Bank of America’s $8.5 billion settlement in 2011 to resolve claims over Countrywide’s mortgage abuses may be in jeopardy. Last week, a group of investors, the Triaxx funds and the Federal Home Loan Banks of Boston, Indianapolis and Chicago, all of which hold certificates of mortgage-backed securities issued by the trusts covered by the settlement, sent a letter to the trustee in the New York case in which the settlement was reached.

The letter was sent to the presiding judge. In that letter, the investors claim that Bank of America may have engaged in self-dealing and other misconduct in connection with modifications to first lien loans held by the trusts where Bank of America or Countrywide held second lien loans on the same mortgaged properties.

Claims of Self-Dealing and Misconduct

The investors further claim that Bank of America’s self-dealing and other misconduct continued to occur during the course of the settlement negotiations. In addition, the investors state that Bank of America avoided repurchasing from the investors in excess of $30 billion in loans. Under the pooling and servicing agreements, either Bank of America or Countrywide are claimed to have had an obligation to repurchase modified mortgage loans.

In three sample loan modifications included with the letter, the investors claim that either Bank of America or Countrywide, as servicer of certain first lien loans, would slash the outstanding principal balance of the loans and book a loss to the trusts while the holder of the second lien loans, Bank of America or Countrywide, would make monetary gains on their loans. In each of these instances, the investors maintain that a short sale or foreclosure would have been a more effective strategy than a large loan writedown.

Writing Down Debt

Prior to the modifications, the investors claim that the collateral value to the second lien loans had been purportedly eroded. However, by writing down debt, Bank of America or Countrywide as owners of the second lien loans avoided taking a loss even though the banks should have taken a loss before the holder of the first mortgage. By modifying the first lien loans they serviced, the banks were apparently increasing their chances of getting full repayment on their loans.

So what’s next? The investors called on the trustee to investigate these claims. We’ll have to keep a watchful eye to see how this all unfolds.