Bank of America Corporation’s (BAC - Analyst Report) legal woes are far from over considering the onslaught of lawsuits related to the risky mortgage securities. Last week, CIFG Assurance North America Inc, a bond issuer, sued BofA for fraudulent representations and breach of contract over insurance policies tied to residential mortgage backed securities (RMBS), according to a Bloomberg Report.
The lawsuit is based on CIFG’s five financial guaranty insurance policies that pertain to the two-structure transactions that were arranged by BofA. These were backed by twenty-two risky RMBS.
CIFG alleged that BofA was well aware of the perils associated with the RMBS offerings. BofA had failed to sell these securities as an underwriter, and therefore was left with too many of these risky securities in its books.
In order to get rid of these securities, BofA issued misleading statements that concealed the associated risks and convinced CIFG to provide insurance worth over $150 million to make them marketable to investors. As a result of these fraudulent representations by BofA, CIFG will have to shell out nearly $170 million in damages. CIFG has filed lawsuit in the New York State Supreme Court in Manhattan.
Apart from BofA, CIFG has pressed similar charges against couple of other financial institutions in the last three years. These include last month’s $$277 million lawsuit against GreenPoint Mortgage Funding Inc. and last year’s $275 million legal charge against The Goldman Sachs Group Inc. (GS - Analyst Report).
In addition to this, BofA faces several other charges related to the sale of defective mortgage securities. Earlier this month, investors including Phoenix Light SF Ltd prosecuted BofA along with its unit, Countrywide Financial, over the sale of $261 million worth of flawed residential mortgage-backed securities using misleading statements.
This led to huge losses and now investors are seeking compensation of nearly $122.2 million from BofA and Countrywide. This case is also filed in New York State Supreme Court in Manhattan.
Earlier in September, Phoenix Light had dragged BofA, along with JPMorgan Chase & Co. (JPM - Analyst Report), Goldman Sachs as well as Ace Securities – a wing of Deutsche Bank AG (DB - Analyst Report) – to court for losses suffered over faulty mortgage-backed securities. JPMorgan and Goldman are encountering a $1.8 billion lawsuit, whereas Ace Securities is facing a $300 million charge. BofA has been sued for losses amounting $36.6 million over $69.8 million worth of MBS.
BofA continues to face lawsuits related to the sale of faulty RMBS. This has resulted in huge litigation costs for the company, which will have a profound impact on its financials. 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; hence, the stock is expected to hold its current rank. We also maintain a long-term Neutral recommendation on the stock.