BofA Reaches $17B Mortgage Settlement, Q3 EPS to Take Hit - Analyst Blog

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Ending months of speculation, Bank of America Corporation ( BAC ) has finally reached a $16.65 billion settlement with the U.S. Department of Justice (DOJ), a few other regulators and Attorneys General (AGs) of six states. This cheered investors, with the shares raising more than 4.1% to close at $16.16 on Thursday.

Nevertheless, BofA expects the settlement to lower third-quarter 2014 earnings by 43 cents per share.

The settlement resolves all the actual and probable civil claims related to the sale of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by Countrywide Financial Inc and Merrill Lynch & Co (both acquired by BofA in 2008) before 2009. Further, it also settles the repurchase claims on loans originated by BofA from 2009 to 2013.

Apart from the DOJ, other regulators involved included the Securities and Exchange Commission (SEC), the Federal Housing Authority (FHA), the Government National Mortgage Association (Ginnie Mae) and the Federal Deposit Insurance Corporation (FDIC). Moreover, the AGs from California, Delaware, Illinois, Kentucky, Maryland and New York were part of the deal.

Settlement Terms

Of the total $16.65 billion settlement amount, BofA will be paying $9.65 million in cash and the remaining $7 billion in form of consumer relief. Of the cash portion, $5.02 billion is civil monetary penalty, while $4.63 billion represents compensatory remediation payments.

Notably, the civil monetary penalty going to the Treasury would roughly aggregate $5 billion, while the six states get less than $1 billion for sharing among them.

Consumer relief will be in the form of principle write-downs and modified terms of loans. Further, new mortgage originations for low and medium-income borrowers, forgiving the remaining principal owed on properties that have been vacated but not foreclosed, and the demolition of deserted homes would also form part of borrower relief.

BofA remains committed to complete the delivery of relief to borrowers by Aug 31, 2018. Notably, an independent observer will supervise the company's progress in this respect.

Additionally, BofA accepted the accusation that both Countrywide and Merrill Lynch had misrepresented facts about the underlying loans while selling them to investors.

However, the settlement does not absolve BofA from probable criminal charges, and law enforcement agencies can also file criminal and civil charges against individual officials. Further, the company's ongoing case regarding 'High Speed Swim Lane' (HUSTLE) does not form part of the settlement.

Road Ahead

Disentangled from the huge litigation snares, we believe BofA will presently focus on its organic expansion. Though the company has remained profitable in the recent quarters (aside from Q1 of 2014), the results were mostly driven by expense-savings initiatives.

According to us, given its diversified footprints and product mix, BofA is well positioned to drive revenue growth. With gradual recovery of the economy, we expect further rise in loan demand, despite a tough industry backdrop.

Currently, BofA carries a Zacks Rank #3 (Hold).

Mortgage Settlements of Other Banks

In the less than a year, the banking regulators have been able to settle three major mortgage issues (including this one). JPMorgan Chase & Co. ( JPM ) had announced a $13 billion-settlement to clear similar charges in Nov 2013. This was followed by Citigroup Inc.'s ( C ) mortgage accord of $7 billion in Jul 2014.

However, in our opinion, this historic settlement does not spell the end of mortgage-settlement deals. The law enforcement agencies are now expected to shift their attention to other banks including Wells Fargo & Co. ( WFC ) and The Goldman Sachs Group, Inc. ( GS ), among others which have been accused of selling flawed MBS prior to the crisis.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: RMBS , BAC , JPM , WFC , C

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