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BofA (BAC) Faces Lawsuit for RMBS Related Contract Breach

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Bank of America Corporation (BAC - Free Report) faces another issue as U.S. Bancorp (USB) files lawsuit against the company in the U.S. District Court for contract breach related to the sale of residential mortgage-backed securities (“RMBS”).

Per the lawsuit, the primary offender is First Franklin Financial Corp, which was acquired by Merrill Lynch in 2006. In 2008, Merrill Lynch was acquired by BofA.

Per the claims, First Franklin sold defective mortgages to a $2-billion RMBS trust in 2007 and failed to inform about the problem mortgages to the trust’s investors.

Per the agreement at that time, it was mandatory for First Franklin to repurchase any mortgage that was found defective.

The current claims suggest that many mortgages between 2012 and 2014 were defective. Merrill Lynch repurchased some of these defective loans. However, an overwhelming majority of the other defective loans have neither been cured nor repurchased.

In fact, the lawsuit claims that First Franklin was aware about the defective loans during the sale to the trust.

Currently, U.S. Bancorp is demanding compensation for the defective mortgages through repurchases or other mediums.

Notably, BofA has three weeks to file a response against the complaint.

Though BofA has resolved many litigation issues, it still faces several investigations from federal agencies for its business conducts in the pre-crisis period. Hence, legal expenses are expected to continue weighing marginally on the company’s bottom line in the near future.

In the past six months, the company’s shares have lost 1.3% compared with 6.6% decline of the industry it belongs to.

Currently, BofA carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks from the finance space are Cohen & Steers, Inc (CNS - Free Report) , BlackRock, Inc (BLK - Free Report) and Franklin Resources, Inc (BEN - Free Report) . All these stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, Cohen & Steers witnessed an upward earnings estimate revision of 6.9% for 2019. The company’s shares have rallied 36.7% in the past six months.

In the past 60 days, the Zacks Consensus Estimate for BlackRock’s current-year earnings has been revised 5.2% upward. Its shares have inched up 0.2% in the past six months.

Franklin Resources has witnessed an upward earnings estimate revision of 8.9% for fiscal 2019 in the past 60 days. The stock has improved 1.9% in the past three months.

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