ADVERTISEMENT

WASHINGTON – Bank of America has reached a record $17 billion settlement to resolve an investigation into its role in the sale of mortgage-backed securities before the 2008 financial crisis, officials directly familiar with the matter said Wednesday.

One of the officials, who spoke with the Associated Press on condition of anonymity because the announcement isn’t scheduled until today at the earliest, said the bank will pay $10 billion in cash and provide consumer relief valued at $7 billion.

But how much will Bank of America’s expected $17 billion mortgage settlement cost the company? The answer is, almost certainly not that much.

In mega-settlements negotiated with the government, a dollar is rarely worth an actual dollar.

Inflated figures make sensational headlines for the Justice Department, and $17 billion would be the largest settlement by far arising from the economic meltdown in which millions of people in the United States lost their homes to foreclosure. But the true cost to companies is often obscured by potential tax deductions and opaque accounting techniques.

The agreement requires the bank to acknowledge making misrepresentations about the quality of its residential mortgage-backed securities itself and in those by Countrywide Financial and Merrill Lynch, according to the officials, who spoke with the AP on condition of anonymity.

Those two institutions were acquired by the bank in 2008 and were responsible for the bulk of the questionable loans.

The bank declined comment Wednesday.

Whether cash payments are structured as penalties or legal settlements can determine whether targeted companies can declare them as tax-deductible business expenses. Also, consumer relief is an amorphous cost category: If Bank of America’s deal resembles the department’s previous settlements with JPMorgan and Citigroup, that part could be less costly to the company than the huge figures suggest.

Some relief comes from actions that do not cost the banks anything, including making loans in depressed areas or reducing the principal of mortgages owned by outside investors.

Banks earn a multiple of each dollar spent on some types of relief. Under Citi’s deal, for example, each dollar spent on legal aid counselors is worth $2 in credits, and paper losses on some affordable housing project loans can be credited at as much as four times their actual value.

“Companies that have reached for these settlements have not taken an explicit charge for it,” said Moshe Orenbuch, a banking stock analyst for Credit Suisse who has debated how to value noncash settlements with clients.

In discussing the deals with analysts, the banks “always say, ‘just remember, there’s the piece that’s cash and the piece that’s not cash.’ In general terms, they’re suggesting that the relief is stuff they’re doing anyway.”

The poor quality of the loans led to huge losses for investors and a slew of foreclosures, kicking off the recession that began in late 2007. The cash totals now being paid by some of the country’s largest banks are not nearly enough to reverse the damages caused by the bursting of the housing bubble and the ensuing recession.

Bank of America had argued that it shouldn’t be held liable for the subprime mortgages issued by Countrywide and Merrill Lynch. Combined, those three firms issued $965 billion in mortgage-backed securities from 2004 to 2008, according to public records. Roughly 75 percent of that total came from Countrywide.

In a federal lawsuit last year, the Securities and Exchange Commission charged Bank of America and two subsidiaries with defrauding investors in an offering of residential mortgage-backed securities by failing to disclose key risks and misrepresenting facts about the underlying mortgages.

The Justice Department filed a parallel civil action against Bank of America alleging violations of the Financial Institutions Reform, Recovery, and Enforcement Act.