A U.S. District Judge in Manhattan cancelled the bid of Merrill Lynch - a wing of Bank of America Corporation (BAC) - to dismiss a lawsuit filed by the Federal Housing Finance Agency (FHFA) against it. The lawsuit pertains to the sale of billions of dollars worth of risky mortgage-backed securities (MBS) to government-sponsored entities (GSEs) - Freddie Mac (FMCC) and Fannie Mae (FNMA) - via misleading statements.

The U.S district Judge allowed the FHFA to pursue its legal proceedings over Merrill Lynch's fraudulent representations. Additionally, the Judge allowed proceedings for claims pursued under the Washington, D.C. securities law. Moreover, proceedings for punitive damages were allowed along with the right to annul any doubtful mortgage transaction. Yet, some of the fraud claims were dismissed.

Freddie Mac and Fannie Mae suffered huge losses on MBS worth $200 billion during the financial crisis. As a result, in 2008, the regulators apprehended these two GSEs and FHFA became their conservator. BofA, along with Merrill Lynch and Countrywide Financial, had underwritten nearly $57.5 billion of these securities.

Therefore in September last year , the FHFA filed a lawsuit against seventeen of the Wall Street biggies, including BofA, JPMorgan Chase & Co. (JPM), Citigroup, Inc. C) and The Goldman Sachs Group, Inc. (GS). The regulators opined that the losses suffered by the two GSE's were the direct result of the failure of the banks to properly disclose the risky nature of the securities sold. The lawsuits are aimed at recouping these losses.

Earlier this year, JPMorgan and Credit Suisse Group (CS) also came up with bids to dismiss the FHFA lawsuit, but were rescinded as well. The trial is scheduled for June 2, 2014 hearing.

Undoubtedly, BofA's legal woes are here to stay. These legal troubles will very likely result in mounted expenses and affect the company's top line. However, the measures undertaken by the regulatory and legal authorities to come down hard on such unwarranted activities of the banks will let the investors breathe a sigh of relief.

BofA currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock
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Tickers in this Article: FMCC, FNMA

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