Bank of America Corp. sent Assured Guaranty $850 million in cash Thursday as part of a $1.1 billion settlement on mortgage-related securities announced Friday. The out-of-court settlement is the biggest to date among municipal bond insurers.
“It’s a major transaction,” said Sabra Purtill, managing director of investor relations at Assured. “This completely settles our reps and warranties dispute with them. It also provides us with substantial protection in the future on any deterioration in our first-lien portfolio that they securitized.”
Assured’s stock price jumped roughly 30% to as high as $18.40 on the news — a three-month high.
Bond insurers have been fighting some of the world’s biggest financial institutions in recent years, claiming that many of the underlying mortgages — which were pooled into asset-backed securities — failed to meet underwriting standards and thus violated certain clauses in the insurer contracts, called representation and warranties.
The money the insurers are trying to recover is commonly called “put-backs.”
This case settles liabilities on 29 transactions. Bank of America will pay the rest of the $1.1 billion by March 31, 2012.
Bank of America and Countrywide — which BofA acquired during the financial crisis — have also agreed to a reinsurance arrangement that will reimburse Assured for 80% of all paid losses on 21 other residential mortgage-backed securities transactions until aggregate collateral losses in those transactions exceed $6.6 billion.
“This settlement significantly strengthens our balance sheet, allowing us to more effectively assist municipal issuers,” Dominic Frederico, Assured’s chief executive, said in a press release.
Assured’s total “recovery assumption” from breaches of contract totaled $1.7 billion, as of year-end 2010. That number could rise as Assured gains more access to loan files, though this transaction concludes any dispute with Bank of America.
While this settlement was outside of court, Assured is suing three other banks — JPMorgan Chase, Deutsche Bank and Flagstar Bank — to meet most of its other claims.
Frederico said he hoped this settlement would encourage other representations and warranties providers to accelerate the claims settlement process.
“We still have a substantial amount to collect from others,” Purtill said.
MBIA Inc., the biggest insurer prior to the financial crisis, expects to recover between $2.5 billion and $4.4 billion in putbacks, according to its year-end 2010 financial statements.
The Assured-Bank of America settlement should bode well for MBIA’s ongoing dispute with more than a dozen banks.
“We believe that the settlement announced today is yet another affirmation of the validity of both our claims and expected recoveries related to improperly originated mortgage loans in insured securitizations,” said Chuck Chaplin, MBIA’s chief financial officer.
MBIA stock shot up more than 20% to as high as $10.90 in early trading.