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Bank of America (BAC): Mortgage Settlement Back In State Court, But Still Not Out Of The Woods

 February 29, 2012 01:25 PM

Bank of America Corp. (NYSE:BAC) cleared a major hurdle in its multi-billion dollar settlement over mortgage bonds announced in June as its proposed $8.5 billion mortgage-bond settlement case has been transferred from Federal Court to the New York state court where it was originally filed.

"We see this move as a marginal positive for BofA, removing a potential roadblock to the ultimate resolution of the $8.5 billion agreement reached last summer," UBS analyst Brennan Hawken wrote in a note to clients.

The state legal provisions are expected to shorten the approval process, somewhat reducing the risk that the settlement price moves higher, and the case is dragged out for an extended period of time.

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Last year, BofA filed a settlement in New York State Supreme Court to resolve claims of group of institutional investors, including Blackrock Inc. (NYSE:BLK) over losses they took on mortgage bonds. But, the case was moved to federal court at the request of a group of bond investors.

However, the U.S. Court of Appeals in Manhattan ruled Monday that the bank's proposed settlement should be reviewed in the state court, not federal court. The latest ruling comes after the mortgage bond trustee Bank of New York Mellon Corp. (NYSE:BK) argued the case should remain in a state court.

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"While we see today's decision as reducing the overhang of a potential adverse outcome to the Bank of NY settlement, we expect challenges to the agreement are far from over, and we expect the case will take some time to resolve," Hawken said.

BofA is not out of the woods yet as BofA is exposed to large and uncertain legal liabilities in its mortgage business due to its 2008 acquisition of Countrywide Financial. The company is also struggling to contain costs in this challenging environment.

Until these issues become clearer, we believe it is difficult to determine BofA's true earnings power," said Hawken, who has a "neutral" rating and price target of $8 on BofA shares

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