Bank of America Corp. agreed Wednesday to pay out $8.5 billion to investors who lost on mortgage-backed securities purchased from the lender. The blue chip investors claim the securities were of poor quality. The investments tanked when the bottom fell out of the housing industry. The payout could pave the way for some mortgage-related investors to bring action against other banks.
Investments of poor quality
The dispute started last fall when Bank of America received a letter from 22 investors. The letter claimed that mortgage-backed securities they bought from Countrywide Financial Corp. before the financial crisis did not meet the seller’s promises about the quality of the borrowers or of the collateral. The Charlotte, N.C. based bank acquired Countrywide Financial in 2008 for $4 billion.
The investors, which include BlackRock Inc., MetLife Inc., Pimco Investment Management and the Federal Reserve Bank of New York, paid out $105 billion total for the investments. The original face value of all the bonds covered in the deal totaled $424 billion. The investors were asking for $47 billion of the bonds to be bought back.
Not B of A’s first buyback this year
Bank of America already paid out $2.6 billion in buybacks to Fannie Mae and Freddie Mac in January, and $1.6 billion to insurance provider Assured Guarantee Ltd. in April. Because of these added expenses, the bank expects to report a net loss of $8.6 billion to $9.1 billion in the second quarter of this year.
CEO could be in hot water
The mortgage buyback deal is the largest ever in the U.S. The Wall Street Journal speculates that the bank’s CEO, Brian Moynihan, who acquired the top job only a year and a half ago, may have reason to fear for his position. Last year, Moynihan vowed to fight “day-to-day, hand-to-hand combat” against investor buybacks and to “not just do a settlement to move the matter behind us.”
May pave the way for other buybacks
The precedent of this buyback deal may lead to others, says the Wall Street Journal. Investment holders, who feel their mortgage-backed securities didn’t perform the way they were promised may decide to seek similar deals with other major U.S. banks. Bank of America, JPMorgan Chase and Wells Fargo banks collect payments for about half of all outstanding mortgages in the U.S.