Bank of America to Pay Investors $8.5 Billion in Mortgage Securities Settlement

On Wednesday, Banking giant Bank of America said  it will pay an $8.5 billion settlement to investors who were sold fraudulent mortgage securities prior to the 2008 financial crisis. As a result of the settlement, the bank expects to report a second-quarter net loss of between $8.6 billion and $9.1 billion (or a range of 88 cents to 93 cents per share).

22 Investors to Be Paid in Settlement

Bank of America is expected to pay 22 investors after they claimed they had been misled by securities packages that included numerous mortgages belonging to borrowers who had questionable credit.

While the securities packages were highly rated by credit rating agencies, the investors believe that involved parties knew the packages were not safe investments and the borrowers with questionable credit could possibly default on their mortgages.

BofA was actually not directly involved at the time of the investment purchases, but was later exposed to the securities after the 2008 acquisition of Countrywide Mortgage Corp. The investors involved in the settlement include BlackRock Inc., the Federal Reserve Bank of New York, Goldman Sachs Asset Management, PIMCO and MetLife Inc.

BofA Sets Aside $5.5 Billion for Additional Liabilities

Bank of America noted that in addition to the $8.5 billion it is paying investors, it is setting aside $5.5 billion for liabilities related to the government-sponsored mortgage backing firms Freddie Mac and Fannie Mae.

Some of the money is also expected to go to other parties that are not government sponsored but were exposed to similar risks as the investors. The parties have not been disclosed by the bank.

Bank of America’s chief executive, Brian Moynihan, stated in a Webcast with reporters, “This is a major step forward for our company.” He went on to say that the settlement will allow his company to eliminate the risk from mortgage issues stemming from its purchase of Countrywide.

While the settlement is subject to court approval, it is expected to be finalized.