The bondholders had alleged that Countrywide had failed to meet certain underwriting standards for the loans included in these RMBS deals and had improperly serviced the loans, and had breached representations and warranties.
Well, several news outlets (the Wall Street Journal had it first, and here’s the FT) reported last night on the expected $8.5bn settlement reached between the bank and the aggrieved parties, and earlier this morning BofA confirmed the details in a statement.
The original letter was sent by 22 investors, who named 115 deals worth $47bn, of which these investors were reported to have owned between a quarter and half. But, as the WSJ explains:
The group has since expanded to 530 bond deals originally valued at $424 billion, said people familiar with the situation. The settlement would cover not just the 22 investors represented by Gibbs & Bruns but all other bondholders in the 530 deals.
And here’s the expected hit to Bank of America’s Q2 bottom line, from the bank’s press release:
As a result of the settlement, and other mortgage-related matters, Bank of America expects to report a net loss in the range of $8.6 billion to $9.1 billion in the second quarter of 2011, or $0.88 to $0.93 per diluted share. Excluding the settlement, other mortgage-related charges, and proceeds from asset sales, the company expects to report net income in the range of $3.2 billion to $3.7 billion in the second quarter of 2011, or $0.28 to $0.33 per fully diluted share.
Except that’s not all. BofA also said it would also take hits of $5.5bn for other reps and warranties breaches and another $6.4bn for further “mortgage-related charges”.
The key driver of the expected loss is the representations and warranties provision of $14.0 billion, including $8.5 billion for the settlement agreement on legacy Countrywide mortgage repurchase and servicing claims, and an additional $5.5 billion increase in the company’s representations and warranties liability for non-GSE exposures and, to a lesser extent, GSE exposures.
The company also expects to record $6.4 billion in other mortgage-related charges in the second quarter of 2011, including a non-cash, non-tax deductible impairment charge of $2.6 billion to write off the balance of goodwill in the Consumer Real Estate Services business, as well as charges related to additional litigation costs, a write-down in the value of mortgage servicing rights, and additional assessment and waiver costs for compensatory fees associated with foreclosure delays. The impairment charge will have no impact on reported Tier 1 and tangible equity capital ratios.
Tough day at the office — or so one would think, except that BofA shares were up 3.5 per cent as of 8:48am New York time in Wednesday pre-market trading, possibly because investors had expected the settlement to be higher.
That wouldn’t have been an unreasonable assumption. As we noted in October, estimates for how much putbacks would ultimately cost the banks have ranged widely, so perhaps shares have been trading on some kind of uncertainty discount — just a guess, really, and this might not hold once the market opens.
Hard to say what happens next. Obviously the door remains wide open for further settlements between investors and other banks — in particular Wells Fargo and JP Morgan, the second- and third-largest mortgage servicers in the country respectively, after BofA.
More to come.