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Bank of America to pay US$9.5 bil. to settle US mortgage bond charges

NEW YORK--Bank of America will pay US$9.5 billion to settle U.S. charges that it sold bad mortgage-backed securities to mortgage giants Freddie Mac and Fannie Mae ahead of the housing bust.

The settlement, arranged with the Federal Housing Finance Agency, which oversees Fannie and Freddie, involves securities sold by BofA as well as by Countrywide and Merrill Lynch, which were acquired by the bank.

The agreement covers four lawsuits alleging the BofA entities misled the two U.S. mortgage giants about the quality of the underlying mortgages tied to US$57.5 billion in securities sold to Freddie and Fannie.

“FHFA has acted under its statutory mandate to recover losses incurred by the companies and American taxpayers and has concluded that this resolution represents a reasonable and prudent settlement of these cases,” said FHFA Director Melvin Watt.

U.S. homeowners will also benefit from “increasing certainty” in the mortgage market due to the resolution of the cases, Watt said.

The bank meanwhile said the agreement resolves “one of the most significant remaining pieces” of litigation involving mortgage-backed securities still facing it.

BofA said it will make a cash payment to the agencies of US$6.3 billion and buy back US$3.2 billion in mortgage securities from them.

Freddie said it would recoup US$5.1 billion in the deal, while Fannie said it would get US$4.4 billion.

The two agencies had to be rescued by the government in the economic crisis, which started with a massive crash in the U.S. housing sector and snowballed through the gigantic market for mortgage securities.

The largest losses were on bonds sold as backed by high-quality mortgages but in reality stuffed with dodgy subprime home loans that went into default by the millions.

BofA said it still faces a number of investigations by the Department of Justice, state attorneys general and other bodies on mortgage-related matters.

The bank said earnings in the first quarter will be hit by US$3.7 billion due to the settlement.

Wednesday's agreement is the latest in a series of major government settlements with big U.S. banks over their role in packaging mortgage-backed securities ahead of the 2008 crisis.

The biggest settlement came in November, when JPMorgan Chase agreed to pay US$13 billion to resolve similar allegations. Citigroup and Wells Fargo have also announced major settlements.

While U.S. regulators have successfully recovered billions in civil payments from the banks, some critics have said the Department of Justice has failed in its duty to enforce the law by not criminally prosecuting senior bank executives for their roles in promoting investments that ultimately led to the biggest financial crisis since the depression.

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