Housing

Bank of America to Pay $1.8B to Ambac in Mortgage Crisis Settlement

OCT 7 2022·Updated OCT 10 2022

Story

Image credit: Shutterstock [via Top Class Actions]

The Facts

Bringing an end to the last of the North Carolina-based mortgage lender's lawsuits involving the 2008 financial crisis, Bank of America (BoA) on Friday agreed to pay bond insurer Ambac Financial Group $1.84B.
Reuters
The agreement "resolve[s] all pending Ambac lawsuits" stemming from a dispute over the mortgage-backed securities company Countrywide, which BoA bought in 2008 and was accused of misrepresenting the quality of its loans ahead of the crisis.
American Banker
One of the suits involved 17 residential mortgage-backed securities — home loans packaged into debt that are then sold to investors — from 2004 to 2006, which Countrywide had underwritten.
The Wall Street Journal
According to Ambac, Countryside knew the loans didn't meet underwriting standards, which would have required the lender to repurchase the mortgages. Unaware of the alleged deficiencies, Ambac insured the loans, leaving them on the hook to pay billions of dollars to investors. Ambac had originally sought $3B in damages.
The Wall Street Journal
After the settlement, Ambac, whose stock rose 23% Friday morning, estimates it will gain around $390M in net reinsurance and discount accretion. This enables the company to repay some of its more than $1.4B in debt.
Seeking Alpha
Bank of America claimed it had already accrued for much of what it owes in the settlement, though it will reportedly still record a pre-tax cost of $354M in the third quarter, or three cents per share.
American Banker

Sources Split

LEFT

CENTER

RIGHT

ESTAB
CRIT

CENTER

PRO
ESTAB

The Spin

Establishment-critical narrative

BoA knew exactly what it was doing when it defrauded bond insurers over a decade ago. When the crisis came, and smaller companies like Ambac saw what had happened, BoA decided to bully them through the courts rather than pay for their wrongdoing. Thankfully, the little guy won this time, and Goliath has to pay David what he's owed.

Seeking Alpha

Pro-establishment narrative

To claim Ambac was some small, vulnerable company up against a financial titan is absurd, as it was the second-largest bond insurer in the world at its peak. While everyone likes to pick on BoA in light of the 2008 crisis, the truth is that Ambac accepted the risks of insuring those mortgage-backed securities to profit millions in premiums.