Bank of America is near a deal to pay $8.5bn to investors, including the Federal Reserve Bank of New York, to settle claims that mortgage-backed securities sold by its Countrywide Financial unit failed to meet underwriting requirements and other guidelines, people familiar with the situation said.
The agreement would be the largest so far by a bank to settle such claims and would exceed BofAs earnings for all of 2009, the last year for which it showed a profit. BofAs board, which met on Tuesday, must approve the deal, people familiar with the matter said.
An agreement would be a significant step for BofA towards resolving legacy claims related to its 2008 purchase of Countrywide.
Roughly 22 large bond investors, including BlackRock, MetLife and Freddie Mac, alleged that loans sold by Countrywide failed to meet underwriting guidelines and that it failed to properly service the loans once they were packaged and sold to investors.
A deal could pave the way for similar agreements between private investors and other banks, including Wells Fargo and JPMorgan Chase, which in addition to BofA, service the vast majority of US mortgages. The risk posed by such claims by private investors has been a growing concern among bank shareholders, in part, because they have been hard to quantify.
In January, BofA agreed to pay $2.6bn to Fannie Mae and Freddie Mac, the government-owned mortgage finance companies, to settle claims that Countrywide sold those companies loans that did not meet underwriting guidelines. When the housing market began to falter, the improperly originated loans went bad at a higher than normal rate.
BofAs chief executive, Brian Moynihan, has made it a top priority to resolve issues related to the housing crisis as way to get the bank back on track.
The Financial Times Limited 2011