Bank chain will pay $8.5B to settle claim

Bank of America accused over sale of mortgage bonds

Investors, including large financial firms, had demanded Bank of America buy back $47 billion in bonds sold by its Countrywide unit.

NEW YORK -- Bank of America Corp. and its Countrywide unit will pay $8.5 billion to settle claims that the lenders sold poor-quality mortgage-backed securities that went sour when the housing market collapsed.

A group of 22 investors had demanded that the bank repurchase $47 billion in mortgages that its Countrywide unit sold to them in the form of bonds. The group includes the Federal Reserve Bank of New York, Pimco Investment Management, and Blackrock Financial Management. It argued that Countrywide had enriched itself at investors' expense by continuing to service bad loans while running up servicing fees.

Bank of America, which bought Countrywide in 2008 for $4 billion, has denied those claims.

Bank of America CEO Brian Moynihan said Wednesday that the settlement would minimize "future economic uncertainty" in the banking business and "clean up the mortgage issues largely stemming from our purchase of Countrywide."

For several months, Bank of America battled claims based on estimates "that were much different from ours," Mr. Moynihan said. But at this point it made more sense to settle than to keep fighting, he said.

"We have said consistently if people are reasonable and can get to a reasonable assessment of their claims, and it's in the best interest of shareholders, we will settle," Mr. Moynihan told Wall Street analysts in a conference call.

The settlement, announced Wednesday, needs court approval. It covers 530 trusts with original principal balance of $424 billion.

Citi analyst Keith Horowitz said the settlement, which amounts to only 2 percent of the original principal balance, removes the largest investor risks for Bank of America, based in Charlotte.

As a result of the settlement, Bank of America put its second-quarter loss at $8.6 billion to $9.1 billion. Excluding the settlement and other charges, the bank expects a quarterly loss of $3.2 billion to $3.7 billion.

Stocks in the financial sector rose in electronic trading Wednesday, likely because the Bank of America deal is a framework for others to follow.