Bank of America Said to Near $8.5 Billion Settlement With Bondholder Group

Bank of America Corp. (BAC), the biggest U.S. bank by assets, is close to announcing an $8.5 billion settlement over soured mortgages after a group of bondholders including BlackRock Inc. (BLK) demanded refunds, said three people briefed on the negotiations.

The company expects that the deal will resolve more than half of its costs tied to demands made by institutional investors, said one of the people, who spoke on the condition of anonymity because the talks aren’t public. Remaining costs on defective mortgages excluded from the deal may range from $2.5 billion to $5.5 billion, the person said.

“This is progress in that it puts some parameters around what the total loss will be,” said Marty Mosby, a Nashville, Tennessee-based analyst at Guggenheim Securities LLC, which manages more than $100 billion, including Bank of America shares. “It’s not a great thing to pay this much, but it’s not the worst-case scenario either.”

Investors, which also include Pacific Investment Management Co. and the Federal Reserve Bank of New York, demanded in October that Bank of America repurchase home loans that had been packaged into bonds by Countrywide Financial Corp., which it acquired in 2008. The deal covers mortgages in trusts with $424 billion in original balances and $106 billion in principal at some stage of default, one of the people said.

The bank may say that it’s adding to a liability reserve for future loan-repurchase demands, which was $6.2 billion as of March 31, the person said. The company’s board met yesterday to discuss the settlement, which follows a $3 billion deal announced in January to resolve similar claims from Fannie Mae and Freddie Mac, the U.S.-owned mortgage firms.

‘Small in Comparison’

Bank of America also said in April that it agreed to pay an estimated $1.6 billion to resolve claims with bond insurer Assured Guaranty Ltd. (AGO)

“While it seemed like a material dollar amount, it was small in comparison to the amount of damages suffered by the investors,” said Isaac Gradman, a San Francisco-based litigation consultant. “Still, getting $8.5 billion out of a bank that said it would fight these things tooth-and-nail has to be considered something of a success.”

Costs tied to faulty mortgages have been a moving target for Bank of America Chief Executive Officer Brian T. Moynihan, 51. The firm previously said that expenses tied to demands from bond buyers other than Fannie Mae and Freddie Mac could range from zero to as much as $7 billion to $10 billion. In a May regulatory filing, the lender said that estimate may be $11 billion to $14 billion if an assumption regarding the difficulties investors would face to make claims proved incorrect.

BlackRock, Pimco

Spokesmen for Bank of America, New York-based BlackRock, the New York Fed and Bank of New York Mellon Corp. (BK), the trustee for the mortgage-bond deals, said they couldn’t comment. Kathy Patrick, a lawyer at Houston-based Gibbs & Bruns LLP, who represents investors, said she couldn’t comment. Mark Porterfield of Newport Beach, California-based Pimco didn’t return phone and e-mail messages seeking comment.

Countrywide ranked as the top issuer of the securities in 2005, 2006 and 2007, when the worst-performing debt was created, according to Inside MBS & ABS, a newsletter. The lender created $405 billion of the $3.04 trillion of the bonds sold in those years. Bank of America issued $76.9 billion of the securities. Merrill Lynch, which was purchased by the bank at the start of 2009, and First Franklin, which Merrill Lynch bought at the beginning of 2007, issued a combined $116 billion.

Bond insurer MBIA Inc., in suing Bank of America and Countrywide over $21 billion of mortgage securities in New York State Supreme Court, said its reviews had found that 91 percent of defaulted or delinquent loans had “material discrepancies from underwriting guidelines,” such as borrower incomes, credit scores or debt-to-income ratios.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net.

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net; Christian Baumgaertel at +1-617-210-4624 or cbaumgaertel@bloomberg.net.

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