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Bank of America: Mortgage Overhang Removal Winner

NEW YORK ( TheStreet) -- Bank of America (BAC - Get Report) was the winner among the largest U.S. banks on Monday, with shares rising over 5% to close at $12.88.

There were several reports last week of major investors dropping their objections to the bank's $8.5 billion proposed settlement in June 2011 of mortgage repurchase claims related to loans originally securitized by Countrywide Financial. Bank of America acquired Countrywide in 2008. The settlement was negotiated by Bank of New York Mellon (JPM - Get Report) as trustee, but was objected to by the Federal Home Loan Bank of San Francisco, American International Group (AIG), the attorneys general of New York and Delaware and the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae (FNMA) and Freddie Mac (FMCC).

JPMorgan analyst Vivek Juneja said in a note to clients late on Friday that "this removes several objectors to the settlement - few others remain, most notably AIG." Juneja noted that "the hedge fund that started the objection process, Walnut Creek (Baupost), already withdrew its objection to the deal." He added that "there has been significant overhang on Bank of America's stock because of fears about this settlement being overturned and this should reduce some of those concerns."

More mortgage overhang was removed on Monday, when Bank of America and MBIA (MBI - Get Report) announced a "comprehensive settlement" of claims against the bank by the bond insurer. The bank agreed to pay MBIA $1.6 billion in cash and an additional $137 million to "remit to MBIA all of the outstanding MBIA 5.70% Senior Notes due 2034 that Bank of America acquired through a tender offer in December 2012."

Bank of America also agreed to "terminate all of its outstanding credit default swap (CDS) protection agreements purchased from MBIA on commercial mortgage-backed securities (CMBS), as well as terminate certain other trades in order to close out positions between the companies."

Bank of America said that as a result of the settlement, its 10-Q report for the first quarter will show lower first-quarter earnings than the company reported on April 17. First-quarter earnings will be lowered by $1.5 billion after tax, or 10 cents a share.

The bank also provided MBIA with a $500 million secured credit line. In return, MBIA agreed to issue warrants allowing Bank of America to purchase 9.94 million MBIA shares for $9.59 a share, which can be exercised at any time through May 2018. The warrants enable Bank of America to acquire up to 4.9% of MBIA's common shares.
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