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Big bank made to pay for GFC catalyst

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The “Big End of Town” that sparked the Global Financial Crisis will pay for actions as the Bank of America hands over more than US$9 billion.

Bank of America (BofA) will pay $US9.3 billion ($A10.18 billion) to settle US charges it sold bad mortgage-backed securities to Freddie Mac and Fannie Mae ahead of the housing bust.

The Federal National Mortgage Association (FNMA), colloquially known as Fannie Mae, was established in 1938 after the Great Depression  as part of Franklin Roosevelt’s New Deal.

Its charter was to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing.

The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, was established in 1970 with similar aims.

The multi-billion dollar settlement, arranged with the Federal Housing Finance Agency, which oversees Fannie and Freddie, involves securities sold by BofA as well as by Countrywide and Merrill Lynch, which were acquired by the bank.

The agreement covers four lawsuits alleging the BofA entities misled the two US mortgage giants about the quality of the underlying mortgages tied to $US57.5 billion in securities sold to Freddie and Fannie.

“FHFA has acted under its statutory mandate to recover losses incurred by the companies and American taxpayers and has concluded that this resolution represents a reasonable and prudent settlement of these cases,” FHFA Director Melvin Watt said today.

US homeowners will also benefit from “increasing certainty” in the mortgage market due to the resolution of the cases, Watt said.

The bank meanwhile said the agreement resolves “one of the most significant remaining pieces” of litigation involving mortgage-backed securities still facing it.

BofA said it still faces a number of investigations by the Department of Justice, state attorneys general and other bodies on mortgage-related matters.

The bank said earnings in the first quarter will be hit by $US3.7 billion due to the settlement.

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