Dominoes from the U.S. housing collapse continue to fall. Coming just a week after reports surfaced that Bank of America Corp. (BofA) faced lawsuits from union and public employee retirement funds due to losses on mortgage-backed securities, BofA yesterday announced it has agreed to pay $8.5 billion to settle claims from investors that lost money on mortgage-backed securities.
A group of 22 investors, including MetLife Inc., Federal Reserve Bank of New York and BlackRock Inc., originally had bought mortgage-backed securities valued at $105 billion before the U.S. housing market burst.
Under the terms of the proposed settlement, BofA would turn over $8.5 billion in cash to Bank of New York Mellon Corp., which acted as the trustee for the bondholders and would distribute funds to the investors, according to the Wall Street Journal. BofA would then take a corresponding pre-tax charge against earnings for the second quarter, which is expected to result in about $5 billion in after-tax costs to the bank.
If all goes as outlined, the settlement would be the largest such payment by a financial services provider to date.
Last week, U.S. District Judge William Pauley named the Pennsylvania Public School Employees' Retirement System as the lead plaintiff in a case against BofA that combined three cases alleging the bank improperly processed foreclosures and hid mortgage debt exposure.
The suit contends that BofA engaged in the process of “dollar rolling,” through which it disguised risk by transferring mortgage debt to a separate entity with an agreement that it would buy back that debt after issuing its quarterly statements.
Learn more about the BofA settlement in the Wall Street Journal.