Bank of America has agreed to pay investors $8.5 billion to compensate them for Countrywide's dealings years before the subprime lender was acquired by BofA.
The company said in a statement Wednesday that the settlement resolves "nearly all" of its repurchase exposure stemming from legacy first-lien residential mortgage-backed securities (RMBS) issued by Countrywide.
The agreement involves 530 trusts, five of which are second-lien trusts, and covers RMBS that carry a total original principal balance of $424 billion.
As part of the settlement, Bank of America has also agreed to implement certain servicing changes, including transferring high-risk loans owned by the trusts to subservicers and paying additional fees to the investors if benchmarked default-servicing timelines are not met.
The company estimates the costs associated with the supplementary servicing obligations to be approximately $400 million, and notes that the agreed upon actions are consistent with the consent orders issued in April by federal regulators.
In addition to the arrangement, which settles claims from 22 private institutional investors and is subject to final court approval, BofA says it will also be making a $5.5
billion provision to address expected loan buyback liability for both GSE and non-GSE exposures in the second quarter.
Bank of America acquired Countrywide, once the largest subprime lender in the country, in July of 2008. The company has paid out billions of dollars to settle lawsuits related to Countrywide's business prior to the acquisition, including a multi-state settlement involving mandatory modifications and restitution for homeowners with Countrywide loans.
""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,"" said Brian Moynihan, Bank of America's CEO. ""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.""
Bank of America says Wednesday's settlement will eat into its second-quarter earnings, scheduled for release on July 19. Company officials are advising investors that the bank will report a loss for Q2 in the range of $8.6 billion to $9.1 billion, or 88 cents to 93 cents per share, as opposed to net income of 28 cents to 33 cents per share without the settlement outlay.
Still, financial markets and the investment community see the settlement agreement as a positive. Analysts say it eliminates a serious cloud of uncertainty that's been hanging over one of the nation's most prominent financial fixtures.
BofA's stock price reportedly rose more than 5 percent in pre-market trading and has seen a steady rally throughout the day, with other shares of financials following suit on its coattails.
Fitch Ratings said it views the settlement as a favorable development, adding that the recognition of the cost associated with the agreement in the second quarter decreases future financial uncertainty and considerably reduces the drag on future earnings from this issue.