BofA in $8.6 billion settlement over Countrywide loans

NEW YORK (Reuters) - As part of a settlement with state attorneys general that could be worth as much as $8.6 billion, Bank of America Corp (BAC.N) said on Monday it would cut interest rates and principal on some troubled mortgages originated by Countrywide Financial Corp.

Bank of America, which bought Countrywide in July, reached a deal with attorneys general representing 11 states in which it will offer more affordable and sustainable mortgage payments for borrowers who had financed their homes with subprime loans or adjustable-rate mortgages serviced by Countrywide.

"This is good," said Christopher Whalen, managing director at Institutional Risk Analytics, a provider of analysis and ratings for banks. "I hate to say we'll need to see a lot more of this, but we will. Banks have no choice because the economy's getting so flat. They're going to become increasingly aggressive about keeping homeowners in their homes."

The Countrywide settlement will likely become the largest predatory lending settlement in history, the California attorney general's office said in a statement.

"With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide," said California Attorney General Edmund Brown in a statement.

"Countrywide's lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn't understand and ultimately couldn't afford," he said.

States including West Virginia, California, Connecticut and Illinois had sued Countrywide over its business practices, alleging that the mortgage lender had made risky and costly loans to consumers who could not afford them.

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Countrywide was once the largest U.S. mortgage lender before being acquired for about $4 billion in stock by Bank of America as its risky subprime mortgage loans began to fail.

"We have committed significant resources and developed innovative programs to help as many Countrywide customers as possible stay in their homes," Barbara Desoer, president of Bank of America Mortgage, Home Equity and Insurance Services, said in a statement.

Bank of America shares fell $1.79, or 5.2 percent, to $32.69 in midday New York Stock Exchange trading. The KBW banks index .BKX was down 6.1 percent.

Whalen said Bank of America's stock price decline was linked to general concern about the health of U.S. financial institutions rather than the settlement.

"Most people would probably view this (settlement) as a neutral to a positive," said Whalen. It could cut profits, he said, but "one would hope that the loss rates would be lower and you'd keep more people in their homes and paying their mortgages."

The deal will enable eligible subprime and pay-option mortgage borrowers to avoid foreclosure by obtaining a modified and more affordable loan. The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America's foreclosure crisis.

Pay-option mortgages allowed borrowers to pay only a fraction of interest and principal owed each month, allowing the loan balance to increase.

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