U.S. prosecutors are seeking more than $13 billion from Bank of America Corp. to resolve federal and state investigations of the lender’s sale of bonds backed by home loans in the run-up to the 2008 financial crisis, according to people familiar with the matter.
The settlement would come on top of the $9.5 billion the bank agreed last month to pay to resolve Federal Housing Finance Agency claims, said two people who asked not to be named because the negotiations are private. A deal could come within the next two months, the people said.
If the Justice Department gets its way, the case against Bank of America will eclipse JPMorgan Chase & Co.’s record $13 billion global settlement over similar issues in November. That settlement, which included a $4 billion agreement with the FHFA, encompassed loans JPMorgan took over with its purchases of Washington Mutual Inc. and Bear Stearns Cos.
Bank of America, the second-biggest U.S. lender, is among at least eight banks under investigation by the Justice Department and state attorneys general for misleading investors about the quality of bonds backed by mortgages amid a drop in housing prices. Many of the loans in question were inherited by Bank of America when it purchased subprime lender Countrywide Financial Corp. and Merrill Lynch & Co., the people said.
“Bank of America owns Countrywide, which was the biggest and most problematic mortgage originator, and Merrill Lynch was the one packaging many of those loans into bonds—together, that’s a huge liability,” said Pri de Silva, senior banking analyst at CreditSights Inc. in New York. “The government’s holding all the cards. It’s a tough place to be for the banks.”
Bank of America, based in Charlotte, hasn’t specified how much money it has set aside for the case. The bank said April 16 that it increased reserves for mortgage-related matters by $2.4 billion.
Lawrence Grayson, a Bank of America spokesman, declined to comment on the negotiations, as did Ellen Canale, a Justice Department spokeswoman.
President Obama ordered the creation of a task force in 2012 to coordinate probes of improper mortgage-bond underwriting by banks. Associate Attorney General Tony West has been overseeing the investigations and negotiations. Other banks that have faced scrutiny include Citigroup Inc., Credit Suisse Group AG and Wells Fargo & Co.
The current talks are aimed at resolving civil probes by federal and state prosecutors in California, New York and New Jersey, the people said.
The negotiations are still in early stages and if an agreement isn’t reached, the government could sue the bank, according to the people. The size of any settlement would depend in part on how much the bank is willing to pay in cash versus other remedies such as mortgage write-downs or consumer relief, one of the people said.
In the FHFA settlement, Bank of America agreed to pay $6.3 billion in cash to Fannie Mae and Freddie Mac to resolve lawsuits alleging it misrepresented loans packaged into bonds that were bought by the U.S.-owned mortgage firms. The company also said it would repurchase about $3.2 billion of mortgage bonds from the firms.
JPMorgan, as part of its settlement, agreed to offer $4 billion in aid to consumers, such as loan modifications and principal forgiveness.
Bank of America Chief Executive Officer Brian Moynihan has spent more than $50 billion since the financial crisis to resolve claims related to mortgages, most tied to the 2008 purchase of Countrywide.
Moynihan, who is in his fifth year of working through setbacks related to his predecessor’s acquisitions, may be nearing the end of its multi-billion dollar settlements, said Paul Miller, a banking analyst at FBR Capital Markets Corp. and former examiner at the Federal Reserve Bank of Philadelphia.
“This is the last big check—they’ve been sued in every direction they could,” Miller said. “Banks are an easy target: they’re making money, nobody likes them and they can’t fight it.”