Bank of America and its Countrywide unit have reportedly agreed to pay $8.5 billion to settle claims made by a group that includes the Federal Reserve Bank of New York, Pimco Investment Management, and Blackrock Financial Management, who have been pressing the bank for a year to honor its obligation to buyback $47 billion in defaulted mortgages that the group purchased as mortgage-backed bonds from Countrywide. Bank of America bought Countrywide in 2008 for $4 billion.
The Federal Reserve stands in the shoes of American International Group, Inc., as a result of its takeover of assets of AIG, which collapsed under the weight of a mountain of bad bets on the housing market.
Countrywide achieved notoriety for knowingly making bad mortgage loans, then bundling and selling them to investors. May of the loans went into default as the housing market collapsed.
According to Citi analyst Keith Horowitz, the settlement, which covers 530 trusts and amounts to only 2 percent of the original principal balance of $424 billion, removes one of the largest investor risks for Bank of America. The settlement is subject to court approval.
Bank of America CEO Brian Moynihan was quoted as saying that the settlement would minimize “future economic uncertainty” in the banking business and “clean up the mortgage issues largely stemming from our purchase of Countrywide.”
Investors may now be able to get similar settlements from other major U.S. banks that created and sold toxic mortgage-backed securities.
Stocks in the financial sector responded positively to the news, perhaps because the settlement provides a framework for others to follow.
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