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By Karen Freifeld
NEW YORK, July 16 (Reuters) - Bank of America agreed to pay American International Group Inc $650 million to settle long-running legal disputes over defective mortgage-backed securities sold in the run-up to the financial crisis.
The deal, which the parties announced early Wednesday, ends securities fraud litigation that the insurer brought against Bank of America. It also removes the biggest obstacle to the bank's $8.5 billion settlement with investors in mortgage securities issued by Countrywide Financial, the subprime lender Bank of America acquired in 2008.
AIG will file notices dismissing its litigation accusing the bank of causing billions of dollars in losses by selling it shoddy mortgage securities. The litigation is pending in New York and California.
For the past three years, AIG led opponents in holding up court approval of a settlement Bank of America reached in June 2011 with institutional investors to pay $8.5 billion to resolve claims over $174 billion worth of mortgage-backed securities issued by Countrywide Financial before the housing crisis.
The investors said Countrywide had misrepresented the quality of the underlying home mortgages, which went sour in the crisis.
Twenty-two institutional investors, including BlackRock Inc , Allianz SE's Pimco and Metlife Inc, and Bank of New York Mellon Corp, the trustee for the securities, agreed to the settlement.
AIG claimed there was no evidence that the deal provided adequate compensation for losses.
Justice Barbara Kapnick in New York state court gave the go-ahead for the bulk of the settlement in January, withholding her approval only from settlement of claims involving certain loans that had been modified. But AIG appealed Kapnick's decision.
As part of the agreement, AIG agreed to withdraw its objection. In a release on Wednesday morning, the insurer said it would receive its pro rata share of whatever is ultimately paid out to investors in connection with that settlement.
A group of funds known as the Triaxx entities and the Chicago Police pension fund remain as objectors.
The $650 million settlement was covered by litigation reserves as of June 30, Bank of America said.
As part of the deal, Bank of America said it was settling three actions it brought to collect mortgage insurance proceeds due from AIG`s United Guaranty mortgage insurance subsidiaries on loans it had originated and serviced.
The cases are American International Group Inc et al v. Maiden Lane II LLC, U.S. District Court, Southern District of New York, No. 13-00951; American International Group Inc et al v. Bank of America Corp et al, U.S. District Court, Central District of California, No. 11-10549. The $8.5 billion case is In re: The Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011. (Reporting by Karen Freifeld; Editing by Lisa Von Ahn)