In what is possibly the best news Bank of America (NYSE:BAC) received on the legal front in months, the troubled U.S. lender has been let off the hook in a mortgage-related lawsuit against it by investment firm Walnut Place. [1] The Supreme Court of the State of New York dismissed the lawsuit filed last February stating that Walnut Place cannot sue the lender directly without giving trustee Bank of New York Mellon (NYSE:BK) enough time to handle the alleged mis-sale. The judgement has a bigger, more far-reaching impact on Bank of America and all other banks jostling with a long list of mortgage-related lawsuits, as it reinforces the procedure that needs to be followed for such lawsuits. The banks will hope that a handful of lawsuits against the big banks will come to a to a close in subsequent months.
We stand by our $8.50 price estimate for Bank of America’s stock. This is nearly 12% below the current market price, and we attribute this difference to the earnings downside related to Bank of America’s shaky mortgage portfolio and the long list of lawsuits the bank still faces.
See our full analysis for Bank of America’s stock here
Walnut Place bought mortgage-backed securities worth about $1.4 billion from Countrywide before the latter was acquired by Bank of America during the economic downturn of 2008. [2] In the lawsuit, Walnut Place argued that Bank of America should buy back the defective portfolio underlying the securities. It also mentioned that it was filing the lawsuit directly because the trustee to this deal, BNY Mellon, had failed to get Bank of America to purchase the portfolio and had also not initiated any legal action.
But the court decided in favor of Bank of America, stating that the lawsuit was “premature” and BNY Mellon has not been allowed sufficient time to act out its role as the trustee. [2]
The court’s decision is a huge break for Bank of America which incurred mortgage-related settlement, provision and other litigation expenses of nearly $20 billion in 2011. These figures for 2009 and 2010 were $13 billion and $15 billion respectively.
With Countrywide’s acquisition widely acknowledged as the single largest source of legal issues for the bank, it will be a relief for Bank of America to know that it would not have to deal with lawsuits from each individual investor who ended up with a loss doing business with Countrywide.
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Notes:- Mortgage Suit Vs Bank Of America, BNY Mellon Is Dismissed, The Wall Street Journal, Mar 29 2012 [↩]
- Bank of America’s Countrywide Wins Walnut Place Dismissal, Bloomberg, Mar 29 2012 [↩] [↩]
