Bank of America has agreed to pay $8.5bn (£5.3bn) to settle claims that the bank sold poor-quality mortgage loans to investors ahead of the housing collapse.
The deal represents the single biggest settlement so far tied to the sub-prime mortgage boom and bust. The bank said the settlement covers nearly all the residential mortgage-backed securitisation (RMBS) investments tied to its controversial Countrywide lending unit. The RMBSs had an original balance of $424bn.
The settlement follows legal action from a group of 22 investors including the Federal Reserve Bank of New York, Pimco Investment Management, and Blackrock, which argued Countrywide enriched itself at the expense of investors by continuing to service bad loans while running up servicing fees.
The payment would wipe out all the profits that BoA, the US's largest bank by assets, has made since the onset of the financial crisis in 2008. The bank will pay $8.5bn in cash to settle the claims and set aside $5.5bn for further possible liabilities tied to sub-prime loans.
Bank of America's chief executive, Brian Moynihan, said: "This is another important step we are taking in the interest of our shareholders to minimise the impact of future economic uncertainty and put legacy issues behind us. We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide."
The bank bought Countrywide for $4.1bn in 2008 just as the largest sub-prime home lender was running aground. It has proved a costly purchase. This is the third settlement Bank of America has made relating to Countrywide in the past six months. In January, the bank paid $2.8bn to settle claims that it mis-sold mortgages to state-sponsored lenders Fannie Mae and Freddie Mac. In April, the company and Countrywide signed a $1.1bn agreement with Assured Guaranty to resolve the bond insurer's claims that it to had been misled by the bank. Assured Guaranty's chief executive Dominic Frederico said negotiating with BoA had been like "Chinese water torture".
BoA's shares rose at it appeared to be putting its Countrywide woes behind it. But there are likely to be more settlements to come for BoA and its competitors. The banking industry is being investigated by all 50 state attorneys general over alleged abuses by the biggest mortgage firms. They are pressing the banks to pay up to $30bn in fines and penalties.
In an April research note, Paul Miller of FBR Capital Markets projected that Bank of America could face a total of $25bn of losses from the bad loans. Its rivals JP Morgan Chase, Citigroup and Wells Fargo also have large exposures to legal claims.
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