MBIA Inc. (MBI) and Bank of America Corp. settled a five-year legal battle over soured mortgage debt in a deal that will pay MBIA the equivalent of $1.7 billion and give the bank a 5 percent stake in the bond insurer. MBIA shares surged to the highest since September 2008.
The bond insurer will drop demands that Bank of America’s Countrywide unit buy back faulty home loans that MBIA guaranteed, while the bank ends a challenge to a 2009 restructuring of the insurer that was intended to jumpstart its business of backing municipal bonds, the two companies said today in separate statements. Bank of America also will provide the MBIA unit that guaranteed the lender’s mortgage debt a $500 million credit line, the firms said.
“This comprehensive and important settlement is a very positive step forward for both Bank of America and MBIA,” Benjamin Lawsky, New York’s superintendent of financial services, said in a statement. “It resolves significant exposure and expensive litigation for Bank of America, while also giving MBIA a path forward.”
The bond insurer had said in February that there was “substantial doubt” about the ability of its MBIA Insurance Corp. unit that backed some of Wall Street’s most toxic mortgage debt to continue as a going concern unless it reached a deal with the bank. In addition to the soured home-loan securities the MBIA unit backed, it also guaranteed contracts protecting BofA and its subsidiaries from losses on commercial-mortgage debt.
For Bank of America, the lawsuits were part of the fallout from its 2008 takeover of Countrywide Financial Corp., whose lax standards and subprime loans were blamed by lawmakers and regulators for helping to fuel the housing bubble. Bond insurers including MBIA have argued they should be reimbursed for claims they paid on securitized pools of home equity lines of credit because of Countrywide’s flawed underwriting.
MBIA rose 45 percent to $14.29 at 4 p.m. in New York and earlier climbed to as high as $15.45, the biggest intraday jump on record. Bank of America’s stock climbed 5.2 percent to $12.88, the highest level since April 2011. The shares had advanced 5.4 percent this year through the end of last week.
Bank of America will revise its first-quarter earnings to book $1.6 billion in additional pretax charges, of which $1.3 billion stems from the settlement, the firm said today in its statement. That will slash the period’s net income to $1.5 billion, or 10 cents a share, from the $2.6 billion, or 20 cents, reported last month.
The bank will pay $1.6 billion in cash to MBIA and remit $137 million of the insurer’s bonds that it bought in December during a tender offer. The lender bought the debt during an attempt at blocking bondholder consents to amendments that would have shielded MBIA from being dragged into bankruptcy by its cash-strapped insurance unit. Bank of America had filed a default notice on those bonds, a claim that was dropped as part of the settlement announced today, MBIA said in its statement.
MBIA first sued Countrywide in 2008 in New York state Supreme Court in Manhattan for fraud and breach of contract related to the securitized home loans.
Bank of America has committed more than $40 billion to settle claims tied to faulty mortgages and foreclosures, with most tied to loans made by Countrywide.
The bank has already reached settlements with Assured Guaranty Ltd. and Syncora Holdings Ltd. The deal with Assured was valued in 2011 at $1.6 billion, and the Syncora agreement announced last year cost Bank of America about $400 million.
Bank of America, along with Societe Generale SA, had sued MBIA over its 2009 restructuring, which they say harmed them as policyholders. In 2009, then-New York Insurance Department Superintendent Eric Dinallo approved the split, allowing MBIA to move guarantees on state and municipal bonds out of its MBIA Insurance Corp. unit, which backed some of Wall Street’s most toxic mortgage debt.
The cost to protect against a default by MBIA Inc. for five years in the credit-default swaps market plunged the most ever.
The contracts fell 512 basis points to a mid-price of 387.5 basis points as of 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market.
Contracts tied to the MBIA Insurance unit dropped 29.8 percentage points to 9.5 percent upfront, the data show.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.
The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court, New York County (Manhattan).
To contact the reporters on this story: David McLaughlin in New York at email@example.com; Chris Dolmetsch in New York State Supreme Court in Manhattan at firstname.lastname@example.org; Mary Childs in New York at email@example.com