Bank of America's deal with Fannie Mae and Freddie Mac is the largest… (Davis Turner, Bloomberg )
Putting to rest one of its biggest remaining headaches, Bank of America Corp. has agreed to pay $9.5 billion to settle claims by Fannie Mae and Freddie Mac.
The government-sponsored mortgage finance giants had demanded compensation from the Charlotte, N.C., bank for losses on securities backed by faulty loans issued during the housing boom.
The bank said the settlement, announced Wednesday, resolves all claims against BofA by the Federal Housing Finance Agency, the agency that regulates Fannie and Freddie.
BofA already had suffered about $50 billion in losses and legal costs stemming from the mortgage meltdown in 2007 and the global financial crisis that ensued the following year — more financial damage than any other bank.
But despite the long string of settlements, its stock price has more than tripled over the last few years. What's more, the bank reached another milestone Wednesday when the Federal Reserve deemed the institution strong enough to reward its shareholders by raising its annual dividend from 4 cents to 20 cents. The Fed also approved a bank plan to repurchase its own shares.
"Today's settlement marks an important milestone for BofA, as it moves on from the problems of the past to hopefully a less stressful future," said RBC Capital Markets bank analyst Joe Morford. "The dividend increase in particular acknowledges how far the company has come in strengthening its capital ratios and improving the consistency of its earnings."
Separately Wednesday, Bank of America said it agreed to a $25-million settlement of a 2010 lawsuit brought by the New York attorney's general's office, which had accused the bank of misleading investors about mounting losses at Merrill Lynch before it acquired the Wall Street giant in 2008.
BofA said it would pay $15 million to reimburse the attorney general for investigation and litigation costs, and adopt certain corporate governance changes. The other $10 million is to be paid by its former chief executive, Ken Lewis, who also agreed to be banned from leading any public company for three years.
The parade of billion-dollar mortgage settlements has been proceeding for so long now that the public has become desensitized to the scope of the problems, said Bert Ely, a bank consultant in Alexandria, Va.
"There have been so many stories like this. This is just one more," Ely said. "It shows the magnitude of the problem, including the fact that we had millions of mortgages across the whole industry involved in this."
Shareholders will ultimately pay for all the settlements, he said.
The Bank of America agreement is the largest in a series of related settlements by the FHFA, which had sued 18 financial institutions in 2011. It alleged securities law violations and, in some instances, fraud in the sale of private-label mortgage securities — those without government guarantees — to Fannie and Freddie as investments.
Previous FHFA settlements included agreements with JPMorgan Chase & Co. ($5.1 billion), Deutsche Bank ($1.9 billion), Morgan Stanley ($1.25 billion), Union Bank of Switzerland ($885 million), Credit Suisse Holdings ($885 million) and Wells Fargo & Co., which reached a $335-million settlement with FHFA without having been sued.
But even those massive figures don't compare to the cumulative damage Wall Street firms inflicted on homeowners and borrowers during the crisis, said Dennis Kelleher, chief executive of Better Markets Inc., a liberal nonprofit focused on financial reform.
"Wall Street enriched itself on a massive fraudulent scheme that paid their bonuses and stuck the American people with the bill," he said. "This settlement is just the latest in trying to recoup some of the fraudulent losses that the American people had to pay for, and on the economic side are still paying for."
Bank of America said the FHFA settlement resolves one of the most significant remaining liabilities in the flood of litigation surrounding securities backed by housing-boom mortgages.
It also covers damages attributable to the two major mortgage market players Bank of America acquired during the crisis: Countrywide Financial in Calabasas, the nation's largest subprime lender, and Merrill Lynch, which had been a major generator of bonds backed by high-risk mortgages.
The bank is not yet out of its thicket of mortgage troubles.
It noted that it has previously described additional investigations and lawsuits that could lead to more penalties and fines by the U.S. Department of Justice, state attorneys general and other members of a financial fraud task force made up of various state and federal authorities.
"The company continues to cooperate with and has had preliminary discussions about a potential resolution of these matters," it said.