Bank of America Faces a New Lawsuit from UBS Over $200M Mortgage Dispute

Bank of America faces a new lawsuit from UBS seeking $200 million in compensation for legal costs related to toxic mortgage securities from the 2008 financial crisis. This lawsuit, filed in July 2024 in the New York State Supreme Court, reopens wounds from one of the most turbulent periods in banking history and highlights how financial institutions are still grappling with the aftermath nearly two decades later.

The Heart of the Dispute: Countrywide’s Toxic Mortgage Legacy

The dispute centres on indemnification agreements related to mortgage loans originated by Countrywide Financial, which Bank of America acquired for $2.5 billion in July 2008.

UBS bundled these Countrywide mortgages into securities and claims that Countrywide had contractually agreed to indemnify it against claims that these mortgages were poorly underwritten or fraudulent. According to court documents, UBS alleges that despite extended discussions with Bank of America about covering approximately $53 million in specific legal costs, the banking giant “ultimately refused to comply with its indemnification obligations.”

This case exemplifies the lingering financial repercussions from the 2008 crisis, with major institutions still battling over responsibility for the toxic mortgage products that contributed to the global economic meltdown.

The Settlements That Triggered the Lawsuit

UBS’s claim stems from two major settlements it reached over Countrywide-linked mortgage securities:

1. An $885 million settlement with the US Federal Housing Finance Agency (FHFA) in 2013 – This settlement resolved allegations that UBS misrepresented the quality of loans backing mortgage securities sold to Fannie Mae and Freddie Mac. Under the terms, UBS paid approximately $415 million to Fannie Mae and $470 million to Freddie Mac for securities sold between 2004 and 2007. This settlement was part of a broader FHFA effort that targeted 18 financial institutions for allegedly misrepresenting mortgage-backed securities.
2. A confidential settlement with the Federal Home Loan Bank of San Francisco in 2016 – This settlement also concerned Countrywide’s mortgage loans, though the specific terms remained private.

The FHFA’s case against UBS specifically alleged that UBS misrepresented the quality of the collateral backing the securities, many of which were originated by Countrywide. The agency claimed UBS knew the underlying mortgages failed to meet stated underwriting guidelines but marketed them to investors anyway.

Bank of America’s Potential Defense Arguments

While Bank of America has not yet responded publicly to the lawsuit, based on similar cases, they could raise several compelling defenses:

1. Successor Liability Limitations: In previous litigation, Bank of America has successfully argued that acquiring Countrywide’s assets didn’t automatically mean assuming all its liabilities. In a 2011 California federal court case, judges ruled under Delaware law that Bank of America didn’t assume Countrywide’s liabilities merely by acquiring its assets.
2. Statute of Limitations: Bank of America could argue that too much time has passed since the original indemnification agreement was made. In similar cases involving RMBS (residential mortgage-backed securities), courts have ruled that the statute of limitations begins running at the moment loans change hands, not when a plaintiff decides to seek remedy.
3. Contractual Interpretation: The bank may contend that the indemnification agreement with Countrywide doesn’t extend to settlements reached by UBS, but only to judgments in actual lawsuits. They could argue the agreement was designed to cover the costs of defending against litigation, not financial payouts from negotiated resolutions.
4. Shared Responsibility: Bank of America might claim that UBS, as a sophisticated financial institution involved in securitizing mortgages, bore responsibility to conduct its own due diligence on the loans’ quality. If UBS failed to identify risks associated with these mortgages, Bank of America could argue UBS shares responsibility for the resulting legal liabilities.
5. Merger Agreement Provisions: The bank could argue that specific provisions in the Bank of America-Countrywide merger agreement superseded any prior indemnification agreements Countrywide had with other parties.

The Financial Impact on Both Banking Giants

For Bank of America, this lawsuit adds to an already expensive acquisition. The $2.5 billion purchase of Countrywide in 2008 has since cost the bank over $65 billion in legal settlements, penalties, and related expenses.

In 2014, Bank of America reached a record $16.65 billion settlement with the US Department of Justice to resolve federal and state claims against it and its subsidiaries, including Countrywide. This settlement was, at the time, the largest civil settlement with a single entity in American history.

Despite these ongoing legal challenges, both banks have performed relatively well in the stock market:

• Bank of America shares gained approximately 31.3% in the past year
• UBS Group shares increased by about 39.9% during the same period

For UBS, winning the $200 million claim would help offset some of the considerable legal costs it has incurred from prior settlements related to crisis-era mortgage securities. In August 2023, UBS agreed to pay $1.435 billion to settle civil fraud claims brought by the Department of Justice over its sale of residential mortgage-backed securities leading up to the 2008 crisis.

Similar Indemnification Disputes and Legal Precedents

The UBS lawsuit against Bank of America isn’t occurring in isolation. Several similar indemnification disputes between financial institutions provide context:

1. Lehman Brothers Holdings Inc. (LBHI) Cases: Following bankruptcy, LBHI has pursued numerous contractual indemnification and breach of warranty cases against mortgage originators and sellers. Many of these cases have settled, but dozens remain active.
2. Chase/EMC Claims: JPMorgan Chase has pursued indemnification related to RMBS settlements it reached with trustees and insurers years after the crisis.
3. Ambac v. Countrywide: In a similar case, Ambac Assurance Corp sued Bank of America over Countrywide mortgage bonds, seeking reimbursement for hundreds of millions in losses from insuring approximately $1.68 billion of securities backed by Countrywide loans.

These cases reveal a pattern of “downstream litigation” where institutions that have settled with regulators or investors subsequently seek indemnification from loan originators or other parties in the securitization chain.

What Makes This Case Legally Significant

The UBS lawsuit has several distinctive legal aspects that make it significant:

1. Indemnification vs. Direct Liability: Unlike many previous RMBS lawsuits that sought to hold lenders directly liable for declining security values, UBS is seeking coverage for settlements it paid related to these securities. Courts have split on whether indemnification claims should be treated differently from repurchase or breach of contract claims for statute of limitations purposes.
2. Delaware vs. New York Law: The choice of law could be crucial. In previous cases, applying Delaware law has sometimes benefited Bank of America regarding successor liability, while New York law has led to different outcomes.
3. Contractual Language Interpretation: The specific wording of the original indemnification agreement will likely be central to the case’s outcome. Courts have closely examined whether agreements contain plaintiff-friendly catch-all clauses or defendant-friendly limitations of remedies.
4. Successor Liability Doctrine: The case may test the boundaries of when an acquiring company (Bank of America) becomes responsible for the contractual obligations of an acquired company (Countrywide).

The Broader Implications for Financial Markets

This case carries implications beyond the immediate $200 million at stake:

1. Precedent Setting: The outcome could influence how similar indemnification disputes between financial institutions are resolved in the future.
2. Long-term Liability Risk: It highlights the extended timeline of potential liability for acquisitions, showing that risks can persist for decades after a deal closes.
3. Due Diligence Importance: The case emphasizes the crucial importance of thorough due diligence in acquisitions, particularly regarding potential indemnification obligations.
4. Regulatory Interest: Financial regulators will be watching closely as they continue to monitor systemic risk factors and the long-term consequences of crisis-era activities.

Current Status and Next Steps in the Legal Battle

The lawsuit, officially identified as “UBS Americas et al v Countrywide Home Loans Inc et al,” is in its early stages in the New York State Supreme Court in Manhattan.

As of this writing:

• Bank of America has not issued an official response to the lawsuit
• UBS declined to provide detailed comments on how they calculated the $200 million figure
• The case is expected to progress through preliminary motions before potentially reaching trial

Typically, such complex financial cases take years to resolve, with extensive discovery, expert testimony, and potentially appeals before reaching a final conclusion.

• Also Read: FintechZoom.io.

FAQs About the UBS Lawsuit Against Bank of America

What exactly is UBS suing Bank of America for?

UBS is suing Bank of America for $200 million to cover legal costs related to settlements UBS reached over mortgage-backed securities containing Countrywide loans. UBS claims Countrywide had agreed to indemnify it against claims that these mortgages were poorly underwritten.

What were the specific settlements UBS is referring to?

UBS reached an $885 million settlement with the US Federal Housing Finance Agency in 2013, paying $415 million to Fannie Mae and $470 million to Freddie Mac. It also reached a confidential settlement with the Federal Home Loan Bank of San Francisco in 2016.

What were the FHFA’s allegations against UBS?

The FHFA alleged that UBS misrepresented the quality of loans backing mortgage securities sold to Fannie Mae and Freddie Mac between 2004 and 2007. The FHFA claimed UBS knew the loans didn’t meet stated underwriting guidelines.

Who was Angelo Mozilo and what was his role in all this?

Angelo Mozilo was the co-founder and CEO of Countrywide Financial who built it into America’s largest mortgage lender by focusing on subprime borrowers. His company’s practices, including minimal documentation requirements and low initial payments, contributed significantly to the housing bubble and subsequent financial crisis. Time magazine named him one of the “25 People to Blame” for the financial crisis.

What is an indemnification agreement?

An indemnification agreement is a contract that protects one party from financial loss arising from the actions of another party. In this case, UBS claims Countrywide agreed to compensate it for any losses related to poorly underwritten mortgages.

Has Bank of America faced similar lawsuits before?

Yes, Bank of America has faced numerous lawsuits related to Countrywide’s mortgage practices. In 2014, it reached a record $16.65 billion settlement with the US Department of Justice to resolve federal and state claims against it and its subsidiaries, including Countrywide.

How long might this legal battle last?

Complex financial cases like this typically take years to resolve. Similar RMBS-related cases from the 2008 crisis have sometimes continued for more than a decade before reaching final resolution.

Bank of America faces a new lawsuit that serves as a powerful reminder of how the 2008 financial crisis continues to cast long shadows over the banking industry, with legal and financial consequences still unfolding nearly two decades later.