Bank of America entered into a settlement which will require the bank to set aside $14 billion to pay investors who bought securities it assembled from mortgages that later soured.  At this amount, the bank would likely post a Q2 loss ranging from $8.6bn to $9.1bn.

Needless to say, this charge represents the banking industry’s biggest single settlement tied to the subprime mortgage boom and the subsequent financial crisis of 2008.  The losses stem largely from mortgages underwritten by Countrywide Financial, the subprime mortgage lender that Bank of America bought in 2008.  

Of the $14 billion, $8.5bn will go to help settle claims by heavyweight holders of the securities - including Pimco, BlackRock, the Federal Reserve Bank of New York - that have been pressing for a settlement since last fall.  The Bank of America settlement will require court approval in New York.

“This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us.  We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide."  -- CEO Brian Moynihan.

Additional Terms of the Settlement.   BofA also will be required to improve its payment collection process by hiring specialists to focus on high-risk loans and to do a better job of self-policing its own internal loan-servicing standards.  The negotiations toward a settlement began last fall but picked up speed in recent weeks as the end of the second quarter approached.  For the investors, settling avoids a costly, multiyear legal fight, while Bank of America can pile a load of its troubles into the second-quarter results and clear away one of the biggest uncertainties hanging over the company.

And That's Not All - Additional Charges.   On top of the $14bn hit, the bank is taking $6bn in Q2 charges to clean up other areas of its troubled mortgage business - including a $2.6bn noncash write-off of the value of its home lending business, a move that tacitly acknowledges that it overpaid for Countrywide.

Despite the staggering size of the settlement with the investors and other charges announced Wednesday, additional liability remains from mortgage securities that were assembled and sold by Bank of America.  CFO Bruce Thompson said the agreement doesn't cover loans sold by BofA to other private trusts;  nor does it cover mortgage securities assembled from the home loans of 3rd parties.

Still, other huge risks loom from the fallout of the subprime mortgage crisis.  All 50 state attorneys general are in the final stages of settling an investigation into abuses by the biggest mortgage servicers, and are pressing the big banks to pay up to $30 billion in fines and penalties.

What’s more, insurance companies that backed many of the soured mortgage-backed securities are also pressing for reimbursement, arguing that the original mortgages were underwritten with false information and did not conform to normal standards.

In an interview on Tuesday, before reports of BofA's settlement, Sheila Bair, FDIC Chairwoman, worried that the unresolved mortgage claims continued to hurt the broader economy:  "Unresolved legal claims could serve as a drag on the recovery of the housing market.  The healing of the housing market is essential to the recovery of the broader economy."

For further details, go to:   [NYTimes, 6/29/11]