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Bank of America, other banks move closer to ending mortgage mess

The logo of the Bank of America is pictured atop the Bank of America building in downtown Los Angeles November 17, 2011. REUTERS/Fred Prouse
The logo of the Bank of America is pictured atop the Bank of America building in downtown Los Angeles November 17, 2011. REUTERS/Fred Prouse

By Rick Rothacker and Aruna Viswanatha

CHARLOTTE/WASHINGTON (Reuters) - Bank of America Corp announced more than $14 billion of legal settlements over bad mortgages it sold to investors and flaws in its foreclosure process, taking the bank a step closer to ending the home loan problems that have dogged it for years.

About $3 billion of Bank of America's Monday's settlements were part of a larger $8.5 billion deal between 10 big mortgage lenders and regulators to end a loan-by-loan review of foreclosures mandated by the government.

Bank of America shares touched their highest level in nearly two years as investors called it a good step toward ending the company's multiple legal woes. The shares later retreated to close down 0.2 percent at $12.09.

Analysts have estimated that Bank of America has paid out some $40 billion for mortgage settlements since the crisis began. Most of those losses stem from its 2008 purchase of Countrywide Financial, once the largest subprime lender in the United States.

But the bank is moving closer to the day when it can stop worrying about mortgages and start focusing on growth, analysts and investors said.

"It's a step in the right direction in terms of trying to put these issues behind the company," said Jonathan Finger of Finger Interests Ltd, a Houston, Texas-based investment firm that owns 1.1 million of the bank's shares.

Besides the multibank foreclosure settlement, the second largest U.S. bank also announced about $11.6 billion of settlements with government mortgage finance company Fannie Mae to end allegations the bank improperly sold mortgages that later soured, and to resolve questions about foreclosure delays.

Bank of America had already set aside money to cover most of those settlements. The deal with Fannie wipes out 44 percent of the buy-back requests the bank faced as of the end of the third quarter. It also eliminates possible future repurchase requests on about $300 billion in loans.

Bank of America's home loan problems are far from over, though. It still needs court approval for an $8.5 billion settlement with private investors and it is locked in litigation with insurer MBIA Inc over mortgage-related claims.

The agreement also does not end a lawsuit the U.S. Justice Department brought against the bank last year over Countrywide and Bank of America loans sold to Fannie Mae and Freddie Mac, the agency said. The suit accuses Countrywide and Bank of America of causing losses to taxpayers of more than $1 billion.

"I think there is still quite a lot of litigation to go, and I don't think we'll see the end of this for some time," said Thomas Perrelli, a former top Justice Department official, speaking of industry wide legal issues stemming from the financial crisis.

BANKS SETTLE

The settlement Bank of America, Citigroup Inc, JPMorgan Chase & Co, Wells Fargo & Co and five other banks entered with regulators pays out up to $125,000 in cash to homeowners whose homes were being foreclosed when the paperwork problems emerged.

About $3.3 billion of the $8.5 billion settlement with the Office of the Comptroller of the Currency will be in cash, with the rest in changes to the terms of loans or mortgage forgiveness.

In April 2011, the government required banks that collect payments on mortgages, known as servicers, to review whether errors in the foreclosure process had harmed borrowers.

The review focused on foreclosures from 2009 and 2010 and looked at processes, including "robo-signing," where servicer employees or contractors signed documents without first reviewing them.

That loan-by-loan review proved slow and expensive, the OCC said.

The reviews had already cost more than $1.5 billion. They turned up evidence that around 6.5 percent of the loan files contained some error requiring compensation, but most of those errors involved potential payouts much less than $125,000, OCC officials said.

Other banks involved in the settlement include MetLife Bank, Aurora Bank FSB, PNC Financial Services Group Inc, Sovereign Bank NA, SunTrust Banks Inc and U.S. Bancorp.

Wells Fargo said its portion of the cash settlement will be $766 million, which will result in a $644 million charge when it reports fourth-quarter earnings on Friday. The bank said it will spend another $1.2 billion on foreclosure prevention actions, which will not result in additional charges.

Citigroup, which reports earnings next week, said it will take a $305 million charge for its cash payment portion of the settlement, while existing reserves would cover $500 million in loan forgiveness and other actions.

Housing advocates said they viewed the settlement as a positive move as it ends a flawed review process and provides some money, if limited, to consumers. But some advocates and lawmakers expressed dissatisfaction with the pact and suggested hearings could follow.

"I remain concerned that banks continue to avoid full accountability, and I believe that borrowers deserve more answers and transparency than the Federal Reserve and the OCC are currently willing to provide," said Elijah Cummings, the top Democrat on the House Oversight committee.

BOFA SELLS SERVICING RIGHTS

For Bank of America, the Fannie Mae deal was the much larger of Monday's agreements.

Fannie Mae and sibling Freddie Mac essentially buy mortgages from banks and package them into bonds for investors. But during the mortgage boom, banks sold loans to the two companies that Fannie Mae and Freddie Mac say should never have been sold because, for example, borrowers had misstated their income. The two mortgage finance companies are pushing banks to buy back the loans.

On Monday, Bank of America also said it was selling the rights to collect payments on about $306 billion of loans to Nationstar Mortgage Holdings and Walter Investment Management Corp. Reuters first reported on Friday that Bank of America was talking to Nationstar and Walter Investment.

Investors appear to have decided the bank is on the right track as its shares hit their highest level since May 2011 on Monday. When Warren Buffett came to the bank's rescue in August 2011 with a $5 billion investment, he received warrants for 700 million shares of stock at $7.14 per share.

(Reporting By Rick Rothacker in Charlotte, Aruna Viswanatha in Washington and Jessica Toonkel and David Henry in New York; Writing by Dan Wilchins and Ben Berkowitz; editing by Jim Marshall)

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