Bank of America to pay $9.3 bn to settle mortgage-backed securities claims

Bank of America, the country's second-largest bank by assets, yesterday agreed to pay $9.3 billion to settle US claims over mis-selling private-label mortgage-backed securities (PLS) to Fannie Mae and Freddie Mac prior to the global financial crisis that later went sour.

The settlement comes less than a week after Credit Suisse agreed to pay $885 mn to settle mortgage-backed securities claims. (See: Credit Suisse to pay $885 mn to settle mortgage-backed securities claims)

Under the agreement with the US Federal Housing Finance Agency (FHFA), Bank of America will pay $6.3 billion in cash and the rest in securities that it will buy from Fannie Mae and Freddie Mac.

''FHFA has acted under its statutory mandate to recover losses incurred by the companies and American taxpayers and has concluded that this resolution represents a reasonable and prudent settlement of these cases. This settlement also represents an important step in helping restore stability to our broader mortgage market and moving to bring back the role of private firms in providing mortgage credit,'' said FHFA director, Melvin Watt.

According to FHFA, Bank of America and Countrywide Financial Corp, which the former acquired in 2008, sold thousands of defective loans from 2007 to 2009 to home-mortgage finance companies Fannie Mae and Freddie Mac.

Assistant US attorney, Jaimie Nawaday, had earlier said that it was a case about greed and lies. She said Countrywide was internally saying that the loans' quality was "in the ditch" even as it sold them to Fannie Mae and Freddie Mac "for a quick profit."

Government-sponsored entities which included Fannie Mae and Freddie Mac bought mortgages on single-family homes from lenders.

FHFA has alleged that in a bid to maintain revenue in a sinking market for sub-prime mortgages, a division of Countrywide initiated a loan programme called High Speed Swim Lane, or HSSL, in August 2007.

According to Countrywide executive Edward O'Donnell, who testified during the trial, he had warned other Countrywide executives about the failure rate of HSSL loans.

This is the tenth settlement that FHFA, which oversees Fannie and Freddie loans, has announced in relation to the 18 PLS lawsuits it had filed in 2011 over $200 billion in mortgage-backed securities.

The FHFA has so far recovered more than $11 billion from banks over similar allegations, including from banks like JPMorgan Chase & Co, Citigroup, Deutsche Bank, Wells Fargo & Co, SunTrust, Flagstar PNC, HSBC Bank USA, Credit Suisse and Morgan Stanley.

The FHFA has still to recover money from seven other banks, including Royal Bank of Scotland.

In 2008 the US Treasury had rescued Fannie and Freddie as mortgage losses mounted.

The two received $187.5 billion in infusions to stay afloat. They have become highly profitable over the past year and have paid as much as $203 billion to the US government in dividends.