It represents what is likely to be the single biggest settlement tied to the subprime mortgage boom and the subsequent financial crisis of 2008.
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.
Michael Mayo, a bank analyst with Crédit Agricole in New York., said: “I think this is huge. 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 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.
“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 settlement, first reported by the Wall Street Journal, would be the largest such sum in the banking industry to date. The deal would have to be approved by the bank’s board, which met on Tuesday to discuss it, according to the source.
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.
Paul Miller, an analyst with FBR Capital Markets, said: “The Street will view this as a good number.”
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.
Bank of America, JPMorgan Chase, Citigroup and Wells Fargo have the greatest exposure to the legal claims that they bundled troubled home loans and sold them as sound investments. Together, they are likely to absorb roughly 40 percent of the industry’s mortgage-related losses.
In a research note, Paul Miller of FBR Capital Markets projected that Bank of America could face a total of $25 billion of losses from the soured mortgages, the most of any of the major banks.
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. [via The New York Times, The Huff Post and Los Angeles Times]