Bank of America (NYSE:BAC), one of the nation's largest banks by assets, has confirmed an $8.5 billion settlement with high-profile investors over mortgage loans, and would report a second-quarter loss in the range of $8.6 billion to $9.1 billion.
On the news, shares of Bank of America rose 5 percent, or 56 cents, in the pre-market hours Wednesday to $11.37 on the New York Stock Exchange. They closed Tuesday's regular trading session at $10.82.
A group of 22 investors including Pacific Investment Management Co., BlackRock Inc., MetLife Inc . and the Federal Reserve Bank of New York had been pressuring the Charlotte, North Carolina-based bank to repurchase mortgages worth more than $40 billion, which the company's Countrywide unit sold to them in the form of bonds.
The investor group, which alleged Bank of America has violated its obligations on at least $47 billion worth of home loans, holds over $80 billion in mortgage-backed securities in home loans from Bank of America.
The settlement deal includes a cash payment of $8.5 billion after final court approval. The company also intends to record an additional $5.5 billion provision to its representations and warranties liability for both Government-Sponsored Enterprises (GSE) and non-GSE exposures in the second quarter of 2011.
The settlement represents Countrywide-issued first-lien residential mortgage-backed securitization (MBS) loans, representing 530 trusts with original principal balance of $424 billion.
The MBS settlement for $8.5 billion is another constructive step management has made in putting legacy issues behind the bank. The MBSes, originated by BAC's predecessor firms, particularly Countrywide, had $359 billion in remaining principal balances at March 31, of which $222 billion was seriously delinquent or in default or foreclosure.
An $8.5 billion settlement represents about 88 basis points of the original principal amount, or 237 basis points of the remaining balance.
"These costs would be above the percentage levels agreed to in the GSE settlement, but still much lower than many investors had feared, and would be a significant positive for BAC's stock," Susquehanna Financial analyst David Hilder wrote in a note to clients.
The latest settlement is considered as the single biggest tied to the subprime mortgage boom that led to financial crisis of 2008. It will also help the bank to put the Countrywide woes behind it.
"This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us," said Chief Executive Brian Moynihan. "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 company believes it will have recorded reserves in its financial statements for a substantial portion of its representations and warranties exposure as measured by original unpaid principal balance. The company also is estimating a range of possible loss for the remainder.
Meanwhile, the latest settlement would result Bank of America reporting a loss for the second quarter in the range of 88 cents to 93 cents a share. Excluding the settlement and other one-time items, the company expects to report net income in the range of $3.2 billion to $3.7 billion, or 28 cents to 33 cents a share.
Wall Street expects the bank to earn 28 cents a share for the second quarter, according to analysts polled by Thomson Reuters. These estimates typically exclude one-time items.
Bank of America, a Dow component, also expects to record $6.4 billion in other mortgage-related charges in the second quarter of 2011, including a impairment charge of $2.6 billion to write off the balance of goodwill in the Consumer Real Estate Services business.
However, the impairment charge would not affect reported Tier 1 and tangible equity capital ratios, the bank said.
Meanwhile, the settlement came much earlier and faster than market analysts' anticipation.
"The speed and timing of this settlement suggests that as bank regulators reviewed BAC capital plans and its desire to raise its dividend in the second half of 2011, the private-label liabilities were viewed as a significant unknown that BAC needed to "ring-fence" in order to move forward," Hilder wrote.
JP Morgan, Wells Fargo, Citigroup
Meanwhile, the settlement would not end with Bank of America alone, and may trigger similar claims with other banking institutions such as Wells Fargo (NYSE:WFC), JP Morgan & Chase (NYSE:JPM) and Citigroup (NYSE:C). Along with Bank of America, these financial heavyweights could absorb more than 35 percent of the industry's mortgage-related losses.
Paul Miller of FBR Capital Markets expects Bank of America could face $25 billion in losses from the risky mortgages. The analyst also expects JP Morgan's losses could reach about $11.2 billion, with Wells Fargo and Citigroup facing potential losses in excess of $5 billion and $3 billion, respectively.
In late 2000s, several mortgage issuers packaged most of their loans and sold them to private investors as well as to government-sponsored entities such as Fannie Mae and Freddie Mac. Such institutions, along with other institutional investors, are now demanding the banks to repurchase mortgage bonds, alleging that the lenders have understated the risk involved in the loans.
In January, Bank of America reached a settlement with Fannie Mae and Freddie Mac to buy back more than $2 billion in troubled mortgages. In April, it agreed to pay an estimated $1.6 billion to bond issuer Assured Guarantee, which had sought to hold the bank liable for poor underwriting standards of Countrywide.
Following is the list of the 22 investors agreed for the latest settlement from Bank of America. The list includes many of the major U.S. and foreign institutional investors:
* AEGON USA Investment Management LLC.
* Bayerische Landesbank.
* BlackRock Financial Management, Inc.
* Federal Home Loan Bank of Atlanta.
* The Federal Reserve Bank of New York's Maiden Lane entities.
* Goldman Sachs Asset Management L.P.
* ING Investment Management L.L.C.
* ING Bank fsb.
* ING Capital LLC.
* Invesco Advisers, Inc.
* Kore Advisors, L.P.
* Landesbank Baden-Wuerttemberg and LBBW Asset Management (Ireland) PLC, Dublin.
* Metropolitan Life Insurance Company (Metlife).
* Nationwide Mutual Insurance Company and its affiliate companies.
* Neuberger Berman Europe Limited.
* New York Life Investment Management LLC.
* Pacific Investment Management Company LLC (PIMCO).
* Prudential Investment Management, Inc.
* Teachers Insurance and Annuity Association of America.
* Thrivent Financial for Lutherans.
* Trust Company of the West and its affiliated companies controlled by The TCW Group, Inc.
* Western Asset Management Company.