If Bank of America’s $8.5 billion deal to settle nearly all lawsuits claiming Countrywide fundamentally lied to investors about the mortgages it stuffed into securities is approved by a judge, BofA has really won a major victory.

The settlement amount is only 2% of the face value of the loans when securitized ($424 billion), and only 4% of the principal still outstanding on those loans, ($221 billion). The face value amounts are relevant because the securities contracts require BofA

to buy back each loan that investors prove Countrywide meaningfully lied about at face value. As a result, settlement of these “rep and warrant” cases would remove a massive cloud over BofA’s balance sheet. (Rep and warrant refers to the representations and warrantees sections of the securities contracts, where Countrywide makes the promises about loan quality.)

But even if the deal is ultimately approved, Bank of America (BAC) isn’t out of the woods. On the investor call this morning and in its related materials, BofA makes clear the settlement doesn’t cover all possible rep and warrant cases it faces, including possible action by Freddie Mac against non-Countrywide BofA mortgage-backed securities, or by Fannie Mae against Countrywide and non-Countrywide BofA mortgage-backed securities. The settlement doesn’t resolve securities fraud suits or any law enforcement actions either. Even so, the deal would take an awful lot of possible liability off the table.

One major hurdle stands in the deal’s way: a judge’s sign-off. In recent settlements between the Securities and Exchange Commission and banks, a few judges have forced the parties to renegotiate deals, and it’s not obvious that this one will sail through smoothly.

From the judge’s perspective, the best thing the deal has going for it is the support of 22 major investors, representing a range of investor types. Wall Street players such as PIMCO, BlackRock (BLK) and Goldman Sachs (GS) are supporting the deal, but so are institutional investors like TIAA (the Teachers Insurance and Annuity Association of America) and Thrivent Financial for Lutherans, and the quasi-governmental Federal Home Loan Bank of Atlanta. (Although the Federal Reserve’s Maiden Lane entities also support the deal, it’s important to note that BlackRock manages those entities and thus presumably influenced its support of the deal.)

For the deal to pass judicial muster, BofA and Bank of New York (BK) will need to convince the judge that it serves the interest of the investors in all 530 Countrywide securitization deals that Bank of New York serves as trustee for, and getting the blessing of a diverse group of investors should help the cause. But it doesn’t guarantee a judge will sign off.

Wall Street’s version of class action

To really understand the deal and the risks it faces, think of it like a class action against Bank of America, where the Bank of New York is the lead plaintiff, empowered to cut a deal with BofA on behalf of the rest of the class. In the analogy, the class is all of the investors in the 530 securitization deals, and the 22 investors are like mini-lead plaintiffs; they can’t bind the rest of the class, but they stand up to say “hey, our claims are typical, and we think it’s a good deal.”

In a class action, people can opt out of the class but are otherwise included. In this analogy, that would include all the investors in these 530 deals that haven’t yet sued BofA. But here’s where the class action analogy breaks down: this deal doesn’t have an opt-out for injured investors. The settlement would end all the existing mortgage buyback litigation claiming Countrywide fundamentally lied about the quality of the loans it securitized in those 530 deals, even though those plaintiffs had no role in negotiating the deal. That’s because for investors to sue, they have to say Bank of New York, the trustee, has failed to act to protect investors, so the investors are forced to act on their own. Now that Bank of New York has settled, that’s no longer true.

For example, Walnut Place investment companies sued Countrywide in this type of case earlier this year. Did they know this deal was in the works? Did they sign off on it? If not, will they object, believing their suit provides a path to a better deal? If they object and the judge signs off, will they go after BNY for failing to cut a good enough deal? Attorneys for the Walnut Place companies haven’t returned a call for comment. How many more suits are there like Walnut Place’s? What will those plaintiffs say?

Objections by investor groups outside the 22 supporting this proposed deal are one major factor the judge will consider in deciding whether or not to approve it. Another related factor the judge may consider is the seemingly inherent conflicts of interest involved among the negotiating parties. The Bank of New York may face liability for its performance of its trustee role, and perhaps this settlement would mitigate those claims. Does that lead it to settle more cheaply than it should?

A good deal for Bank of America

As to that $8.5 billion number, it seems awfully small. Yes, rep and warrant suits usually settle cheaply because going through each loan file to prove Countrywide lied is hard and expensive, and with BofA’s promise to fight loan by loan, the litigation costs were sure to be as high as possible for both sides. But even so plaintiffs are taking pennies on the dollar. How many pennies precisely isn’t clear, because if this holds up we’ll never know how many of the loans really were bad enough to force BofA to buy back; that is, we’ll never know what percentage of the $424 billion really was at stake. But given what’s known about Countrywide, it seems clear that “pennies” is accurate enough.

The judge will also consider a part of the deal that BofA was really vague about — changes to its mortgage servicing and foreclosure practices, including its “documentation issues.” What are those changes? What do they mean for homeowners? Will a judge find them appropriate?

For now, BofA can let out a big exhale, plaintiff investors have some scrambling to do, and the settlement approval process gets underway.