Triaxx Turns Up the Heat in the Article 77

I have posted that any calculation (both in terms of likelihood and amount) as to whether Bank of America (BAC) settles with MBIA  before Justice Bransten issues her successor liability summary judgment opinion involves not only an analysis of the legal merits (which I believe favor MBIA-see Why BAC Will Lose on Successor Liability), but also the adverse effect such a holding would have upon BAC's obtaining judicial approval of its $8.5 billion settlement in the ongoing Article 77 proceeding (see Bank of America Successor Liability, the Article 77 Case, and Settlement Game Theory).

Now, Triaxx, an objecting investor in the Article 77 proceeding, and three Federal Home Loan Banks (collectively, Triaxx) have just turned up the heat in the Article 77 proceeding.  See Triaxx-Turns-Up-the-Heat-in-the-Article-77-Proceeding

Triaxx points out in a letter to the Trustee, BNYM, filed with the court in the Article 77 hearing on February 1, 2013, that prior to its settlement with BAC, BAC modified loans held in the investor trusts having a principal amount in excess of $32 billion.  Importantly, these modified loans were governed by Pooling and Servicing Agreements which require the Master Servicer (BAC) to repurchase such modified loans from the trusts.  The Trustee released claims obligating BAC to make such purchases, apparently without investigation or negotiation by the Trustee on behalf of the trust investors.

Typical PSA language regarding the Master Servicer's obligation to repurchase modified loans is set forth below:

"Section 3.11(b) The Master Servicer may agree to a modification of any Mortgage Loan (the "Modified Mortgage Loan") if (i) the modification is in lieu of a refinancing and (ii) the Mortgage Rate on the Modified Mortgage Loan is approximately a prevailing market rate for newly-originated mortgage loans having similar terms and (iii) the Master Servicer purchases the Modified Mortgage Loan from the Trust Fund as described below."

Triaxx goes on the point out that with respect to many of these modified loans, BAC owned second mortgages that were subordinated to the modified loans.  Therefore, BAC had a conflict of interest with the trust investors when BAC reduced the principal amount and interest rate of the modified loans owned by the investor trusts, causing losses incurred by the investor trusts, but maintained BAC's second loans in unmodified form.  Triaxx alleges that this impermissible conflict of interest resulted in massive value transfers from the investor trusts to BAC as second mortgagee.

Until this Triaxx filing, the Article 77 hearing was thought to bear only upon whether the Trustee settled too cheaply with BAC with respect to losses incurred by the investor trusts (over $25 billion at the time the Trustee settled for $8.5 billion).  Now the stakes have been raised to include BAC's obligation to repurchase over $32 billion of modified loans.

Remember, the core reasoning supporting the Trustee's settlement at $8.5 billion was that the Trustee believed that BAC would not have successor liability for Countrywide's liabilities.  If Justice Bransten issues an adverse successor liability holding, that core reasoning will come under intense scrutiny, and BAC's potential exposure for Countrywide liabilities will only be further magnified based upon Triaxx's allegations.

Just another reason not to believe the BAC CFO when he stated on BAC's most recent earnings conference call that Article 77 hearing is "completely independent from what's going on at MBIA."

NB:  this blog is not intended to be investment advice, and should not be relied upon by anyone to constitute investment advice.  Investing is a tough game, and everyone must do and "own" their own work, because you will certainly own your investments.

Disclosure: long MBI.  Follow me on twitter.