The payment is the largest such settlement by a financial-services firm to date, exceeding the total profits of the Charlotte, N.C., bank since the onset of the financial crisis in 2008.
The settlement ends a nine-month fight with a group of 22 investors who hold mortgage-backed securities with an original value of $105 billion, including the giant money manager BlackRock Inc., the insurer MetLife Inc. and the Federal Reserve Bank of New York. The settlement covers not just the 22 high-profile holders but all investors in 530 separate bond deals. The original face value of all bonds covered by the deal is $424 billion.
A deal could embolden mutual-fund managers, insurance companies and investment partnerships to seek similar settlements with other major U.S. banks by arguing that billions of dollars in loans they bought before the housing collapse didn't meet sellers' promises or were improperly managed.
Bank of America, Wells Fargo & Co. and J.P. Morgan Chase & Co. collect loan payments on about half of all outstanding U.S. mortgages.
Indeed, Bank of America said Wednesday morning it would take $14 billion in charges in its second quarter for the settlement as well as its future exposure to mortgage repurchase claims from government-run mortgage giants Fannie Mae and Freddie Mac and other private investors.
The dispute between Bank of America and the mortgage investors began last fall when they alleged in a letter to the bank that securities they scooped up before the financial crisis from Countrywide Financial Corp. were full of loans that didn't meet sellers' promises about the quality of the borrowers or the collateral. The investors also alleged Countrywide failed to maintain accurate files while managing the loans. Bank of America purchased Countrywide in 2008 for $4 billion.
In the agreement, Bank of America will hand $8.5 billion in cash to The Bank of New York Mellon Corp., which acted as the trustee for the bondholders and will distribute the funds to the investors. The trustee expects to submit a filing soon asking a New York state court to approve the transaction.
Bank of America will take a corresponding pre-tax charge against earnings for the second quarter. The after-tax cost to the bank would be roughly $5 billion, the bank said. Bank of America said Wednesday that, due to the mortgage settlement, the additional provision and other mortgage-related charges adding up to $6.4 billion, it expects to report a net loss of $8.6 billion to $9.1 billion in the second quarter, or 88 cents to 93 cents a share.
The mortgage-related woes highlight the challenges faced by large banks as they struggle to put the financial crisis behind them and soothe investor concerns about their future profitability.
The $8.5 billion settlement has the potential to put Chief Executive Brian Moynihan on the hot seat. The bank hopes that the deal will convince shareholders that many of the problems inherited from Countrywide are behind it a year and a half into Mr. Moynihan's tenure as chief, according to people familiar with the situation.
Bank of America shares rallied as investors appeared to believe the charges put behind a major cloud hanging over the shares. Indeed, for the $8.5 billion settlement to big name investors, the bank is paying just 2 cents on the dollar of the original principal, and just under 4 cents on the dollar for the remaining unpaid balance. Estimates from analysts on the problem had at points suggested the bank may need to pay more than $50 billion ultimately.
In premarket trading Wednesday, shares of the bank were up 3.5%.
Still, some investors may be upset about such a large payment in the wake of Mr. Moynihan's pledge last year to engage in "day-to-day, hand-to-hand combat" against investors demanding that the bank repurchase bad loans--called "put-back" demands--and "not just do a settlement to move the matter behind us." In a conference call with investors in October, he said the bank would push back against investors whose attitude was: "I bought a Chevy Vega but I want it to be a Mercedes."
On June 1, he hinted at a new approach. "There's a point where fighting doesn't have any value," he said during an appearance in New York.