BofA pays out $2.8bn to ease mortgage row

BANK of America shares soared yesterday on news it had agreed to pay Fannie Mae and Freddie Mac $2.8bn (£1.8bn) to settle claims it sold the mortgage companies bad home loans.

Bank of America shares rose 6.37 per cent to $14.19 on the New York Stock Exchange. The deal triggered hopes that other banks may soon make similar settlements, and shares of Citigroup and JPMorgan Chase & Co also rose.

Investors have feared for months that Bank of America would have to buy back billions of dollars of home loans it sold to investors at the height of the housing boom.

The agreement with Fannie Mae and Freddie Mac resolves the bulk of Bank of America’s exposure to those government-sponsored enterprises (GSEs), but probably means the bank will post its second straight quarterly loss when it announces fourth-quarter earnings on January 21.

Bank of America said it would set aside $3bn in the fourth quarter to help cover the Fannie and Freddie claims. It also said it expects to take a $2bn charge in the quarter to write down goodwill linked to its home loans and insurance business unit.

Despite the settlement, the bank still faces more potential liabilities.