NEW YORK: Bank of America will pay $9.5 billion to settle US charges that it sold bad mortgage-backed securities to mortgage giants Freddie Mac and Fannie Mae ahead of the housing bust.
The settlement, arranged with the Federal Housing Finance Agency, which oversees Fannie and Freddie, involves securities sold by BofA as well as by Countrywide and Merrill Lynch, which were acquired by the bank.
The agreement covers four lawsuits alleging the BofA entities misled the two US mortgage giants about the quality of the underlying mortgages tied to $57.5 billion in securities sold to Freddie and Fannie.
“FHFA has acted under its statutory mandate to recover losses incurred by the companies and American taxpayers and has concluded that this resolution represents a reasonable and prudent settlement of these cases,” said FHFA Director Melvin Watt.
US homeowners will also benefit from “increasing certainty” in the mortgage market due to the resolution of the cases, Watt said.
The bank meanwhile said the agreement resolves “one of the most significant remaining pieces” of litigation involving mortgage-backed securities still facing it.
BofA said it will make a cash payment to the agencies of $6.3 billion and buy back $3.2 billion in mortgage securities from them.
Freddie said it would recoup $5.1 billion in the deal, while Fannie said it would get $4.4 billion.
The two agencies had to be rescued by the government in the economic crisis, which started with a massive crash in the US housing sector and snowballed through the gigantic market for mortgage securities.
The largest losses were on bonds sold as backed by high-quality mortgages but in reality stuffed with dodgy subprime home loans that went into default by the millions.
BofA said it still faces a number of investigations by the Department of Justice, state attorneys general and other bodies on mortgage-related matters.
The bank said earnings in the first quarter will be hit by $3.7 billion due to the settlement.
Wednesday’s agreement is the latest in a series of major government settlements with big US banks over their role in packaging mortgage-backed securities ahead of the 2008 crisis.
The biggest settlement came in November, when JPMorgan Chase agreed to pay $13 billion to resolve similar allegations. Citigroup and Wells Fargo have also announced major settlements.
While US regulators have successfully recovered billions in civil payments from the banks, some critics have said the Department of Justice has failed in its duty to enforce the law by not criminally prosecuting senior bank executives for their roles in promoting investments that ultimately led to the biggest financial crisis since the depression.
In a recent op-ed column, US District Judge Jed Rakoff said the absence of high-level convictions for the mortgage debacle likely “bespeaks weaknesses in our prosecutorial system that need to be addressed.”
Like JPMorgan, BofA has been eager to close the books on mortgage litigation.
The company said the FHFA agreement means it has resolved approximately 88 percent of the value of mortgage securities for which “litigation has been filed or threatened for all Bank of America-related entities.”
The bank could face additional penalties and fines due to pending investigations. BofA “continues to cooperate with and has preliminary discussions” with regulators about settling other mortgage cases, it said.
In a separate action, New York Attorney General Eric Schneiderman announced a $25 million settlement with BofA and with former Bank of America chief executive Kenneth Lewis over Lewis’ handling of BofA’s acquisition of Merrill Lynch.
Lewis was forbidden by the New York attorney general from serving as an officer or director of a public company for three years for pushing the takeover even as he knew Merrill faced losses of $9 billion, a fact not told to Bank of America shareholders.
Lewis was ordered to pay New York $10 million, and Bank of America agreed to pay $15 million in the case.
The settlement “represents one of the first successful attempts by law enforcement to hold accountable a CEO or individual at a major institution since the financial crisis,” the attorney general’s office said in a statement.
Shares of Bank of America rose 0.7 percent to $17.30 in after-hours trading.