The Bank of America is said to be close to making a settlement over soured mortgages, and if this deal goes ahead it could resolve a large proportion of costs demanded by institutional investors.
The experts view seems to be that although this settlement figure isn’t great, it is also not the worse case scenario either.
Investors demanded in October that the Bank of America repurchase home loans packaged into bonds by Countrywide Financial Corp, which were then acquired by the bank in 2008. Investors include Pacific management Co. and the Federal Reserve Bank of New York. The deal includes mortgages in trust which have $424 billion in original balances, while a further $106 billion is in possible default.
Countrywide was one of the top issuers of these types of securities in 2005, 2006 and 2007, and this was when the worst performing debt was created. Countrywide created $405 billion out of a total of $3.04 trillion of bonds sold during this period. Bank of America was responsible for issuing $76.9 billion of securities during these years, and Merrill Lynch, which was bought by the Bank of America at the start of 2009, and First Franklin, which was purchased by Merrill Lynch at the beginning of 2007, was responsible for issuing a total of $116 billion.
Bond insurer, MBIA inc., who is suing the Bank of America and Countrywide for over $21 billion of mortgage securities, said it found that 91% of delinquent or defaulted loans had some sort of discrepancies.
It’s estimated that remaining costs to the Bank of America on defective mortgages not covered by this deal could be anything from $2.5 billion to $5.5 billion.