Despite the huge losses that this deal would cause in the beginning of the next fiscal year, Bank of America is finalizing an agreement to pay $8.5 billion to settle claims by investors that purchased mortgage securities that went awry when the housing market took a turn for the worst. This deal could potentially be the single biggest settlement after the economic crisis that began in 2008 (Schwartz).
"I think this is huge," said Michael Mayo, a bank analyst with Credit Agricole in New York. "It's about time the industry resolves issues from the financial crisis and focuses more on righting their companies and improving the economy. This is the most significant step since the financial crisis that helps do that" (Schwartz). .
Although this deal would right a lot of wrong, it would come at a great cost to the company. The settlement would claim all of the company's earnings in the first half of this year. Furthermore, it would undoubtedly break ground for other big banks that face similar situations (Schwartz). .
The Bank of America settlement involves more than 20 investors, including asset managers Pimco, Metropolitan Life and BlackRock, as well as the Federal Reserve Bank of New York. They hold a combined $100 billion in home loans from mortgage-backed securities from Bank of America, the nation's biggest bank by assets. The securities affected by the deal come from Countrywide Financial, the subprime mortgage lender whose practices have come to symbolize the excesses of the housing boom. Bank of America acquired Countrywide in 2008 (Schwartz). .
The settlement also covers almost all of $424 billion in mortgages that were issued by Countrywide, which were packaged into mortgage bonds at the time. Therefore, a broader group of investors will share in the proceeds, according to the people who were briefed on the proposed settlement. Additionally, Bank of America agreed to improve its payment collection process by hiring specialists to focus on high-risk loans and improve their methods for tracking whether the bank is following its own internal loan-servicing standards (Schwartz).