August 15, 2022

Bank of America Near $8.5 Billion Deal on Mortgage Securities

The company’s board has yet to approve the settlement, but both sides are aiming to get it done by Thursday, according to an individual close to the negotiations. The timing is intended to take place before the second quarter ends.

Bank of America stock jumped 38 cents in after-hours trading to $11.19 a share after news reports of the deal.

The issue of how much the bank would have to compensate investors in mortgage securities it had assembled has been hanging over the shares since last fall. But the company does not anticipate having to raise capital or sell stock to come up with the money for the settlement.

The settlement was less than the tens of billions some investors feared Bank of America would have to shell out, but it will wipe out all of the company earnings in the first half of this year, while heightening the risks that other banks will be sued by investors who hold securities the banks assembled from home loans that have since defaulted.

  “I think this is huge,” said Mike Mayo, a bank analyst with Credit Agricole in New York. “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.”

Last fall, analysts warned that the toll from suits by these investors and other private holders could total tens of billions of dollars, but the proposed deal would lift some of that uncertainty. The securities affected by the deal come almost entirely from Countrywide, the subprime mortgage lender whose excesses have come to symbolize the excesses of the housing boom. Bank of America bought Countrywide in 2008.

The $8.5 billion settlement represents just a portion of the bank’s total exposure to faulty mortgage bonds. Analysts say it appears to cover about $56 billion of the roughly $222 billion of troubled loans that were bundled into securities, largely by the Countrywide Financial business in acquired in early 2008.

Other huge risks from the fallout of the subprime mortgage crisis still loom — both for Bank of America and its giant peers.  All 50 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 $30 billion in fines and penalties.

What’s more, insurance companies that backed many of the soured mortgage-backed securities are also pressing for reimbursement,  arguing that the original mortgages were underwritten with false information and didn’t conform to normal standards.

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