Bank of America Corp. (BAC-N
) said it expects to take more than $20 billion US in charges after settling with mortgage bond investors, resulting in a second-quarter loss.
The sum, which includes an $8.5 billion settlement, removes a question mark that had been hovering over the bank since October, and Bank of America's shares rallied.
"Investors can now start attaching a number to these unknowns and what they will cost the bank. With the swipe of a pen, they've dealt with a large chunk of these issues," said Paul Miller, a banking analyst with FBR Capital Markets.
Excluding items such as the settlement, the bank forecast second-quarter earnings that could top analysts' average estimate.
The deal, combined with other settlement-related charges, was within the range that Bank of America disclosed in a filing in May.
The settlement, which still requires court approval, could pressure other big banks, including JPMorgan Chase & Co and Wells Fargo & Co, to resolve similar allegations, and could result in new lawsuits as well.
"This settlement is likely to embolden the other plaintiff's lawyers to go after other banks and look for similarities in their securitizations," said Nancy Bush, a veteran bank analyst.
Bank of America settled with a group of investors, including BlackRock Financial Management, who alleged that bonds they bought from Countrywide Financial were packed with mortgages that should never have been sold. Bank of America bought Countrywide, once the largest U.S. mortgage lender, in 2008.
The investors also said Bank of America, which is collecting payments on the mortgages, was not doing enough to maximize the collections. Part of the settlement includes improvements in gathering payments, known as servicing.
Bank of America said it expected to post a loss of 88 cents to 93 cents per share for the second quarter.
Excluding special items, it expects earnings of 28 cents to 33 cents a share. Analysts' average forecast was 28 cents, according to Thomson Reuters I/B/E/S.
The bank said charges would include the $8.5 billion settlement with bond investors, $5.5 billion to cover expected payments to other mortgage bond investors, and $6.4 billion in other charges linked to mortgages.
The $8.5 billion settlement covers a lawsuit filed by 22 institutional investors, including BlackRock, Pacific Investment Management Co and Western Asset Management.
All investors in the securities will share in the settlement, and the 22 institutional investors will not receive any special benefits, according to a statement from law firm Gibbs & Bruns, which represented the institutional investors.