Ending months of speculation,
Bank of America Corporation
) 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.
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
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
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.
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. (
) had announced a $13 billion-settlement to clear similar charges
in Nov 2013. This was followed by Citigroup Inc.'s (
) 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. (
) and The Goldman Sachs Group, Inc. (
), among others which have been accused of selling flawed MBS prior
to the crisis.
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