Government-sponsored mortgage-finance giants Fannie Mae and Freddie Mac demanded compensation from Bank of America for losses on securities that were backed by faulty loans given out during the time of the housing boom. The Bank of America (BofA) has agreed to settle the claims made by Fannie Mae and Freddie Mac by paying the finance companies $9.5 billion, LA Times said.
The settlement was announced yesterday (Wednesday, March 26th). BofA stated that the settlement takes care of all claims made by the Federal Housing Finance Agency (FHFA). The FHFA is the agency which regulates Fannie Mae and Freddie Mac.
BofA is only one of eighteen financial institutions that FHFA sued in 2011. BofA, however, has the largest settlement of all those institutions. Other FHFA settlements included agreements with JP Morgan Chase and Co. ($5.1 billion), Deutsche Bank ($1.9 billion), Morgan Stanley ($1.25 billion), Union Bank of Switzerland ($885 million), Credit Suisse Holdings ($885 million), and Wells Fargo and Co., which settled for $335 million before FHFA had a chance to sue.
BofA said that the settlement with the FHFA takes care of a significant liability in the litigation surrounding securities backed by housing-boom mortgages, while also covering damages by the two major mortgage market players that BofA acquired during the housing crisis – Countrywide Financial in Calabasas and Merrill Lynch. Countrywide is the nation’s largest sub-prime lender. Merrill Lynch was a major generator of bonds backed by high-risk mortgages.
This settlement is on the tail-end of a number of losses BofA has dealt with. The mortgage meltdown in 2007 created about $50 billion in losses and legal costs. Then, of course, there was the global financial crisis the next year (2008). BofA suffered more damages and legal costs than any other bank because of and as a result of the mortgage meltdown of 2007.
According to USA Today, the 2010 lawsuit brought against BofA by the New York attorney general’s office settled for $25 million. The New York attorney generals’ office had claimed BofA misled investors about mounting losses at Merrill Lynch before it acquired the company in 2008. To reimburse the attorney general for investigation and litigation costs, BofA will pay $15 million and make certain corporate governance changes. The other $10 million of the $25 million will be paid by Ken Lewis, BofA’s former chief executive, who is also banned from leading any public company for three years.
Surprisingly, even with their long list of settlements, Bank of America’s stock price has more than tripled in the past few years. On Wednesday, BofA was even declared by the Federal Reserve to be strong enough to reward shareholders by raising the annual dividend from four cents to twenty cents. that was not all that the Fed did for BofA. The Fed also approved a plan for BofA to repurchase its own stock.
The dollar amount Bank of America needs to pay off for all its settlements is staggering, but the fact is that it will not be the bank itself paying those settlements; it will be the shareholders.
BofA’s mortgage troubles are not yet over. The bank has described other investigations and lawsuits which may lead to more penalties and fines by the US. Department of Justice, state attorney generals and other members of a financial fraud task force made up of state and federal authorities.
Bank of America has said that it will continue to cooperate and that it is currently in preliminary discussions to hopefully resolve all claims against it.