Bank of America Corp has started negotiating with powerful mortgage investors that accused the bank of failing to buy back bad home loans, in an apparent shift in the lender's stance.
Previously, Bank of America had said it would not be shy about fighting investors.
Bank of America on Wednesday said the investors have agreed to continue negotiating instead of putting it into technical default over $16.5 billion of bonds.
The investors including Pacific Investment Management Co and BlackRock Inc said the bank hasn't sought to recover money on loans that should never have been sold into bonds because they did not meet specifications. They want Bank of New York Mellon, the trustee, to force repurchase of loans at face value.
Our clients are very pleased to be able to open the dialogue with both Bank of America and Bank of New York, and we hope those discussions will be very productive, Kathy Patrick, a lawyer with Houston law firm Gibbs & Bruns representing the investors, told Reuters in an interview.
The clash is part of a larger movement by investors including mortgage giants Fannie Mae and Freddie Mac to put-back faulty loans to lenders that sold loans into Wall Street and government bond programs without regard for quality.
Fannie Mae and Freddie Mac have already won billions of dollars from banks over misrepresentations on loans sold into government-supported mortgage bonds.
BofA's Countrywide and other so-called servicers work on behalf of mortgage bondholders to collect payments on loans and work on modifications and foreclosures when borrowers are in default. The industry has come under intense scrutiny for its shortcomings, which recently included submitting foreclosure documents in court that haven't been properly reviewed.
The investors in October gave Countrywide 60 days to fix the problems before they would declare an event of default, -- a technical violation of the terms of the bond, Patrick said. After an event of default, investors can sue.
The timeline for a default has been suspended to permit the parties to engage in a dialogue about the issues raised by the notice of non-performance, without the pressure of a deadline, Patrick said.
Added Patrick, We appreciate the willingness to discuss these matters in a constructive way, and beyond that, we'll see where it goes.
Bank of America said the extension will let the parties continue a constructive dialogue.
Today's comment is consistent with our view that when there is a valid defect, BofA will buy back the loan, but when there is not, the bank will defend its, and its shareholders', interests, said BofA spokesman Jerry Dubrowski.
Spokesmen for Pimco and BlackRock declined to comment. Other investors in the group, including Freddie Mac and the Federal Reserve Bank of New York, also declined comment.
The bank has previously said it isn't responsible for poor loan performance, with Chief Executive Brian Moynihan telling shareholders he wouldn't be shy about fighting the investors who knew they were buying a Chevy Vega instead of a more prestigious Mercedes Benz.
Recent revelations of foreclosure errors have given momentum to investors' bid to enforce so-called representations and warranties, which state that loans in bonds met strict requirements. More investors have joined the Gibbs & Bruns group since the initial salvos, Patrick said.
Signs that investors may have more success have tainted bank shares and led Wall Street analysts to handicap the costs. According to Paul Miller, an analyst with FBR Capital Markets, losses to banks could be between $54 billion and $106 billion.
(Additional reporting by Joe Rauch; Editing by Steve Orlofsky)