$40 Billion Settlement

Bank of America  has agreed to settle a class-action lawsuit brought by investors who claimed they were misled by its Countrywide unit into buying risky mortgage securities. Bank of America acquired Countrywide Financial, a California-based lender, in July 2008 for $2.5 billion, but analysts have put the effective cost at more than $40 billion, taking into account the post-purchase lawsuits, loan buybacks and write-downs.

According to attorneys for the plaintiffs, the settlement is to date the largest consensual resolution of a federal securities class-action case over mortgage-backed securities. Bank of America won court approval for a $315 million settlement of a similar lawsuit against its Merrill Lynch unit last May.

This settlement of Countrywide liabilities resolves three lawsuits and requires the approval of U.S. District Court Judge Mariana Pfaelzer in Los Angeles. The lawsuits were brought by the Maine State Retirement System and other pension funds who allege they were provided false or misleading information about the quality of the Countrywide loan pools they were investing in.

A Small Step On a Long Road to Recovery 

The announcement of the settlement was included in Bank of America’s quarterly earning statement  in which the nation’s second biggest bank reported higher net income for the first quarter, but missed analysts’ profit expectations.

Bank of America said the settlement resolves claims on about 80 percent of the unpaid principal balance of Countrywide-issued residential mortgage-backed securities, and 70 percent of similar claims against the bank overall.

This latest settlement, if approved, will be yet another step in Bank of America’s long road to recovery from what most analysts agree was one of the worst deals in the history of the financial services industry. That said, Bank of America can take some comfort in the fact that, while it made it to the final two years in a row, it has yet to beat video game maker Electronic Arts for the title of “Worst Company In America” based on a poll of Consumerist readers.

Bank of America/Countrywide still faces daunting challenges of various types, including trying to overcome substantial statute of limitations hurdles, should it now try to recoup its settlement payment costs by pursuing the loan originators from which it acquired many of the loans that ultimately were securitized.