Bank of America Sets Aside $14 Billion for Mortgage Securities Charges

Arjun Dave
29 Jun, 2011
New York City

Bank of America agreed to pay between $8.5 billion and $9.1 billion for losses linked to mortgage securities that were sold between 2004 and 2008. The bank also guided second quarter net income between $3.2 billion and $3.7 billion.

[R]12:25 AM New York – Bank of America agreed to pay between $8.5 billion and $9.1 billion for losses linked to mortgage securities that were sold between 2004 and 2008. The bank also guided second quarter net income between $3.2 billion and $3.7 billion.[/R]

Bank of America Corporation ((BAC)) advanced 3.4% or 37 cents to $11.19 after the holding company agreed to resolve all of legacy of residential mortgage.

The agreement includes a cash payment of $8.5 billion to the covered trusts and record additional $5.5 billion provision to its representations and warranties liability for both Government-Sponsored Enterprises and non-GSE exposures in the second quarter of 2011.

As a result of the settlement, the bank expects to report net loss in the range of $8.6 billion to $9.1 billion in the second quarter of 2011 or $0.88 to $0.93 per diluted share.

The company also expects to report net income in the range of $3.2 billion to $3.7 billion in the second quarter of 2011 or $0.28 to $0.33 per fully diluted share.

The settlement is an admission that the bank overpaid for Countrywide and it will also set aside $6.4 billion to cover troubled mortgage business that includes a write down of $2.6 billion for the subprime lending unit.

The settlement covers 525 legacy Countrywide Financial first-lien RMBS trusts and five legacy Countrywide second-lien RMBS trusts with mortgage loans principally originated between 2004 and 2008.

The settlement ended the nine-month fight between 22 investors including MetLife, BlackRock and Federal Reserve Bank of New York that collectively hold $56 billion in mortgage securities issued by Countrywide.

The Bank of America settlement is required to be approved by a court in New York.

Despite the largest settlement related to subprime securities, largely rooted in the Countrywide Financial portfolio of securities, the bank is still expected to face charged related mortgage securities sold by the bank.

Bank of America is expected to meet its settlement amount from its current cash and future cash flows and is not expected to raise capital through stock sale or borrowings.