MET MetLife Inc

Bank of America Corp. (BAC) has hit the headlines again and this time for a wrong reason. The company is said to be reaching an agreement to pay $8.5 billion to a group of investors who had suffered substantial losses for their investments in mortgage-backed securities sold by the company prior to the housing market failure, according to a Wall Street Journal report.

The group of investors, including names such as BlackRock Inc. (BLK), MetLife Inc. (MET) and the Federal Reserve Bank of New York alleged that prior to the financial crisis, Countrywide Financial Corp., a company that was acquired by BofA in 2008, had sold those securities that were tied to bad-quality loans.

Neither the quality of the borrowers nor the collaterals matched the standards that Countrywide assured to the buyer of these securities. The loans were not even managed well and lacked proper paperwork. Therefore, these investors sought a buyback relief of $47 billion in mortgages backed securities that were offloaded by Countrywide Financial before it was acquired by BofA. The agreement, if reached, would close a nine-month fight between BofA and the investors.

The acquisition of Countrywide substantially increased BofA’s mortgage exposure. As a result, following the collapse of housing market, mortgage repurchases claim risk for the company has increased significantly. BofA reached agreements of similar nature but of lesser amounts earlier this year with Fannie Mae and Freddie Mac as well as with Assured Guaranty Ltd. (AGO).

Such hefty payment, which represents the highest by a financial services company till date, would definitely dent BofA’s financials and reputation. In addition to this, revenue headwinds and issues related U.S. regulatory reform continue to restrict the company’s earnings.

It could also motivate other investors to ask for claims from mortgage lenders like Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) for their mortgage-backed securities tied to soured loans.

As such, we have an Underperform recommendation on the stock.  Shares of BofA also retain a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating.

 
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