Money for Fannie and Freddie
But it does more than that. It also sets aside $5.5 billion to cover estimated coming put-back requests from Fannie Mae and Freddie Mac for mortgages that fail to adhere to the standards set by the firms at the time of purchase or guarantee. This is in addition to $3 billion the bank agreed to provide Fannie and Freddie last January. According to the bank's press release, it should now be done paying off Fannie and Freddie for its rep and warranty disputes related to first mortgages.
Money for Servicing
Finally, another $400 million will be spent to improve the loan servicing side of its mortgage business. A part of the settlement with investors called for better servicing procedures. This money will be used in an effort to do a better job resolving non-performing mortgages.
No Money Set Aside for Past or Present Homeowners
Who doesn't get any of the $14 billion? The mortgage borrowers who might have been foreclosed on by BoA through flawed procedures won't be provided damages from today's settlement. It also doesn't provide any direct benefit to homeowners currently facing foreclosure, though they could reap some indirect benefit (explained below).
What It Means for Investors
This is a settlement, which implies that neither side is getting exactly what it wants. Obviously, BoA would have preferred to pay nothing, while investors wanted the bank to buyback at least $47 billion in mortgage exposure. BoA ultimately must have concluded that it was better off paying $8.5 billion to these investors than buying back those mortgages or fighting in court.
To be sure, $8.5 billion is a lot of money, but according to the BoA press release, it covers 525 mortgage bond deals initially sold for $424 billion. In that context, the settlement amounts to just 2% of the original balance of those bonds sold. That's not a lot, but the big investors must be satisfied that it's enough to cover the harm BoA's alleged failure to adhere to its reps and warranties. It should be noted, however, that any additional losses that result on those mortgage bonds in excess of the $8.5 billion will be up to the investors to endure.
The press release appears to imply that this settlement is class-action in nature, as it covers BoA's exposure to this gigantic portfolio of mortgage bonds, originally created by Countrywide. So major investors like Blackrock, PIMCO, The Federal Reserve Bank of New York, Invesco, Met Life, Teachers, and Goldman Sachs Asset Management are covered. But smaller investors should be as well. Presumably, investors will get some amount in proportion to the bonds they own.
What It Means for Other Mortgage Lenders
Ultimately, this settlement may serve as a blueprint for future investor settlements with other lenders that may have failed to follow reps and warranties related to mortgage bonds. But this case could be somewhat unique to BoA. When the demand first surfaced, other banks were not named -- just BoA, due to its acquisition of Countrywide. Other big banks have been accused of similar misdeeds, however. If other alleged rep and warranty breaches just as serious are identified, then the precedent set here might matter.