Bank of America (NYSE:BAC) is nearing an $8.5 billion settlement with high-profile investors over mortgage loans, according to people familiar with the matter.
The group of more than 20 investors includes Pacific Investment Management Co., BlackRock Inc., MetLife Inc. and the Federal Reserve Bank of New York. The group had been pressuring the Charlotte, N.C.-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 that 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, one of the nation's biggest banks by assets.
The latest settlement is considered as the single biggest tied to the subprime mortgage boom that led to the financial crisis of 2008. It will also help the bank to put the Countrywide woes behind it.
The settlement, which would surpass the bank's earnings for the last three years, is more than triple the $2.5 billion that it paid in 2008 for Countrywide Financial Corp.
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 $2.5 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.
Shares of Bank of America closed at $10.82 Tuesday on the New York Stock Exchange. In the pre-market hours Wednesday, they were up 25 cents, or 2.31 percent, to $11.07.