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Court delays stymie lottery-ticket RMBS buyers

(Repeats to fix typo in graf 2)

By Andrew Park

NEW YORK, Nov 7 (IFR) - Investors who bought battered or so-called "lottery-ticket" RMBS bonds in hopes of a big payday are having to wait longer than expected before cashing in, due to drawn-out fights in court.

Hedge funds and other speculators have scooped up soured pre-crash mortgage bonds for pennies on the dollar, hoping the courts will force mortgage originators to make investors whole.

But as court battles over the cases intensify, quick resolution becomes a more distant prospect, leaving holders of the bonds with little to do but wait on the justice system.

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"It's very hard to quantify the timelines to potential payouts whenever the court system is involved," one RMBS analyst told IFR.

One high-profile case in the sector, known as ACE II and revolving around HSBC as trustee against Deutsche Bank (Xetra: 514000 - news) , was first brought to New York's state supreme court in 2012.

It has inched its way to the New York Court of Appeals, where oral arguments that had been expected to begin in 2014, could now be delayed until April 2015, a lawyer on the case said.

Market participants had been hoping for a final decision by around then, he said.

As one chief investment officer at a hedge fund put it: "Always a longer timeline than us laymen think."

TWISTS AND TURNS

In ACE II, HSBC is acting as a trustee for bondholders who claim that Deutsche Bank Structured Products is responsible for repurchasing defective loans sold into the trust in 2006.

The decision on the ACE II case will determine when the six year time limit to pursue litigation against the originator expires.

The plaintiffs argue that the definitive point should be when the originator denies a repurchase request for a loan. Defendants, however, say the six year period begins as soon as the deal closes, which in the case of ACE II was 2006.

The ACE II case will help determine the ruling on several other similar cases wending their way through the US courts.

Other ongoing legal fights are also moving at a snail's pace.

The article 77 proceeding on Countrywide (LSE: CWD.L - news) over whether trustee Bank of New York Mellon acted in the best interests of bondholders in reaching a US$8.5bn settlement with Bank of America - originally struck in June 2011 but still lingering on.

Bank of New York Mellon was found to have improperly settled loan modification claims without further investigation into their full value on behalf of investors, a court ruled in January.

The trustee appealed the decision a month later, triggering a string of other appeals. Remaining objectors in the case include American Fidelity Assurance, Doubleline, Pine River, United States Debt Recovery Funds and Two Harbors.

"Years after the terms of the Countrywide settlement were announced, we are still nowhere close to getting a dime of proceeds from it," one investor said.

Bank of America (Swiss: BAC.SW - news) is expected to settle with the remaining objectors, and one RMBS analyst expects the payment into the 530 trusts in the next nine months.

But the fact it has been pushed back so much means that another settlement - the US$4.5bn JP Morgan case - could pay out before the Countrywide case, even though it was brought nearly two years later, the investor said.

In yet another case, this one involving Citi originated RMBS, bondholders had a June 30 deadline to accept a US$1.125bn settlement.

That was extended to August, then October - and now has been put off again until December 5.

In this case, advisers hired by the trustees said they needed more time to evaluate the settlement terms for each of the 68 bonds involved.

In a letter last month, the trustees in the case said they expected that the time between receiving the evaluations and the new acceptance deadline "likely will be short". (Reporting by Andrew Park; Editing by Natalie Harrison and Marc Carnegie)