Last week we told you about a New York state supreme court justice's dismissal of a class action claiming Bank of America was obliged to buy back hundreds of thousands of Countrywide-issued mortgages to the tune of billions of dollars. The problem with the suit, according to the judge who tossed it, was that the named plaintiff hadn't adhered to pooling and servicing agreements that required (among other things) support from 25 percent of the certificate holders to initiate litigation.
But what if a group of bondholders stuck with $47 billion in Countrywide-issued residential mortgage-backed securities that have drastically eroded in value jumped through all the necessary administrative hoops en route to litigation? "The exposure is gigantic," said Kathy Patrick of Gibbs & Bruns. "North of $20 billion."
Patrick represents a group of eight institutional investors who collectively hold more than 25 percent of the voting rights in more than $47 billion in Countrywide mortgage-backed securities issued in 115 offerings in 2006 and 2007. Late Monday, the group sent a notice of non-performance to BofA and Bank of New York Mellon (as trustee), claiming that BofA failed to perform its duties as the servicer of the bond deals. The notice follows the group's August request that BoNY initiate an investigation of the offerings, which the bank declined to do.
And unless BofA takes action on the notice, Patrick said -- by buying back at par securities backed by mortgages that violated contractual underwriting standards -- the group intends to sue. The Wall Street Journal reported Tuesday that such a case "could be one of the first lawsuits by mortgage-bond investors seeking to enforce their contract rights."
Gibbs & Bruns worked with one of its longtime bondholder clients to assemble the group, which includes mutual funds, insurers, and investors, Patrick told us. (Dealbook reported Tuesday that the Federal Reserve Bank of New York signed the Gibbs & Bruns letter, along with bondholders including BlackRock and the Pacific Investment Management Company.) Patrick said the coalition has been "working in an orderly way to open these administrative gates" since June.
The bondholders' claims that they were duped about the quality of the mortgages backing the securities they purchased parallel allegations by three Federal Home Loan Banks (see here for the latest suit, by the Chicago bank) and by the bond insurers that insured various offerings (here's our most recent post on that litigation).
But Patrick said the bondholders will have a key advantage if their claims proceed to litigation. "This isn't a securities case," she told us. "We just want to enforce our contractual rights. We don't have to prove intent. Logistically, this case is difficult. But unlike in the securities context, we just have to show they didn't meet the contract terms. People either lived in these houses or they didn't."
Leo Crowley of Pillsbury Winthrop Shaw Pittman, who represented BoNY in previous discussions with the bondholder group, referred us to a BoNY spokesperson who sent us this e-mail statement: "The [Gibbs & Bruns] letter states a demand directed to Countrywide to cure the defaults. It does not ask BNY Mellon to take any action. BNY Mellon will continue to perform its duties as trustee." BofA spokesperson Bill Halldin didn't return our call for comment.
This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.