The Bank of New York Mellon Corporation’s BK efforts to rid itself of the case related to its role overseeing mortgage-backed securities (“MBS”) of Countrywide Financial Corp. suffered a setback after the U.S. District Judge William Pauley in Manhattan rejected the bank’s bid to dismiss the lawsuit on Friday. The news was first reported by Bloomberg.
BNY Mellon can soon be burdened with a lawsuit by pension funds alleging the company caused billions of dollars in damages by failing to perform its day-to-day obligations as a trustee, which includes ensuring proper documentation of the underlying home loans as well as protection of bondholders' rights.
While the bank’s earlier bids for dismissal of the suit also failed, a variety of other claims against the bank have been rejected previously by the court.
In June 2011, Bank of America Corporation BAC had reached an agreement to pay $8.5 billion for its legacy Countrywide mortgage repurchase and servicing claims. The settlement took place between 22 investors who suffered significant losses for their investments in MBS that were sold by Countrywide prior to the housing market failure. BofA acquired Countrywide in 2008.
The agreement basically covered most of BofA’s legacy Countrywide- issued first-lien MBS repurchase exposure. It represented 530 trusts with original principal balance of $424 billion and a total current unpaid principal balance of about $221 billion.
The group of investors, including BlackRock Inc. BLK, PIMCO, MetLife Inc. MET and the Federal Reserve, had alleged that prior to the financial crisis Countrywide had sold securities that were tied to bad-quality loans.
The loans were not even well managed by BNY Mellon, which was the trustee for the MBS. Therefore, despite BofA’s settlement, a Chicago pension fund sued BNY Mellon on behalf of itself and similar investors two months after the settlement was announced. The funds alleged failure on the bank’s behalf to properly review defective loans serviced by Countrywide causing significant losses to them.
Later in 2014, the appeals court allowed four pension funds to bring claims under the Trustee Indenture Act in relation to 26 BNY Mellon-controlled trusts in which they invested.
According to the funds, including the City of Grand Rapids General Retirement System and the Retirement Board of the Policemen’s Annuity & Benefit Fund of the City of Chicago, BNY Mellon did not review mortgages properly for missing or defective documents and failed to act on behalf of investors to make sure that loans with “irregularities” were removed from the pools of mortgages.
The bank caused bondholders to suffer billions of dollars in damages and created “considerable uncertainty” regarding investors’ ownership interest in the mortgage loans backing their securities, the funds said, according to the Bloomberg report.
Currently, BNY Mellon carries a Zacks Rank #3 (Hold).
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