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BofA to Pay $8.5 Billion to Settle Countrywide Mortgages

CNBC.com
Wednesday, 29 Jun 2011 | 9:26 AM ET

Bank of America has reached a final settlement in which it will pay $8.5 billion in cash to a group of 530 private trusts who say the bank violated its obligations regarding mortgages issued from Countrywide Financial.

Bank of America branch, New York City.
Oliver Quillia for cnbc.com
Bank of America branch, New York City.

The company said said it expected to take more than $20 billion in charges after settling with mortgage bond investors, resulting in a second-quarter loss.

Countrywide, at one time the nation's largest housing lender, was purchased by Bank of America during the height of the financial crisis. The company has come under scrutiny for its lending practices, particularly to low-income buyers.

Bank of America settled with a group of investors, including BlackRock Financial Management, who alleged the bonds they bought from Countrywide Financial were packed with mortgages that should never have been sold.

In addition to the $8.5 billion BofA will pay to settle the claims, the firm also will provide another $5.5 billion for exposure to loans regarding government sponsored entities Fannie Mae and Freddie Mac as well as non-GSE exposures.

"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," BofA CEO Brian Moynihan said in a statement. "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 settlement helps put to rest charges that the bank violated its servicing agreements with home-loan buyers on mortgages valued at tens of billions of dollars during the housing boom. It would also end one of the more awkward chapters in Bank of America's battle with dissatisfied mortgage holders and buyers of mortgage-backed securities.

The settlement could pressure other big banks, including JPMorgan Chase and Wells Fargo , to settle similar lawsuits with mortgage bond investors.

Bank of America has been dogged all year by concerns about its many legal issues—a topic that consumes multiple pages in the bank’s most recent annual report.

As recently as January, Bank of America’s chief financial officer estimated losses of no more than $7 billion to $10 billion from so-called put-backs, or private-label mortgages like the ones in question in the pending settlement.

But a more recent estimate from Credit Agricole Securities financials analyst Mike Mayo pegged potential losses from put-backs at $7 billion, suggesting that the market may have been expecting a lower number.

BofA said the settlement now will cause it to report a net loss in the range of $8.6 billion to $9.1 billion in the second quarter, which would equate to 88 to 93 cents per share.

Excluding the mortgage and other non-operating items, the company expects to report net income of 28 to 33 cents per share.

Shares rose more than 5 percent in premarket trading as the settlement takes away a key area of uncertainty in the bank's financial picture.

—CNBC's Kate Kelly and Reuters contributed to this report.

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