Bank of America’s Remaining Legal Liability

Everyone knows that Bank of America (NYSE: BAC  ) has nearly buckled under the weight of costs from litigation and extrajudicial settlements over the last few years, the majority of which relate to its ill-fated acquisition of Countrywide Financial. However, few people have even a cursory grasp about how much exposure remains.

The following chart assists in this regard. It illustrates the value of mortgages that Countrywide originated between 2004 and 2008, and then passed on to either Fannie Mae or Freddie Mac, or packaged into securities, and then sold to private investors like university endowments, pension funds, and insurance companies.

Source: Bank of America's 3Q12 10-Q.

The good news here is that B of A has effectively extinguished its liability associated with the $111 billion in mortgages that it sold to Fannie Mae and Freddie Mac, which have defaulted or are currently more than 180 days past due on their payments. In two separate settlements, one at the beginning of 2011 and the other at the beginning of this year, B of A agreed to pay the two government-sponsored agencies roughly $10 billion in exchange for the release of liability.

The bad news is that the disturbingly larger $190 billion in similarly-situated mortgages held by private investors remains a subject of numerous legal disputes. Now, to be fair, as in the GSE settlement, B of A isn't on the hook for the entire $190 billion. But, unlike the GSE settlement, the quality of loans underlying the private-label actions is significantly worse. The reason for this is that a not-insignificant portion of them relate to home equity loans, which are secured by second or third liens on otherwise underwater real estate and, thus, effectively not collateralized.

So how much will B of A end up paying to resolve all of this? Your guess is as good as mine, but it's fair to say that the resolution won't come cheap.

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  • Report this Comment On February 02, 2013, at 1:05 PM, kthor wrote:

    if they could settle before next earning, that would be good news for the rest of the year and 2015 as well ...

  • Report this Comment On February 03, 2013, at 7:30 AM, jgetze wrote:

    You guys like to forget an important fact: The majority of those private investors are "accredited investors," meaning when they bought these packages of risky mortgages, they signed off on their own due diligence, and signed papers saying they wouldn't change their mind and sue later. The judge noted this her decision on the 8 cents on the dollar settlement.

  • Report this Comment On February 09, 2013, at 11:42 AM, whyaduck1128 wrote:

    Even if they dodge the bullet on the remaining potential liability, fear not. They're a big bank, and in their greed they will find another way to dive into boiling water.

  • Report this Comment On February 10, 2013, at 12:24 AM, SkepikI wrote:

    ^ Its worse than you think. As much trouble as they have been in, as many bad decisions as they have made, you would think they just might see the need to keep friends and customers. BOA continues to this day to treat their customers badly and alienate their few remaining friends. The inertia however is huge and continues to hold them up, occasionally restoring stock price. I would call them stupid, but they are not...they are clever at running a business badly and being able to continue to do that despite the rather obvious signs of bad management. It took more than 10 years for the disbelieving participants to allow ENRON to collapse. Many think they know the lessons of ENRON, but they fail to understand this one: Bankrupting your customers is NOT a long term business strategy. I could care less if the private investors were "accredited" or if they get their "just deserts" I merely have to observe that the organization who survived and purveyed the business is not to be trusted, either with my business dealings or with my investment money. If the hangover from their past misbehavior doesn't sink them some new clever, so smart they are stupid piece of financial engineering will. Its like watching a Roadrunner Cartoon without the laughs.

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