Allstate Sues BofA on MBS Purchase (revised) - Analyst Blog

On Monday, Allstate Corp. (ALL) filed a federal complaint against the mortgage giant, Countrywide Financial Corp., and 17 other defendants, alleging that the latter have sold $700 million of toxic investments in lieu of safe investments to Allstate in 2005, which later experienced a drastic price decline.

However, Countrywide Financial was acquired by Bank of America Corp. (BAC) (BofA) in July 2008. Accordingly, Allstate now directly demands for justice and penalty from the leading US bank. Allstate seeks undetermined damages in the litigation.

The company alleged that Countrywide enhanced its market share in 2003 by accepting mortgage products that borrowers were unable to afford. These risks were then passed on to investors as securities without previously revealing that those were toxic mortgage-backed securities (MBS).

Further, Allstate claims to have been duped by Capital Financial as the latter acknowledged the true worth of these investments, thereby concealing and misrepresenting crucial information. As a result, Allstate has questioned its investments in Countrywide Financial made between March 2005 and June 2007.

However, BofA, which will now defend the case for Countrywide Financial, believes that Countrywide is less likely to be blamed since the turn of events was the effect of the global downturn that drastically increased the investment losses of Allstate. The company incurred about $1.7 billion in investment losses in 2008.

Conversely, Allstate is not the only organization pointing out the misleading investment practices of Countrywide Financial, the leading underwriter until 2006. Post its acquisition in 2008, BofA incurred an $8.4 billion lawsuit settlement, with 12 states, on behalf of Countrywide Financial.

Moreover, BofA is yet to deal with more mortgage pullback lawsuits that surface from companies such as Pacific Investment Management Co., BlackRock Inc. (BLK), TCW Group, Fannie Mae, Freddie Mac and MetLife Inc. (MET), among others. These mono-line insurers would be seeking a buyback relief of $47 billion in MBS that were offloaded by Countrywide Financial before it was acquired by BofA.

Although the lawsuit remains unsettled, we believe such mortgage pullback issues need to be attended adequately in order to avoid another downturn in the market cycle.

(We are reissuing this article to correct a mistake. The original article, issued on Thursday, December 30, 2010, should no longer be relied upon.)
 
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