On Friday, Reuters reported that a U.S. Federal court judge had allowed Deutsche Bank AG (DB) and BNP Paribas Mortgage Corp. to proceed with their lawsuit against Bank of America Corporation (BAC).
The case is related to losses incurred by these two companies on asset-backed commercial paper as a result of the mortgage lender Taylor Bean & Whittaker Mortgage Corp going bankrupt.
In 2005, Ocala Funding LCC was created by Taylor Bean to purchase its home loans. These mortgages were later bundled into securities and sold to investors such as Freddie Mac (FMCC). Ocala had issued short-term notes to Deutsche Bank and BNP Paribas Mortgage to fund its business and buy Taylor Bean’s mortgages. BofA was a trustee for these notes.
However, Ocala was unable to repay the notes, following the collapse of Taylor Bean in August 2009. In November 2009, Deutsche Bank and BNP Paribas had filed a lawsuit stating that BofA had breached its obligations. They also claimed that BofA failed to redeem $1.2 billion in secured notes held by Deutsche Bank and $480.7 million held by BNP Paribas.
In their complaints, BNP Paribas and Deutsche Bank alleged that BofA improperly transferred billions of dollars out of Ocala, issued wrong statements regarding amount of collateral it held, did not track mortgages it held as securities, and took various other steps that misled these two banks.
However, BofA claimed that under the terms of the agreement, the company was neither required to check Ocala’s use of funds nor evaluate the firm’s assets and liabilities.
Judge Robert Sweet, in his opinion filed on last Wednesday, had dismissed 14 out of 20 claims against BofA. But, he allowed the claims related to the breach of contract to proceed, stating that Deutsche Bank and BNP Paribas Mortgage had reasonable claims against BofA for failing to secure $1.75 billion in cash and mortgage loans on their behalf.
Though BofA is poised to benefit from its large scale operations, prudent capital management, non-core asset shedding and improving credit quality, concerns related to rising expenses, pressure on net interest yield and limited claim experience for non-government-sponsored enterprise (GSEs) will resist bottom-line expansion in the near term. Furthermore, the latest lawsuit will also deter investors’ confidence.
Currently, BofA retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. However, considering the fundamentals, we are maintaining a long-term ‘Neutral’ recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
FREDDIE MAC (FMCC): Free Stock Analysis Report
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