How the BofA settlement deal got made
There are only 30 lawyers at Gibbs & Bruns, the Houston litigation boutique that orchestrated Tuesday’s $8.5 billion settlement between Bank of America and mortgage bond investors. But good things come in small packages. This deal, struck with the noteholders in 530 trusts that issued securities backed by Countrywide mortgage loans, would not have happened without Gibbs partner Kathy Patrick. She put together a coalition of major institutional investors that BofA’s trustee on the securitizations, Bank of New York Mellon, could not afford to ignore. Patrick sent a red-alert warning to the bank last October, by announcing publicly that Gibbs & Bruns and its bondholder clients were gearing up for litigation. That move alone sent BofA’s stock down five percent. Then Patrick worked with lawyers for BofA and BoNY to structure a novel deal that makes sense for all of them.
The settlement agreement submitted to New York state supreme court judge Barbara Krapnick Tuesday morning calls for BofA to pay Gibbs & Bruns $85 million if the settlement is approved. Patrick told OTC the firm has earned it. “We’re happy we’ll get paid for our work,” she said. “We’re very proud of this outcome.”
In a way, the roots of the BofA MBS deal are more than 10 years deep, dating back to when Gibbs & Bruns began representing a predecessor of the asset manager Black Rock in a Texas legal malpractice case that the firm eventually won at trial. Patrick’s relationship with Pimco, the gargantuan bond fund manager, goes back to 2003, when she was hired to bring suits against the banks that issued $2 billion in National Century Financial Enterprises securitizations. Pimco was one of the NCFE noteholders for whom Gibbs & Brun recovered more than $500 million.
Those two clients were founding members of the heavyweight coalition Patrick assembled for the assault on Bank of America. By October, when Gibbs & Bruns sent BoNY and BofA a notice of default, the group included eight institutional investors who held more than 25 percent of the voting rights in 115 trusts that sold securities backed by Countrywide mortgages. (25 percent is the crucial threshold for demands on a trustee under standard securitization contracts.) Both numbers kept growing as Patrick entered discussions with Jason Kravitt of Mayer Brown (for Bank of New York), Ted Mirvis of Wachtell, Lipton, Rosen & Katz (for BofA) and Brian Pastuszenski of Goodwin Procter (for Countrywide). Gibbs & Bruns now represents 22 institutional investors with a threshold 25 percent voting interest in 225 of the 530 trusts that are part of the proposed settlement.
Unlike some MBS investors’ counsel who have sued mortgage-backed securities issuers under state and federal securities laws, Patrick always said her case would be a straightforward state-court breach-of-contract action. She maintained that BofA had broken its agreement with investors in two ways: by failing to live up to representations and warranties about the mortgages underlying the offerings; and by failing to service the underlying mortgage loans properly.
Tuesday’s proposed settlement, Patrick said, addresses both of those litigation theories. The $8.5 billion payout compensates noteholders for the alleged representations and warranties breaches. And BofA’s agreement to subcontract loan servicing (which involves collecting and distributing interest and principal payments on the underlying loans, restructuring loans in danger of default, and foreclosing on defaulted properties) covers investors’ allegations about BofA’s ongoing servicing deficiencies. BofA has said the servicing subcontracts will cost $400 million, in addition to the servicing fee revenue stream it will lose.
“We respond to our clients’ needs,” Patrick said, noting that bondholders will retain their securities (some of which don’t mature for 20 years) under the proposed deal. “Our clients need a solution that would improve the performance of the collateral. For long-term holders of these certificates, fixing the collateral is a real priority.”
Patrick’s clients had enough leverage to force the trustee and BofA to talk after they received her default notice in October, but what made the deal attractive for the bank was the prospect of resolving all of its Countrywide MBS liability in one settlement. That’s why BoNY, as trustee for all of the noteholders, was crucial to the settlement talks: It’s the trustee’s job to decide whether a settlement is fair to all of the noteholders, not just to Kathy Patrick’s clients.
BoNY counsel Kravitt, whom Patrick calls “one of the wisest people I’ve ever met,” brought in five experts to evaluate the trusts’ litigation claims against BofA. According to Patrick, they came up with an estimate of $8 billion to $11 billion. “The size of the repurchase settlement relative to where the trustee valued it is eminently fair,” Patrick said.
(It’s worth noting that $59 billion of the $424 billion in underlying mortgage loans in the 530 trusts are severely delinquent and another $47 billion are in default, but not all of the delinquent and defaulted loans breached representations and warranties provisions, according to Patrick.)
Patrick’s clients have all pledged to support the trustee’s petition for court approval of the settlement. Patrick said she’s also heard from other BofA noteholders since news of the deal broke; all of them, she said, have been happy with the terms of the settlement.
Nevertheless, the proposed deal may face opposition, as Tom Hals reported for Reuters. “The numbers are silly small,” Bill Frey of Greenwich Financial, a firm that structures asset-backed securities, told Hals. “This settlement is an attempt to whitewash the problem,” said Frey, adding that angry investors have been e-mailing him to urge a protest.
Patrick told OTC she’s not worried. (Only two other Countrywide MBS noteholders have even filed a suit against BofA that will be swept up if the proposed settlement is approved.) Patrick implied that there’s been more talk than action from lawyers for other MBS investors. “We did a good job of keeping quiet until we had something to say. “Outcomes are their own justification,” she told OTC. “I have a hard time seeing how anyone could recover more than this in six or seven years of litigation…I don’t know of any long-term holder of these certificates who wouldn’t think this is a good deal.”