On Monday, Congressman Brad Miller wrote to the Federal Housing Finance Agency, raising doubts about Fannie Mae and Freddie Mac’s participation in the $8.5 billion proposed settlement between Bank of America and investors in Countrywide mortgage-backed securities offerings. Like many of the other critics of the deal (see here and here, for example), Miller focused on the size of the proposed settlement relative to the $424 billion initial value of the securities and to the $174 billion unpaid principal balance on the mortgage-backed certificates. The $8.5 billion proposal, he wrote, was only two percent of the initial par value and less than five percent of the unpaid principal balance.

It’s fun to throw around numbers like $424 billion and $174 billion, but neither has much to do with the size of the MBS investors’ actual breach-of-contract claims against Bank of America, which is what the settlement would resolve.

Remember, the BofA deal doesn’t resolve investors’ securities fraud claims and doesn’t call on BofA to repurchase their mortgage-backed certificates. It only settles so-called “put-back” claims, in which certificate holders call on the bank to repurchase underlying individual mortgage loans that somehow breached the representations and warranties Countrywide made about them. Tens of thousands of mortgage loans backed the securities that Countrywide sold to MBS investors. Some percentage of them didn’t meet the standards Countrywide said they did, and investors have a contractual right to demand that BofA (as Countrywide’s successor) buy back or replace the faulty loans.

So the key metric in evaluating whether BofA is settling on the cheap isn’t the initial size of the offerings or the unpaid MBS balance. It’s not even the value of the mortgage loans in default, since we don’t know, without looking at individual loans, whether Countrywide misled investors about those troubled mortgages. The key number is the size of investors’ actual put-back claims against BofA.

The problem, however, is that no one really knows how many underlying individual mortgage loans MBS investors could have demanded BofA buy back, or how many billions of dollars those loans represent. Technically, the trustee makes the put-back demand on behalf of investors; the trustee for the Countrywide offerings is Bank of New York Mellon. The trustee’s lawyers at Mayer Brown said in their petition for approval of the settlement that their experts estimated Countrywide MBS investors’ put-back claims to be worth between $8.8 billion and $11 billion, though we haven’t seen a public version of those expert reports so we don’t know what kind of assumptions the experts made about how many mortgage loans breached Countrywide’s representations.

Bank of America, meanwhile, has added to the confusion by highlighting the initial MBS value and unpaid principal numbers in its announcements of MBS settlements. In the June 29 press release on the $8.5 billion deal, the bank’s first sentence refers to “530 trusts with original principal balance of $424 billion.” BofA’s January 3 announcement of its $2.6 billion MBS deal with Fannie Mae and Freddie Mac (which covered mortgages the quasi-government agencies bought directly from Countrywide) emphasized $127 billion in unpaid principal on mortgage loans Countrywide sold Freddie and $4 billion in unpaid Fannie loans.

The press release on the deal with the mortgage giants didn’t make any mention of the size of Fannie and Freddie’s actual put-back claims, even though BofA knew that number--$21.6 billion—and disclosed it in a power-point presentation on the settlement.

Given that the January settlement with Fannie and Freddie was criticized as a “backdoor bailout” for BofA, why didn’t the bank emphasize the percentage of actual claims it was settling rather than the size of the unpaid principal at issue, making it seem as though the settlement gave Fannie and Freddie a much smaller recovery (in percentage terms) than they actually got?

The reason is simple: Bank of America has to worry about its shareholders. The bank’s announcements of these MBS deals are intended to remind BofA shareholders of the risk the settlements avert. From the bank’s perspective, its lawyers and executives are out there fighting the dragon of mortgage-backed securities liability, in front of an audience of shareholders. The bigger and scarier the dragon, the louder the applause from the crowd.

But will critics like Congressman Miller and others raising “pennies on the dollar” objections based on the very metrics BofA cites in its press releases succeed in derailing the $8.5 billion deal? BofA spokesman Jerry Dubrowski told OTC the settlement will be judged by its fairness. “We think that the agreement is fair to all parties,” he said. “It helps resolve a significant portion of Bank of America’s mortgage repurchase risk and potential exposure.”

One ironic twist: Congressman Miller doesn’t note this in his letter to the FHFA, but Freddie Mac was one of the Countrywide MBS investors in the Gibbs & Bruns coalition that negotiated the $8.5 billion settlement. Indeed, Freddie Mac was actually on the settlement steering committee (though Freddie, unlike the other Gibbs & Bruns investors, didn’t submit a court filing in support of the deal).

Kathy Patrick of Gibbs & Bruns told OTC that she has offered to meet with the Congressman or his staff to answer questions about the settlement. “We remain confident that accurate information about the settlement will confirm the trustee’s judgement that the settlement is fair to the covered trusts,” she said.

(Reporting by Alison Frankel)