New York Life Insurance Co., TIAA-CREF, the French bank Dexia and other institutional investors joined the list of bondholders seeking compensation from Bank of America Corp. over MBS losses they suffered from buying nonprime bonds from Countrywide Financial Corp.
Countrywide, which B of A bought in August 2008, "recklessly" misled the investors in marketing the securities, according to a lawsuit filed in New York State Supreme Court on Monday.
The investors accuse Countrywide and several executives of perpetrating a "massive fraud" in representations about the "purportedly conservative underwriting standards" in term sheets, prospectuses and other materials for the hundreds of millions of dollars in securities they purchased between 2005 and 2007.
Countrywide was not only a top ranked funder of subprime, but its investment banking division issued billions of dollars worth of product during the boom years.
"These representations by Defendants were recklessly or knowingly false when made," the lawsuit said. "In reality, Countrywide was an enterprise driven by only one purpose — to originate and securitize as many mortgage loans as possible into MBS to generate profits for the Countrywide Defendants, without regard to the investors that relied on the critical, false information provided to them."
A spokeswoman for B of A did not immediately return a request for comment.
B of A recently estimated that litigation over private-label MBS could cost it up to $7 billion to $10 billion, although the company emphasized that this worst-case scenario was not "probable."
"As a reminder, there are significant procedural hurdles that parties would have to overcome before any of these amounts become probable," chief executive Brian Moynihan told analysts Friday.
In December, B of A said it was holding "constructive" talks with some holders of its private-label mortgage-backed securities over accusations that the Charlotte, N.C., bank engaged in shoddy servicing. That group of investors, which included PIMCO, BlackRock and the Federal Reserve Bank of New York, has not filed a suit against B of A.
However, two Federal Home Loan Banks and bond insurers have sued B of A over the matter.
Among other things, the suit filed Monday cites the claim, made by a Bank of America employee deposed in a New Jersey personal-bankruptcy suit, that "not delivering the original note to the trustee [in mortgage securitizations] was Countrywide's standard business practice." The trustees need such documents "in order for the MBS holders to be legally entitled to enforce the mortgage loans in case of default," the suit says. (B of A has said that the employee, who had worked in Countrywide's servicing operation for 10 years, was out of her depth when talking about documentation issues.)
