(Updates with shares in the first paragraph.)
July 14 (Bloomberg) -- Bank of America Corp., the biggest U.S. lender, has made a preliminary offer to bond insurer MBIA Inc. aimed at settling a legal dispute tied to defective mortgages, according to two people briefed on the discussions. MBIA shares surged as much as 13 percent.
The two companies remain split on how much the Charlotte, North Carolina-based bank would have to pay to resolve the disagreement and it is unclear when an agreement can be reached, said the people, who declined to be identified because the talks are private. Bill Halldin, a spokesman for Bank of America, and Kevin Brown of Armonk, New York-based MBIA declined to comment.
A settlement would help revive the fortunes of MBIA, the biggest bond insurer before the financial crisis, which has posted cumulative losses of more than $5 billion since the end of 2006. Bank of America Chief Executive Officer Brian T. Moynihan is working to resolve demands from bond buyers and insurers over defective mortgages created by Countrywide Financial Corp., acquired by his predecessor in 2008.
“We will fight and represent your interest to the point where we got the interests represented,” Moynihan said in a June 1 conference. “There is a point where fighting doesn’t have any value.”
MBIA rose 84 cents, or 9.2 percent, to $10.02 at 4 p.m. in New York Stock Exchange composite trading. The stock sold for more than $73 in 2006 before defaults on mortgage bonds began to multiply. Bank of America slipped 13 cents to $10.07. The bank has this year announced settlements with Fannie Mae, Freddie Mac, bond insurer Assured Guaranty Ltd. and institutional investors tied to soured home loans.
The lawsuit is among several between Bank of America and MBIA, which guaranteed Wall Street’s toxic mortgage debt. Bank of America bought Countrywide in 2008 and Merrill Lynch & Co. in 2009, two of the largest participants in the market for subprime home mortgages.
In response to an analyst’s question during a May conference call, MBIA Chief Financial Officer Charles Edward Chaplin said that cases over loan repurchases “typically do not go all the way through trial.”
MBIA has booked $2.7 billion in estimated recoveries on its balance sheet for mortgage-bond repurchase claims as of the first quarter, the firm said in a May filing. The insurer said it believes it is entitled to collect the full $4.6 billion of losses it has incurred on the debt. Through September, MBIA had paid out $2.5 billion on mortgage securities sponsored by Countrywide, Chief Executive Officer Jay Brown said in February.
An eventual settlement may cost Bank of America “in the higher end” of a $2 billion to $3 billion range, Robert Haines, an analyst at CreditSights Inc., said this week in an interview.
Countrywide, once the biggest U.S. home lender, was criticized by regulators for sloppy underwriting that contributed to record defaults on loans bundled into bonds that MBIA guaranteed. Defaults ran so high that Countrywide faced bankruptcy before it was rescued by Bank of America.
--With assistance from Shannon D. Harrington in New York. Editors: Rick Green, Dan Kraut
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