Bank of America Mortgage Settlement: Big Banks Could Be Forced to Repay $45 Billion

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Eight months ago, when approached by investors to repay a portion of their losses in mortgage bonds, Bank of America CEO Brian Moynihan said no way. He said that his firm had followed the rules and that he was going to fight this one to the end. The outcome of that “fight” may indicate that the big banks are far from paying their tab for the mortgage mess. On Tuesday, Bank of America reportedly agreed to pay $8.5 billion to investors who lost money on mortgage bonds purchased before the housing bust.

The settlement covers $424 billion dollars in bonds that were tied to mortgage lender Countrywide, which Bank of America purchased in early 2008. On that basis, $8.5 billion seems small, and that Bank of America got away with a good deal. But Tuesday’s settlement also shows once again how badly Wall Street and the big banks either mis-judged or lied about the size of their potential losses on mortgage bonds. Bank of America, for example, told its own investors at the end of last year that it had $1.4 billion in unresolved repayment claims from private investors. It appears Bank of America is about to pay nearly 6 times that amount. And this suit started back in October, so it is unclear why Bank of America’s estimate would have been so low.

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And the settlement suggests that the other big banks may have to shell out big bucks for soured mortgage deals as well.All of the big banks have been sued by investors over similar deals. The claims of misconduct that Bank of America is settling were common practices during the housing bubble. The investors claim Bank of America and its subsidiary Countrywide misled them into thinking the bonds they bought were safer than they appeared. Also, the investors claim that after the bonds were issued and sold, Bank of America and Countrywide, which BofA bought in early 2008, also screwed up key elements of servicing the mortgage loans. In November, in an investigation of one family’s foreclosure proceedings, I found that Bank of America had lost key documents that entitled the bank to be able to foreclose, and then lied about it in court proceedings. Indeed, Countrywide was a bit worse than other mortgage lenders. But generally the things that Bank of America did – make loans with low documentation and little down payment to borrowers with poor credit scores, and then make those loans sound well vetted – were common practices for all mortgage lenders. Already, the big banks are in settlement talks with regulators over how they mishandled foreclosure practices.

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That’s why analyst Paul Miller of FBR Capital Markets says all the banks will soon have to shell out significantly more to settle claims from mortgage investors. Bank of America has already handed over $17 billion to investors. So this week’s settlement brings its bill to $25.5 billion. That will be more than double what any other bank has to pay, but still Bank of America will not be alone. Miller expects Chase will have to pay investors $11.3 billion. Wells Fargo may have to reimburse $5.2 billion. Citigroup could be on the hook for $3.3 billion. In all, the big banks are expected to have to pay out $45.3 billion to investors, though some of those payments, as in the case of Bank of America have already been paid.

These settlements come at a time when the SEC and others are ramping up their investigations into Wall Street. What’s clear is that the big banks are far from putting their housing bubble/financial crisis-related troubles behind them.