Bank of Americas pending settlement with large investors would be the first… (Robert Caplin, Bloomberg )
In the latest blow from its takeover of Countrywide Financial Corp., Bank of America Corp. tentatively agreed to pay $8.5 billion to settle claims by large investors stung by losses on mortgage-related securities that Countrywide issued.
The final details of the agreement were still being worked out, according to a bank executive knowledgeable about the pending settlement but not authorized to discuss it publicly.
The 22 investors, including money-management giants Pacific Investment Management Co. of Newport Beach and BlackRock Inc. of New York, held $56 billion in bonds backed by loans from Countrywide, once the nation's largest home lender and an aggressive supplier of subprime and other high-risk mortgages.
"This transaction essentially takes all Countrywide's private-label mortgage-backed securities off the table," the executive said Tuesday. "It's considered to be a significant step forward in Bank of America putting the Countrywide issues behind us."
The pending settlement covers only mortgage-related securities issued by Countrywide and not those that BofA issued on its own.
BofA shares, which had lost 3 cents on the day, were up 12 cents at $10.94 in after-hours trading after word of the impending deal leaked. Some estimates of the bank's liability had been much higher than $8.5 billion.
"The Street will view this as a good number," said Paul Miller, an analyst with FBR Capital Markets.
Nearly all major mortgage issuers of that era bundled up most of their loans and sold them to private investors as well as to government-sponsored entities such as Fannie Mae and Freddie Mac.
Fannie, Freddie and a host of institutional investors have demanded that the banks buy back many of the mortgage bonds, contending that the lenders understated the riskiness of the loans and mishandled troubled borrowers after the industry's meltdown beginning in 2007.
Bank of America agreed in January to pay Fannie and Freddie $2.8 billion to settle demands for buybacks of flawed home loans, in addition to some $3.5 billion in such payments it had already made to them.
The pending settlement would be the first with private mortgage bond investors, but it's unlikely to be the last. Among other big lenders with major exposure are Wells Fargo & Co. and JPMorgan Chase & Co. Chase had bought the remains of one of the most aggressive lenders, Washington Mutual Bank, after the Seattle-based thrift became the largest bank failure in history.
BofA, based in Charlotte, N.C., has struggled to put Countrywide's woes behind it since 2008 when it paid $2.5 billion in stock for the Calabasas-based mortgage specialist.
The bank settled securities-fraud accusations by some major Countrywide shareholders in August, but before the deal was finalized 33 plaintiffs — including the California Public Employees' Retirement System — dropped out to seek more money on their own.
And in April, BofA agreed to pay $1.1 billion to mortgage insurer Assured Guaranty Ltd. Other mortgage insurers are pressing claims to try to recover losses they sustained on Countrywide loans.
BofA is also among five major loan servicers negotiating with a coalition of state attorneys general and federal officials seeking damages and reforms following revelations that the lenders shortcut procedures and failed to follow laws while foreclosing on borrowers.
The damages under discussion in that case range from a total of $5 billion to more than $20 billion, according to people close to the negotiations.