Economy Watch: Bank of America to Pay $8B to Settle Countrywide Claims

3 min read

BofA will pay $8.5 billion to aggrieved mortgage-backed bondholders sold by Countrywide; owning a home is still part of the American dream; and pending home sales were up last month.

The acquisition of Countrywide Financial Corp. has been giving banking giant Bank of America Corp. painful indigestion for some time now–arguably since the ink on the 2008 deal was still moist–and now BofA says it will pay $8.5 billion to aggrieved mortgage-backed bondholders who have demanded refunds. The bonds were sold by Countrywide at the height of the real estate bubble and, to put it charitably, were backed by substandard pools of loans.

Moreover, the investors, including such heavyweights as BlackRock Inc., Pacific Investment Management Co. and the Federal Reserve Bank of New York, asserted that Countrywide lied left and right about the quality of the securities it was selling. More importantly for BofA, the investors wanted the bank held responsible for the sins of the mortgage company that briefly seemed like a good acquisition for the bank back in 2008.

But $8 billion and change aren’t the only added costs for the bank from the Countrywide debacle. BofA also said that it’s adding $5.5 billion to a liability reserve in case more loan-repurchase demands emerge from the woodwork, and that it’s recording $6.4 billion in other charges, including legal costs and a write-down of mortgage-unit goodwill. The settlement will push the bank into the red for the second quarter of 2011, when losses are projected to be as high as $9.1 billion.

Americans still seek homeownership

The dream of homeownership among Americans is not, in fact, dead, if the results of a recent New York Times/CBS News poll are any indication. About nine in 10 Americans call owning a home an important part of the dream, with 55 percent saying that it’s “very important.”

Despite the recent depression in most housing markets, the idea that it’s better to own than rent is pervasive as well, according to the poll. Sixty-eight percent of those already invested in a house think that it’s a good financial idea, and overall 62 percent of those polled said so. This despite the fact that one in four homeowners said their homes are worth less than what they paid, and that about one in five have underwater mortgages.

Americans’ attitudes about housing also have policy implications. Forty-five percent said that the government should do more to help improve the housing market, while 16 percent say it should be doing less. Virtually no one is in favor of eliminating the mortgage tax deduction.

Pending home sales up

Pending home sales were up in May, according to the National Association of Realtors on Wednesday, which put its Pending Home Sales Index at 88.8 for the month, up from a revised 82.1 in April. The index, which reflects signed deals but not closed ones, was also higher than May 2010, when it read 78.3, but then again that was right after the end of the homebuyer tax credit.

Ever-cheerful NAR Chief Economist Lawrence Yun took banks to task once again for their underwriting standards, which he says are now too tight to maintain a healthy real estate market. “Home sales still could be 15 to 20 percent higher,” he asserts. “If banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we’d get a much faster recovery in the housing sector.”

Wall Street bounced around on Wednesday, but ended the day in the plus column, probably because investors are glad that the Greek parliament voted for more austerity. The Dow Jones Industrial Average gained 72.73 points, or 0.6 percent. The S&P 500 was up 0.83 percent, and the Nasdaq advanced by 0.41 percent.

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