Bank of America Corp. has agreed to pay $16.65 billion to end federal and state investigations into the sale of toxic mortgage securities during the subprime housing boom, the largest settlement by a single company in U.S. history, the Justice Department said Thursday.
The settlement includes $9.65 billion in fines and $7 billion in aid to communities and homeowners hit hard by the housing market crash that triggered the Great Recession.
“This historic resolution -- the largest such settlement on record -- goes far beyond ‘the cost of doing business,’” Atty. Gen. Eric H. Holder Jr. said in describing what he called “pervasive schemes to defraud financial institutions and other investors.”
"Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct,” he said. “This is appropriate given the size and scope of the wrongdoing at issue.”
Most of the toxic loans that backed the securities came from firms BofA acquired in 2008, including Countrywide Financial Corp. of Calabasas and Wall Street investment bank Merrill Lynch & Co.
BofA already had incurred about $60 billion in losses and legal settlements from the purchase of Countrywide, which was one of the nation's biggest subprime mortgage lenders during the housing boom of the mid 2000s.
Associate Atty. Gen. Tony West said employees of BofA or the firms it acquired misled investors about the quality of the mortgages in the securities.
“It's kind of like going to your neighborhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you,” West said.
“And just like you might be in for an unpleasant surprise when you got home and poured yourself that glass of milk, investors -- such as public pension funds and federally insured financial institutions -- were unpleasantly met with billions of dollars in losses when those securities investments soured,” he said.
The deal settles claims from the Justice Department, the Securities Exchange Commission and other federal agencies, as well as California, New York and four other states.
California will receive $300 million from the settlement to reimburse its two biggest public pension funds, the California Public Employees' Retirement System and the California State Teachers' Retirement System.
“Bank of America profited by misleading investors about the risky nature of the mortgage-backed securities it sold,” said California Atty. Gen. Kamala D. Harris. “This settlement makes our pension funds whole for the financial losses caused by these misrepresentations and brings help to hard-pressed homeowners and communities in California.”
Included in the consumer aid will be reductions in the size of some mortgages and funding for more affordable rental housing, West said.
“This is one of largest consumer relief packages we have ever assembled with a single financial institution, and its impact could benefit hundreds of thousands of Americans still struggling to pull themselves out from under the weight of the financial crisis,” West said.
BofA agreed to reduce the size of some mortgages and lower the interest rate to 2%, helping homeowners who owe more on their loan than the property is worth, West said.
As an example, he said a woman who owes $250,000 on a mortgage on a home worth only $150,000 would see the loan reduced to about $112,000 so her monthly mortgage payments would be cut dramatically, and her house would be transformed from a liability into an asset with equity.
BofA said Thursday the settlement is expected to reduce its pre-tax third-quarter earnings by $5.3 billion. The bank's stock was up about 1.7% in early trading on Wall Street.
“We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future,” BofA Chief Executive Brian Moynihan said.
Thursday's settlement tops JPMorgan Chase & Co.'s $13-billion settlement last year with federal and state officials concerning similar charges.
In July, Citigroup Inc. agreed to a $7-billion settlement as authorities wrap up their investigations into the sale of defective securities that helped trigger the Great Recession.
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6:51 a.m.: This post has been updated with details of the settlement and comments from federal and state officials as well as Bank of America.
This post was originally published at 5:59 a.m.