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Bank puts end to some mortgage claims for $8.5b

As a result of the settlement and other mortgage-related costs, Bank of America will report a net loss of $8.6 billion to $9.1 billion in the second quarter. That’s up to 93 cents per share. As a result of the settlement and other mortgage-related costs, Bank of America will report a net loss of $8.6 billion to $9.1 billion in the second quarter. That’s up to 93 cents per share. (Associated Press/File 2009)
By Pallavi Gogoi
Associated Press / June 30, 2011

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NEW YORK — Bank of America’s $8.5 billion settlement with investors is the largest any bank has ever paid.

It might help assuage worries about how deep the bank’s mortgage problems might be and how long it might take to settle them. But for the largest US bank and its chief executive Brian Moynihan, the slate is far from clean.

The payout settles claims by just 22 investors who said Bank of America Corp. sold bonds based on substandard home mortgages. The bonds fell in value when the housing market collapsed and left the investors with losses on $424 billion worth of mortgages. The $8.5 billion settlement eclipses the last three years of earnings at the Charlotte, N.C., bank.

The uncertainty about just how bad Bank of America’s mortgage issues might be has scared investors and led to a 31 percent decline in Bank of America’s stock price since January of last year when Moynihan took over.

‘‘This is a major step forward for our company,’’ Moynihan said in a conference call yesterday.

Wall Street is cheering the move, sending the stock up 3 percent, to $11.14 yesterday.

But that rally could be short-lived. Analysts say the $8.5 billion is about double the amount they had expected. The bank continues to fight other investor groups that are demanding similar settlements. Lawsuits from the Federal Home Loan Bank of Boston, bond insurers MBIA and Syncora Holdings linger. And Bank of America is likely to be ordered to pay a hefty portion of the estimated $20 billion multibank settlement over the mishandling hundreds of thousands of home foreclosures.

Paul Miller, a bank analyst at FBR Capital Markets, says he’s concerned about the bank’s ability to increase earnings at a pace that would make up for these higher costs. These worries are magnified by the fact that the economic recovery in the United States is slowing. That could reduce the number of loans the bank is able to make to consumers and businesses.

Bank of America is in worse shape than other major banks like JPMorgan Chase & Co. and Wells Fargo & Co. because of its purchase of Countrywide for $4 billion in 2008. What seemed like a bargain price for the country’s largest mortgage lender has cost the bank tens of billions more in mortgage losses, regulatory fines, repurchases of poorly-written loans, and expensive litigation. At the same time, Bank of America itself had written a fair amount of bad mortgages. As it stands, the bank services one out of every five US mortgages.

So even though most of the major banks sold the same kind of securities and have bad mortgages on their books, analysts say they are in better shape.

The other banks don’t have the same pressure to put the mortgage woes behind them. In March, the Federal Reserve didn’t allow Bank of America to increase its dividend, citing uncertainty about the depth of its mortgage problems. It was the only denial issued to any of the four largest US banks. And it raised questions over whether the bank was strong enough to withstand another downturn.

The combined effect of the losses and the uncertainty prompted a reversal in the bank’s longtime strategy of fighting claims from investors, Moynihan admits. Since the beginning of the year, the bank has struck large settlements with multiple investors totaling $12.7 billion.

Most of the settlements are with investors that had purchased mortgages or mortgage-backed securities. They want banks to buy back mortgages that had misinformation about qualifications of borrowers who received them. During the housing boom, lenders such as Countrywide routinely gave mortgages to people without documenting their income or ability to pay.