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Bank of America to pay $8b for failed mortgage securities

July 10, 2011

BoA takes $8b hit on toxic mortgages

THE Bank of America is completing an agreement to pay $US8.5 billion ($8 billion) to settle claims by investors that bought mortgage securities that soured when the housing bubble burst.

The settlement would wipe out all of the company’s earnings in the first half of this year and it could also provide a template for deals with other big banks that face tens of billions in similar claims.

”I think this is huge,” Michael Mayo, a bank analyst with Credit Agricole, said. ”It’s about time the industry resolves issues from the financial crisis and focuses more on righting their companies and improving the economy. This is the most significant step since the financial crisis that helps do that.”

The proposed settlement is with a group of more than 20 investors that includes the asset managers Pimco, Metropolitan Life and BlackRock, as well as the Federal Reserve Bank of New York. Together they hold mortgage-backed securities from Bank of America, the US’s biggest bank by assets.

The securities affected by the deal come from Countrywide Financial, the subprime mortgage lender whose practices have come to symbolise the excesses of the housing boom. Bank of America bought it in 2008.

The settlement covers nearly all of the $US424 billion in mortgages that Countrywide issued, which were then packaged into mortgage bonds. That means a broader group of investors will share in the proceeds, according to people who were briefed on the proposed settlement.

In addition, the deal will require Bank of America to improve its payment collection process by hiring specialists to focus on high-risk loans and do a better job of tracking whether the bank is adhering to its own loan-servicing standards.

For the investors, a settlement avoids a costly, drawn-out legal fight, while Bank of America can clear away one of the biggest clouds hanging over the company.

Once it is approved by Bank of America’s board, the settlement will require court approval in New York. Bank of America is expected to take a $US5 billion after-tax charge in the second quarter to cover the payout.

If successful, the bank hopes to turn attention away from the huge payout and to the bank’s performance in the second half of the year.

Still, other huge risks loom from the fallout of the subprime mortgage crisis. All 50 US state attorneys-general are in the final stages of settling an investigation into abuses by the biggest mortgage servicers and are pressing the banks to pay up to $US30 billion in fines and penalties.

Insurance companies that backed many of the soured mortgage-backed securities are also pressing for reimbursement.

The New York Times

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