlements. Joel Bernstein, the lead lawyer for the plaintiffs still participating in the agreement, predicted that U.S. District Judge Mariana Pfaelzer would approve it.

The plaintiffs opting out believe the settlement is "shockingly cheap," Columbia University law professor John C. Coffee said, citing a discussion with one of the lawyers representing those institutions.

But Bernstein said expert witnesses testified that Countrywide's near-demise was caused mainly by the broader financial crisis.

The plaintiffs opting out run the risk that they'll wind up with less than they would under the settlement — or nothing at all. "People make individual decisions about the amount of risk they want to take," Bernstein said.

scott.reckard@latimes.com

Times staff writer Marc Lifsher in Sacramento contributed to this report.

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