Bank of America Corp. is paying $950 million to settle claims that its Countrywide unit pooled faulty mortgages into securities that helped hobble Financial Guaranty Insurance Co. and saddled buyers with losses.
The accords resolve outstanding litigation with FGIC, as well as claims and potential claims that the lender is required to repurchase defective home loans backing the bonds because they failed to match their promised quality, Bank of America said today in a statement. The second-largest U.S. lender entered into the deals with FGIC, which guaranteed the debt, and Bank of New York Mellon Corp., the trustee for the securities.
Chief Executive Officer Brian T. Moynihan has committed more than $50 billion to resolve disputes with regulators and investors over foreclosures and shoddy mortgages. The latest agreement reimburses FGIC and investors in nine bond deals tied to home-equity loans made by Countrywide -- which the bank bought in 2008 including Fir Tree Partners, a $12 billion hedge fund. Fir Tree said in a separate statement that it helped structure the accord.
"This unique global settlement provides both significant direct cash payments to the RMBS trusts and increased long-term value to all FGIC policyholders," David Proman, director of structured products at the hedge fund, said in the statement. The fund, which said it's been a "major" holder of FGIC-backed mortgage bonds since 2008, is among investors that have sought to profit on debt backed by distressed insurers.
The sum includes $584 million for FGIC and $365 million in cash payments to bond trusts, according to the Fir Tree statement. Charlotte, North Carolina-based Bank of America said it has already paid about $900 million. Government-backed Freddie Mac was also involved in the deal, Fir Tree said.
FGIC stopped paying claims on mortgage bonds in November 2009, becoming the second debt guarantor to do so amid record home-loan defaults, according to a September report by JPMorgan Chase & Co. analysts. New York regulators in 2012 took control of the insurer, which exited rehabilitation in August under a plan in which it pays holders of residential mortgage securities only a portion of their claims, starting at 17 percent.
The company was among the U.S. bond insurers that carried top credit grades before the housing crisis foiled expansions beyond their traditional business of backing municipal debt. Units of Ambac Financial Group Inc. and Syncora Holdings Ltd. were also seized by regulators, while MBIA Inc. (MBI) split its insurance businesses in 2009 after losing its AAA ratings.
The insurers have erased some of the damage with payments from lenders whose securities they backed, after suits claiming the quality of the underlying home loans was misrepresented. Bank of America agreed in 2012 to pay $375 million to Syncora as part of a deal to resolve a dispute over soured mortgages, and reached an about $1.7 billion deal last May with MBIA to end five years of litigation against the bank.
The deal announced today differs from previous settlements between lenders and bond insurers over bad home loans in that it offers cash directly to mortgage-bond investors. It also veers from previous multi billion-dollar deals between banks and investor groups because it doesn't require court approval, so the money will flow almost immediately to the bondholders.
Under an agreement reached in the bankruptcy case of Ally Financial Inc.'s former Residential Capital unit, owners of 47 sets of FGIC-insured mortgage bonds started receiving in January $253.3 million of cash passed through the guarantor by the lender as compensation for defective loans, according to a report that month by Nomura Securities International analysts.