Bank of America Corp. has reached an $8.5 billion settlement with investors over repurchase demands on $424 billion worth of RMBS.

The deal encompasses 530 trusts and 22 investors, including Blackrock Financial Management, Goldman Sachs Asset Management, and Nationwide Mutual Insurance. Gibbs & Bruns represents the major institutional investors in this case.

BofA will also increase its representations and warranties liability by $5.5 billion in the second quarter of 2011. Due to the settlement, the bank now expects that it will report a net loss for the second quarter of somewhere between $8.6 billion and $9.1 billion. The deal is still subject to court approval.

The press release from BofA stated that the deal covers 525 legacy Countrywide first-lien RMBS and five legacy Countrywide second-lien RMBS based on mortgages originated between 2004 and 2008. Bank of New York Mellon is the trustee to the trusts.

The securities, which initially had a value of $424 billion, currently have an unpaid balance of $221 billion following the housing market collapse. This settlement covers almost all of the repurchase exposure resulting from legacy Countrywide-issued first-lien private label RMBS.  

A Barclays Capital report on the settlement said that the total Countrywide non-agency issuance in 2004 to 2007, which is the period where the deals in the settlement were issued, was $532 billion.

The settlement, analysts said, covers around 35% of the 2004 to 2007 origination. They said that on the one hand, some of the transactions that are not part of the settlement are likely to be cleaner sectors or more focused in 2004. Given these, analysts estimated that the overall implied liability for BofA from Countrywide deals can be at most $24 billion, which was derived from dividing $8.5 billion by .35. However, analysts said that a simple extrapolation utilizing the settlement amount as a percentage of current balance amounts to over $30 billion.

According to the release, BofA hopes that this latest settlement will help both the firm and investors move on from the lingering effects of the financial crisis.

"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," said BofA Chief Executive Officer Brian Moynihan.

The firm has made three other agreements over the past six months concerning investor exposure to legacy Countrywide mortgage issues.

According to the press release released today, it reached settlements in January with GSEs Fannie Mae and Freddie Mac to resolve outstanding repurchase issues resulting from the “alleged breaches of selling representations and warranties” on the mortgages.     

Last April, BofA and Countrywide agreed to resolve a similar repurchase claims with Assured Guaranty on 29 RMBS trusts that the insurer help guaranty.

In the report mentioned previously, Barclays Capital analysts also detailed their initial thoughts on the BofA settlement and its potential implications for non-agencies.

The most important issue facing non-agencies, according to analysts, is whether the settlement payment is made to the investor group or the trusts. Barclays believes it is more likely it will be made to the trusts because of the further exposure and liability BofA would face in terms of the questionable securities if the payment were made directly to investors. 

"It could mean that the compensated investors are left holding these securities — because if they sell, it might bring new litigants into the equation for the same set of securities," analysts wrote. However, they said that it is possible to argue that these buyers could structure the sale so that the new investors could not go after BofA for rep-and-warranty-related repurchases.

The report also discussed the problem of timing and allocation of cash flows across the capital structure. Analysts stated that the most logical path would be to “let the cash flow through the deal waterfall” assuming that settlement cash comes in over the following months. Generally this would benefit the Countrywide front cash flows since these would effectively come in as faster prepays and reduce total losses. 

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