Bank of America close to $17 billion settlement with U.S. over mortgage securities

Kevin Smith
POSTED: 08/06/2014 08:07:06 PM PDT

Bank of America has tentatively agreed to pay up to $17 billion to settle an investigation into its sale of toxic mortgage-backed securities leading up to the nation’s financial crisis, an insider said Wednesday.

The deal must still be finalized. But if approved, it would be the largest Justice Department settlement arising from the meltdown — a financial collapse that saw millions of Americans lose their homes to foreclosure.

“That’s definitely a big number, but Bank of America is a big institution,” said economist Jordan Levine, director of economic research with Beacon Economics in Los Angeles. “Even with a penalty like that they will keep trucking.”

The Bank of America settlement comes on the heels of a $7 billion settlement announced last month with Citigroup and another $13 billion settlement the Justice Department forged last year with JPMorgan Chase & Co.

The person who revealed the tentative deal and spoke on condition of anonymity said the two sides reached an agreement in principle following a conversation last week between Attorney General Eric Holder and Bank of America CEO Brian Moynihan.

The tentative deal, they said, calls for the bank to pay roughly $9 billion in cash and for the remaining sum to go toward consumer relief.

The settlements stem from the sale of toxic securities made up of subprime mortgages. Banks played down the risks of subprime mortgages when packaging and selling the securities to mutual funds, investment trusts and pensions, as well as other banks and investors.

The securities contained residential mortgages from borrowers who were unlikely to be able to repay their loans, yet were publicly promoted as relatively safe investments until the housing market collapsed and investors suffered billions of dollars in losses. Those losses triggered a financial crisis that pushed the economy into the worst recession since the 1930s.

Critics say the government’s actions have been soft on the banks because no top executives from any of the firms are facing criminal charges for their companies’ actions or for an apparent lack of transparency.

Bank of America had previously argued that it shouldn’t be held liable for the subprime mortgages issued by Countrywide and Merrill Lynch, two troubled firms the bank acquired in 2008 as the meltdown took hold. Combined, those three firms issued $965 billion in mortgage-backed securities from 2004 to 2008, according to public records. Almost 75 percent of that total came from Countrywide.

Marty Rodriguez, owner of Century 21 Rodriguez in Glendora, says Bank of America is basically right.

“There were so many things going on and I saw it,” she said. “People were selling loans to Countrywide and mortgage brokers were doing these bad deals. Bank of America was not really doing that. I thought, ‘Oh my God, what are these people doing?’

“At the end of the day, Bank of America was left holding the bag. You can’t put the total blame on them, but they are the ones who have to pay the piper.”

Rodriguez said many borrowers were issued loans they likely knew they wouldn’t be able to handle. Then they borrowed off of those loans to buy boats, cars and other items they could ill afford.

“Then they went back and said, ‘Why did you give us all of this money?’” she said. “But I know there were others who really did get hurt by it.”

The settlements may be too little, too late. But Levine said scores of Americans are probably pleased to see the banks paying up.

“I think there will be people out there who will look at their own short sale or foreclosure they had to go through,” he said. “It will be nice for them to see that these financial institutions also have some skin in the game.”

Fallout from the nation’s recession is still being felt.

A Labor Department report released last week showed that 9.7 million Americans are still unemployed and 3.2 million of them have been out of work for 27 weeks or more.

The nation’s unemployment rate has slowly retreated from its peak of 10 percent in October of 2009 to 6.2 percent last month. The most recent reading from the state Employment Development Department put California’s jobless rate at 7.4 percent in June.

http://www.contracostatimes.com/news...settlement-u-s