Investors have prosecuted Bank of America Corporation (BAC - Analyst Report) along with its unit – Countrywide Financial – over the sale of $261 million worth of flawed residential mortgage-backed securities (RMBS), according to a Bloomberg report on November 15.
Investors, including Dublin-based Phoenix Light SF Ltd, have sued BofA for selling faulty RMBS with misleading statements. Investors allege that the offer material contained misrepresentations of the information pertaining to underlying loans, including the percentage of properties held by the owners.
This led to huge losses and now investors are seeking compensation of nearly $122.2 million from BofA and Countrywide. The case is filed in New York State Supreme Court in Manhattan.
BofA’s legal woes seem to be ceaseless. Earlier in September, Phoenix Light had dragged BofA, along with JPMorgan Chase & Co. (JPM - Analyst Report), The Goldman Sachs Group, Inc. (GS - Analyst Report) as well as Ace Securities – a wing of Deutsche Bank AG (DB - Analyst Report) – to court for losses suffered over faulty mortgage-backed securities. Now, Phoenix Light is a limited liability company, which inherits legal claims in lieu of rescue finance on behalf of companies that have collapsed or are on the verge of a collapse.
JPMorgan and Goldman are encountering a $1.8 billion lawsuit, whereas Ace Securities is facing a $300 million lawsuit. BofA has been sued for losses summing to $36.6 million over $69.8 million worth of MBS.
To add to its woes, recently, a U.S. District Judge in Manhattan cancelled a bid by Merrill Lynch – a wing of BofA – regarding the dismissal of a lawsuit filed by the regulatory body of Federal Housing Finance Agency (FHFA) against it. The lawsuit pertained to the sale of billions of dollars worth of RMBS to government-sponsored entities – Freddie Mac and Fannie Mae – using misleading statements.
BofA continues to counter problems related to the acquisitions (namely Countrywide and Merrill Lynch) it made during the height of the financial crisis. These acquisitions have been draining the company’s funds through various litigations and losses. BofA is passing through a rough patch with all the litigation overhangs.
Apart from the aforesaid litigation, the company is also confronting many other lawsuits related to the sale of MBS. However, on the positive side, the ill effects of these are likely to be eliminated by the gradually strengthening fundamentals of the company.
BofA currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We believe that on account of such litigation overhangs, there is little possibility of any upward estimate revisions; thereby the stock is expected to hold its current rank. Currently, we maintain a long-term Neutral recommendation on the stock.