Bank of America (NYSE:BAC) has reached a US$1.7 billion settlement with MBIA Inc. (NYSE:MBI) over claims of mortgage underwriting failures in the years leading up to the financial crisis.
The U.S. bank giant said Monday that the deal represents a comprehensive settlement with MBIA “to resolve all outstanding representations and warranties claims and all other claims between the parties.”
The agreement still requires approval from the New York State Department of Financial Services, which it says is expected to be received shortly.
As part of the settlement, Bank of America will pay MBIA approximately US$1.7 billion in cash and return to MBIA all of the outstanding MBIA senior notes (due 2034) that Bank of America acquired through a tender offer in December 2012. Additionally, Bank of America will terminate all of its outstanding credit default swap protection agreements purchased from MBIA on commercial mortgage-backed securities, as well as terminate certain other trades in order to close out positions between the companies.
MBIA will also issue warrants to purchase 9.94 million shares of its common stock, or approximately 4.9% of its currently outstanding shares, to Bank of America at an exercise price of US$9.59 per share. The warrants may be exercised at any time prior to May 2018. The bank is also to provide a senior secured US$500 million credit facility to MBIA Insurance Corp.
Bank of America says that it will record US$1.6 billion in additional pretax charges in the first quarter of 2013, of which US$1.3 billion is related to the settlement and the remainder is related to other monoline insurers. The after-tax effect of the additional charges will reduce the company’s first-quarter 2013 net income to US$1.5 billion from the US$2.6 billion reported on April 17, it reports.
Fitch Ratings says that the settlement “represents another positive step” for Bank of America in reducing litigation risk. “We view the settlement as manageable for BAC in the context of capital and better core earnings in the first quarter. Furthermore, this settlement eliminates all potential future liabilities from MBIA,” it says.
“Legacy litigation risks remain, but resolution of the MBIA dispute serves as another example of ongoing progress reported in reaching manageable settlements since early 2011,” it adds.
New York AG suing Boa, Wells Fargo
In the wake of Bank of America’s billion-dollar settlement with MBIA Inc. over mortgage failures, another litigation issue is rearing its head for the bank with the New York state attorney general’s office announcing that it is suing BofA and Wells Fargo for allegedly violating terms of a settlement reached last year concerning mortgage servicing.
New York’s AG, Eric Schneiderman, said that he intends to sue both Bank of America and Wells Fargo “for repeatedly violating” the terms of the national mortgage settlement, which was signed in 2012, requiring the five largest mortgage servicing banks in the US to improve their customer service practices by complying with new mortgage servicing rules.
Schneiderman said his office has documented 339 violations of standards dictating the timeline for banks to process mortgage modification applications by the two banks since October 2012. The allegations have not been proven.
“The five mortgage servicers that signed the national mortgage settlement are legally required to take specific, rigorous, and enforceable steps to protect homeowners,” said Schneiderman. “Wells Fargo and Bank of America have flagrantly violated those obligations, putting hundreds of homeowners across New York at greater risk of foreclosure. I intend to use every tool available to my office to hold these companies accountable under the terms of the national mortgage settlement.”
Last year, New York joined 48 states, the Department of Justice, and the five largest mortgage servicers in negotiating the settlement, which includes $25 billion and mandated forms of consumer relief, such as mortgage modifications for at-risk homeowners. It also imposes new servicing standards designed to address long standing complaints from consumers and their advocates that servicers persistently failed to provide fair and timely services to their customers.