Bank of America Corporation (BAC) may have to counter yet another legal hassle as a New York appeals court upheld a prior judgment that its unit – Merrill Lynch Mortgage Lending Inc. – must face a lawsuit filed by two trusts back in 2012. These trusts manage mortgages on behalf of investors having ownership of more than $1 billion of securities collateralized by the loans.
The lawsuit filed in New York State Supreme Court in Manhattan is to compel the company to repurchase the allegedly defective loans.
The Background
As per the complaint, back in 2006, Merrill Lynch purchased more than 6,000 mortgages with an original principal balance of more than $1.1 billion from a third-party loan originator – ResMAE Mortgage Corp. and converted such mortgages into tradable securities (RMBS – residential mortgage-backed securities), which were sold to investors.
In Feb 2007, ResMAE filed for bankruptcy. While it went bankrupt, the trusts pursued claims against ResMAE through LaSalle Bank demanding to buy back the loans pertaining to borrowers who have missed the first or second payments or provide other compensation. Later in Jul 2008, LaSalle settled those claims on behalf of 5 of Merrill Lynch’s sponsored trusts, including the two plaintiffs listed in this lawsuit.
The two trusts claim that Merrill Lynch is liable to buy back the loans since ResMAE violated the representations and warranties and the latter is not in a position to execute the obligations of the contract following its bankruptcy.
In Sep 2013, the New York Supreme Court in Manhattan ruled that BofA should face the lawsuit. The company appealed for dismissal of the lawsuit stating that it was not accountable for the violations of ResMAE. However, the court currently turned down the plea and upheld the previous decision.
Bottom Line
If BofA needs to reach a settlement owing to the probable lawsuit, it will weigh on the company’s financials. However, nothing conclusive can be said about the outcome of the lawsuit until the extent of Bank of America’s involvement in the case is revealed.
Bank of America currently holds a Zacks Rank# 4 (Sell). Some better ranked stocks include Capital City Bank Group Inc. (CCBG), CVB Financial Corp. (CVBF) and Community National Bank (CBNY). All these stocks carry a Zacks Rank #1 (Strong Buy).
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