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.
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.